The Central Bank of Nigeria (CBN) is unlikely to devalue the naira exchange rate further against the dollar despite rising demand for the greenback at both official and parallel markets.
Report by Augusto & Co. titled: “2022: The Story So Far & What Lies Ahead”, said the naira, which started this year at N567/$ at the parallel market now exchanges at N707/$ and N416.37/$ at the official market. This has pushed up the exchange rate premium between the official and parallel markets to N290.63/$.
Despite the depreciation of the naira at the parallel market, the apex bank, the report predicted, will not devalue the naira further.
The last devaluation of the naira was in May 2021, when the CBN adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX), also known as the Investor and Exporter (I&E) forex window rate as its official exchange rate to the dollar. The rate at the window was
“We do not expect the CBN to officially devalue the exchange rate despite sustained pressure. At the official market, we expect the naira to hover around N419/$ to N425/$ through the end of 2022,” the report said.
The research firm added: “The persistent swings and volatility of the naira exchange rate has worsened in recent time. It began a wild race on July 19, depreciating by 16 per cent to N717/$ on July 28 before appreciating to N707 on July 29.”
It explained that election-related uncertainty will severely limit capital inflows in the rest of 2022 even if domestic interest rates rise further.
As a result, external reserves accretion, which has been ostensibly triggered by the CBN’s interest rate hike, is expected to be constrained.
This, it predicted, will also impair the CBN’s ability to intervene in the foreign exchange market, hence the reserves level will stabilise at about $41 billion by the end of 2022.
The Agusto & Co. report noted that long term inflation is one of the exchange rate stoking factors, adding that the differential between two countries’ long term inflation rate would be mirrored in the exchange rate depreciation between both countries.
In other words, the long-term rate of inflation of the naira compared to that of the US Dollar plays a significant role in what the value of naira would be relative to the dollar.
“Since the Naira has a higher long-term rate of inflation (12 per cent) compared to the US Dollar (two per cent), it is a weaker currency and will depreciate by approximately 10 per cent,” it said.
The report enumerated three major mechanisms for exchange rate determination, namely, pegged exchange rate system, floating currency, and a crawling peg. It explained that although each of the options has its own shortcomings, a crawling peg option is more suitable for Nigeria.
This, it said, allows the CBN to intervene in the market when rates are significantly higher or lower than its target.
Furthermore, an economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the naira surprised speculators and market watchers by appreciating by 1.5 per cent from N718/$ to N707/$ on Friday.
“Most analysts were fearing that a N1000/$ was within shouting distance. As unpalatable as N707/$ may sound, some Nigerians are breathing a sigh of relief. The reason for this respite is mainly because of a naira crunch,” he explained.
Continuing, he said there is temporary resistance at N718/$ and a market correction which means the naira may appreciate to N695/$ before falling again.
