The naira which depreciated to N1,089.51 against the dollar on Tuesday last week is undervalued by 26.56 percent at the official market, according to Bismarck Rewane, managing director/Chief Executive Officer of Financial Derivatives Company Limited.
The naira experienced a notable decline, reaching N1,089.51 against the dollar last week, marking the second instance in 2024 that it fell below the N1,000 threshold in the official foreign exchange (FX) market.
During a presentation on January 11, 2024, Rewane highlighted that the exchange rate convergence occurred following the official exchange rate’s depreciation.
This shift was a consequence of the Central Bank’s decision on June 14, 2023, to consolidate all foreign exchange market segments into the Investors and Exporters (I&E) forex window, now known as the Nigeria Autonomous Foreign Exchange Market (NAFEM).
Rewane pointed out that the gap between the NAFEM and the parallel FX market had narrowed to as low as N4.75. However, he observed that the naira’s volatility in the parallel market persisted due to factors such as low-interest rates, speculation on the naira, and forex scarcity. Presently, the exchange rate gap between the NAFEM window and the parallel market stands at N155.49 per dollar.
At the official market, the dollar was quoted at N1,089.51, while in the black market, it was valued at N1,245/$ last week. Rewane expressed that at the parallel market rate of N1,245/$, the naira is undervalued by 35.73 percent.
These revelations raise concerns about the overall stability of the naira and underscore the impact of recent policy changes on the foreign exchange market.
Rewane emphasized the pivotal role of capital control measures in shaping the future of Nigeria’s currency, the naira. According to him, the removal of these controls, coupled with increased transparency in the foreign exchange market, is poised to fortify the naira’s position.
In the optimistic scenario envisioned by Rewane, the elimination of capital controls is anticipated to usher in a new era of transparency and confidence in the FX market. Predicting stability, he foresees the exchange rate plateauing at N900 per dollar throughout the years 2024 and 2025. Additionally, he expects a substantial surge in foreign inflows, estimating an influx ranging from $8 to $10 billion in 2024 and N1 billion in 2025. This upswing is anticipated to result from various channels, including remittances, foreign direct investment (FDIs), foreign portfolio investment (FPIs), and invisible transactions.
However, the economic analyst also outlined a less optimistic scenario in the event that capital controls persist. In this situation, he foresees a loss of confidence and investor jitters, triggering a depreciation of the naira to N1,530 in 2024 and a further dip to N1,700 in 2025. The continuation of capital controls is expected to constrain foreign inflows significantly, with projections ranging from $900 million to $1.1 billion in 2024 and $800 million to $1.05 billion in 2025.