As its current exchange rate to the dollar is significantly higher than fair value, Nigeria’s local currency unit is expected to weaken even more over the course of the following year, according to Bank of America.
The widely used black market rate, the real effective exchange rate set by the central bank, and our own analysis of the naira’s fair value all indicate that the currency is 20% overvalued, according to a Bloomberg report on economist Tatonga Rusike’s note to clients on Tuesday.
Over the next six to nine months, “we see potential for it to weaken by an equivalent amount, taking it to as high as 520 per USD.”
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.
CBN Tackles Those Using Parallel Market To Push For Naira Devaluation
The naira exchanged at 440.95 to the dollar in the official spot while parallel rate went up to N740, according to the bureau de change operators.
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 per cent, BofA analysis show.
“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.
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