Naira Lost 233% Under 7 Years – Analysts
In less than seven years, the Nigerian naira has lost N464.67 or 233% of its purchasing power to persistent devaluation, according to analysts at Cowry Asset Management Limited. Naira was officially floated last week as Nigeria bites the bullet after long years of dilly-dallying on FX reform despite increased foreign investors’ exits from the local economy.
Multi-tiered exchange rate management was cited by global rating agencies and multinational lenders as the key factor stopping FX inflows in Nigeria, resulting in a surge in forex backlog despite as market seeing capital control measures initiated by the Central Bank as a barrier to foreign inflows.
In 2022, MSCI Index in a report threatened to downgrade the Nigeria index as it also cited the inability to get foreign currency out of the economy over CBN managed FX regime and scarcity. At various analysts’ earnings conferences attended by MarketForces Africa, multinational companies noted that upstream profits have been difficult.
In a circular released, the Central Bank of Nigeria (CBN) announced immediate changes to the Nigerian FX market. The apex seeks to collapse all segments into the Investors and Exporters (I&E) window, introducing the ‘’willing buyer willing seller’’ model.
Following the announcement, the naira plunged to N664.04 per US dollar, after rising to as high as N702, from N471.67, implying a 40.9% depreciation. However, the end-of-day rate remains significantly lower than the black-market rate, which sold for as much as N760.
In its note to investors, Cowry Asset Management Limited said the decision to float the naira became effective with the collapsing of the existing market segments into the Investors and Exporters window, the reintroduction of the ‘willing buyer, willing seller” model, 2-way based quotes with a bid-ask spread of N1, and an order book to ensure transparency of orders and seamless trade executions.
Although the decision to float the local naira has been met with mixed reactions, analysts stated that it is widely believed that this step was a necessity in order to improve the country’s economy.
CSL Stockbrokers said the pro-market policy will be positive for the economy in the long term, and expressed concern that the shock may be too hard on the fragile economy and the average consumer in the short to medium term.
“A focus on rate convergence without structural reforms to increase the supply of FX will be a case of treating the symptoms while ignoring the underlying cause of the problem which is an acute shortage of supply amidst a growing demand for FX”, CSL Stockbrokers said in a note to investors.
The strong argument for this new development still holds that the free market will be able to determine the naira’s true value, leading to more investment inflow and economic growth, Cowry Asset Managers said.
The investment firm said there may be, in the short term, FX market instability emanating from the inability of the free market to determine the naira’s true value. Recall that in 2016, the apex bank introduced a managed floating exchange rate regime, which replaced the previous fixed exchange rate regime. Analysts said the managed floating regime allows the naira to fluctuate freely within a band set by the CBN.
The monetary authority’s managed foreign exchange regime was implemented in an effort to improve transparency and efficiency in the FX market and make the naira more competitive. Cowry Asset Management said the policy was marred by racketeering, speculative rip-offs, and incoherent FX policies. Citing FX market data, the firm said the value of the naira depreciated at the official rate by 233.1% between January 4, 2016, and June 14, 2023.
This means that Naira traded between N199.37/$1 and N664.04/$1, with a loss of N464.67 in value under 7 years, it added. Over the years, Nigeria’s foreign exchange market has operated a multi-tiered system that includes the official market, the parallel market, and the Bureaux de Change (BDC) market segments.
The central bank has been heavily involved in the regulation of these markets as well as in managing the value of the naira across all markets. “While it is too early to ascertain the long-term impact of the free-float decision, there is a clear indication that it is a significant policy shift with a major economic impact.
“However, we have asserted in our foreign exchange outlook for 2023 that further pressure from the dollar in the fx market will remain unabated due to limited FX inflows from exports and foreign investments as a result of the stewing business environment”.
The firm revealed that a key benefit will be the elimination of losses ensuing from the arbitrage spread, adding that this could help alleviate pressure on the foreign reserves.
“We can tilt a bit of our focus on the banks (especially the Tier-1 banks) that hold fx-denominated assets as key beneficiaries of the devaluation, as those in long positions may likely record gains from asset revaluations. i.e., converting to naira from dollars.
“Nigerian manufacturing firms, which are heavily reliant on imports of raw materials, may encounter some challenges, which include pressure on operating and profit margins”, the investment firm stated.
Cowry Asset Management expects to see the foreign exchange market remain volatile in the near term as market participants position themselves to determine the fair exchange price levels and, in the medium to long term, ascertain the true value of the naira against the dollar in the market. #Naira Lost 233% Under 7 Years – Analysts
