The Nigerian naira has transitioned from an overvalued to an undervalued currency following the government’s long-awaited foreign exchange reform, according to analysts at the US-based Bank of America. The reform, which involved floating the naira on June 14, has resulted in a significant depreciation of the currency by over 60% compared to its pre-reform level of N460 per USD. Bank of America analysts now estimate a fair value of N680 per USD for the naira, indicating that the currency is currently 12% undervalued. However, they expect the naira to trade above this level, with a projected year-end rate of N700 per USD and a return to the range of N650-N680 in early 2024.
Currency Depreciation and Transition Challenges:
Since the floating of the naira, the currency has weakened considerably, reaching a closing rate of N780 per USD on Tuesday, according to FMDQ data. Bank of America analysts caution that the transition process, including aligning rates and increasing USD liquidity in the formal market, will take time. They believe that once these challenges are overcome, the naira’s value should strengthen and appreciate.
Factors Supporting the Naira’s Future Outlook:
Bank of America highlights that higher oil exports, amounting to an additional $12 billion, coupled with a liberalized import regime that could contribute $10 billion from non-oil imports, can lead to consistent current account surpluses in the medium term. These surpluses would boost dollar inflows necessary to support the naira. The analysts estimate a net gain of $2-3 billion, which would strengthen the current account surplus and support the naira’s value.
Validation from Standard Chartered Bank:
Standard Chartered Bank also considers the naira undervalued following the float and expects the currency to strengthen to N685 per USD as Nigeria accelerates the implementation of necessary reforms in its foreign exchange market. They forecast a further rise to N720 per USD in Q3-2023 before appreciating thereafter as the market stabilizes.
Unified Exchange Rate and Economic Reforms:
Nigeria’s decision to float the naira marks a significant shift from years of a currency peg system that deterred foreign investors and negatively impacted the economy. The move towards achieving a unified exchange rate, along with other reforms, such as the removal of a costly petrol subsidy program, is part of President Bola Tinubu’s broader agenda to revitalize the economy and attract investment.
Conclusion:
The Nigerian naira has experienced a significant depreciation since the country’s foreign exchange reform, moving from an overvalued to an undervalued currency. Bank of America and Standard Chartered Bank analysts both suggest that the naira is currently undervalued and anticipate a strengthening of its value in the future. While challenges persist during the transition period, the liberalization of the exchange rate and the implementation of economic reforms signal Nigeria’s commitment to creating a more stable and investor-friendly environment.
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