Nigeria’s local currency unit is set to weaken further next year as its current exchange rate to the dollar is well above fair value, according to Bank of America.
According to a report by Bloomberg, economist Tatonga Rusike said in a note to clients on Tuesday that, “three indicators, the widely-used black-market rate, the central bank’s real effective exchange rate, and our own currency fair value analysis shows the naira is 20 per cent overvalued.
“We see scope for it to weaken by an equivalent amount over the next six-nine months, taking it to as high as 520 per USD.”
Why Naira will be under pressure: While the naira will come under increasing pressure “due to limited government external borrowing,” devaluation is unlikely to happen until after the February 2023 presidential elections, the bank said.
Africa’s largest economy operates a multiple exchange regime dominated by a tightly controlled official exchange rate and a parallel market where the currency is freely traded.
“The greater the disparity with the official market, the higher the likelihood of increasing excess demand for foreign currency on the parallel market,” the bank said.
The official rate has depreciated by less than 10 per cent since December 2021 even as the parallel rate is down by nearly a third within the same period, widening the gap to almost 70%, BofA analysis show.