Naira at growing risk of devaluation in coming weeks, Absa says

Nigeria will likely devalue its local currency by about 15% after President-elect, Bola Tinubu, is sworn in on May 29 to alleviate severe trade imbalances and dollar shortages, an analyst at Absa Group Ltd. said.

Africa’s largest economy operates a multiple exchange regime dominated by a tightly controlled official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market.

In his election manifesto, the 71-year-old Tinubu pledged to “carefully review and better optimise” the naira system — a central bank policy he has described as “somewhat arbitrary.”

The Central Bank of Nigeria has kept the naira around 460 per dollar since the start of the year to try to contain inflationary pressures, Nikolaus Geromont, a fixed-income and currency analyst at Johannesburg-based Absa said in a research note. That’s led the spread between the managed and parallel markets to widen significantly. The difference is almost 60%.

“This discrepancy between the official and parallel markets is among the widest since the managed floating rate was introduced in 2016,” Geromont said. With “Tinubu calling for more flexibility in the exchange rate regime, we expect the naira to be upwardly adjusted to 530/USD after the presidential inauguration.”

Naira forward contracts are priced in depreciation of about 21 percent over the next three months. In a survey conducted by Bloomberg last year, investors and analysts also predicted the central bank would devalue the naira after a new president was elected.

A currency devaluation should help ease the severe imbalances currently found in the foreign exchange and trade markets, Geromont said.

Read also: Naira falls to record low at official market

Other factors Geromont sees supporting a devaluation include expectations that inflation may peak in the coming months, easing pressure on the central bank to keep the exchange rate artificially low for the sake of price stability and dwindling international reserves that may face further pressure from growing debt servicing costs and weaker oil prices. Nigeria’s reserves have declined to an almost two-year low of $35 billion.

The central bank has historically maintained hard-currency reserves at around $40 billion, Geromont said. “As they drop closer toward the $30 billion mark, the bank tends to upwardly revise the exchange rate, as was done in August 2017, March 2020 and February 2021.”