The Nigerian currency is over-valued by 200 percent and the Investors and Exporters (I&E) foreign exchange window rate may be devalued next month, Bismarck Rewane, managing director of Financial Derivatives Company Limited (FDC) has said.
The valuation is based on the Big Mac index which is considered extreme – taking into account just one product and used to measure the level of overvalued currency and as a strategy to encourage exports.
The naira has depreciated against the dollar across the Nigerian foreign exchange market in recent weeks. It fell to N431 per dollar, its lowest since the introduction of the I&E forex window, which is the official window.
It weakened to a record low N710 per dollar on the parallel market, popularly called black market, last month.
“Most currencies are undervalued but Nigerian naira [is] overvalued by 200 percent,” Rewane said at a breakfast session at Lagos Business School (LBS) in Lagos. “The naira will likely depreciate again towards the N695/$-N700/$ range at the parallel market. The CBN will allow for a partial crawling peg in the forex market, and bring the I&E rate down to N440/$ in September.”
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About 48 countries in the world, including nine African countries, operate floating or flexible exchange rate regimes, according to him.
Demand pressure and limited foreign currency inflows triggered depreciation of the naira, widening exchange rate premium, FSDH Research said in its macroeconomic report.
Despite the increase in oil price, external reserves were under pressure in the second quarter of 2022, FSDH analysts said.
Nigeria’s external reserves, which stood at $40.52 billion in 2021, have declined to $39.18 billion in 2022, data from the FDC said.
Nigeria’s rising import bill and low inflows from non-oil exports continue to exert pressure on exchange rate and external reserves, Rewane said.
“Forex market in Nigeria is a price discriminatory monopoly. The barriers between the markets are thin and permissible. Multiple exchange rates create room for arbitrage and encourage rent-seeking behaviour,” he added.
Rewane stressed the need to increase dollar inflows into the country to address the naira crisis.
Reacting to the development, rate higher under the current situation in Nigeria,”
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said the direction of the naira in the short term will largely depend on the ability of the country to exports both oil and non-oil goods and services, attract foreign direct investments (which can happen through the provision adequate security of lives and property in the country) and the country’s ability to create an enabling environment that will ensure that it produces goods that it has competitive advantage over other country to reduce imports.
“I agree that the naira is currently mispriced in view of Nigeria’s inflation rate and other economic fundamentals relative to the United States,”
Uche Uwaleke, professor of capital market, said.
He said this had equally become evident against the backdrop of the US Fed’s interest rate hike, capital flow reversals currently being experienced by most emerging economies including Nigeria and the strengthening of the US dollar against other world currencies.
He said: “Be that as it may, it is near impossible at this time to determine the real Exchange rate of the naira given peculiar behavioural aspects which do not lend themselves to financial modelling.
“To this end, attempt to estimate the degree by which the naira is overvalued is only tantamount to an academic exercise. More than this, the theoretical bases for determining exchange rates including the Purchasing Power Parity, the Real Effective Exchange rate, the Fundamental Equilibrium Exchange rate, etc. all have conditions and assumptions which are not met in Nigeria’s current situation.”
Uwaleke said: “The crawling peg argument, in which the naira is pegged to a band and allowed to fluctuate within it, appears persuasive but it must be borne in mind that it can only be successful in a low inflation rate environment supported by multiple streams of forex else the band breaks down and suffers from frequent adjustments.
“I think the naira will stabilise and the parallel market premium will narrow in the medium term following improvements in forex liquidity on the back of the gradual increase in the forex inflows from Non-oil sources largely on account of the RT 200 FX programme of the CBN.”
