Devaluation: Naira 20% Overvalued, Bank of America Says

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Devaluation: Naira 20% Overvalued, Bank of America Says

Devaluation: Naira 20% Overvalued, Bank of America Says

 

Bank of America has indicated that Nigerian local currency, the naira, is 20% overvalued, according to a latest report. The global lender said the naira will be devalued as its exchange rate to the dollar is well above fair value.

The Economist, Bank of America Sub-Saharan Africa, Tatonga Rusike, listed three indicators that would crumble the naira.

First is the widely-used black-market rate, the central bank’s real effective exchange rate, and “our own currency fair value analysis”, indicating that the naira is 20 per cent overvalued.

“We see scope for it to weaken by an equivalent amount over the next six-nine months, taking it to as high as 520 per USD,” Rusike said in a note to clients.

While the naira will come under increasing pressure “due to limited government external borrowing,” devaluation is unlikely to happen until after the February 2023 presidential elections, the bank said.

Africa’s largest economy operates a multiple exchange regime dominated by a tightly controlled official exchange rate and a parallel market where the currency is freely traded. The naira exchanged at N440.95 to the dollar in the official spot market yesterday, and about N731.46 in the parallel market.

The official rate has depreciated by less than 10 per cent since December 2021 even as the parallel rate is down by nearly a third within the same period, widening the gap to almost 70 per cent, BofA analysis show. READ:Nigeria Shifts Towards Flexible Exchange Regime

“The greater the disparity with the official market, the higher the likelihood of increasing excess demand for foreign currency on the parallel market,” the bank said.

CBN Governor, Godwin Emefiele said Nigeria, like other emerging market countries and countries reliant on oil exports, the decline in crude oil earnings as well as the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into Nigeria.

“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” he said at a bankers’ meeting in Lagos.

Emefiele explained that due to the unprecedented nature of the shock, the apex bank had continued to favour a gradual liberalisation of the foreign exchange market to make smooth exchange rate volatility and mitigate the impact which, rapid changes in the exchange rate could have on key macro-economic variables.

# Devaluation: Naira 20% Overvalued, Bank of America Says#