Following the government’s long-awaited foreign exchange reform, the Nigerian naira has moved from being overvalued to being undervalued, according to analysts at US-based Bank of America, as reported by Businessday in a note sent to clients on June 28.
“We now see a USDNGN fair value of 680 per USD (previously 580),” the analysts were reported as stating in the publication. However, the Bank of America (BOA) analysts predicted that USDNGN will likely trade above this level with year-end 700 and the return to 650–680 in early 2024.
Since Nigeria’s naira was floated on June 14, the value of the currency has fallen more than 60% from its pre-reform level of N460 per USD.
On Tuesday, the currency closed at N780 per USD, according to FMDQ data.
The Bank of America’s fair value estimate of N680 means the naira is now 12 percent undervalued.
“The caution is transition time, aligning rates and still to unlock more USD into the formal market will take some time.
When the dust has settled, the value of the naira should be stronger and appreciating,” the analysts added.
According to Bank of America, higher oil exports ($12 billion more) and a liberalised import regime ($10 billion increase in non-oil imports) can still result in consistent current account surpluses over the medium term which will boost dollar inflows required to support the naira.
“An addition of $12-13 billion on export revenues from higher oil production is moderated by a liberalised imports regime that could add $10 billion as non-oil imports increase. Still a net gain of $2-3billion that strengthens the current account surplus,” the BOfA analysts said.
On June 13, Nigeria decided to float the naira, a marked departure from years of a currency peg that spooked foreign investors and hurt the economy.
Standard Chartered Bank is also of the view that the naira is undervalued following the float and expects the currency to strengthen to N685 per US dollar as Nigeria quickens the pace of implementing reforms needed to fix its foreign exchange market.
“We now forecast USD-NGN at 685.00 at the end Q2-2023 (from 480 previously), rising to 720 in Q3-2023 (520 prior), before appreciating thereafter as the market stabilises,” Razia Khan, head of research, Africa & Middle East and Samir Gadio, head of Africa strategy both at Standard Chartered bank said in a June 14 note to investors.
The latest in a series of reforms by new President Bola Tinubu is the elimination of a costly petrol subsidy program. Nigeria’s daring move towards a single currency rate after years of various exchange rate practice sparked criticism from economists.
Ada Peter
