Reversed FX Adjustment Prompts Confusion over Naira Valuation
Reversal of the foreign exchange rate adjustment at the Investors & Exporters Window by the Central Bank of Nigeria on the first trading day in 2021 has triggered confusion over Naira valuation.
The monetary policy authority closed 2020 by devaluing Naira by about 4.25% in the Investors & Exporters window, the third devaluation recorded in the period.
Amidst clout for devaluation of the local currency due to low accretion into the external reserves, currently below $36 billion, analysts claim Naira remains largely overvalued.
While devaluation would put pressure on Nigerians with declining purchasing power, it could trigger inflow of foreign currency into the economy.
This could, according to analysts, provide support base for economic growth planning and development agenda.
Uncertainty over probable devaluation as forecasted by growing number of investment analysts could ease if Nigeria’s oil production/supply comes with relatively strong price of oil.
In 2021, as the countries scramble for COVID-19, global prices of oil has gained strong, rising above $53 per barrel in the first week.
Federal Government revenue target underperformed due to the outbreak of coronavirus amidst structural and fiscal imbalances.
According to Tellimer – an emerging market investment firm, Nigeria tests the water for another devaluation.
The firm noted that the Central Bank of Nigeria (CBN) closed 2020 by devaluing Naira by about 4.25% in the I&E window, the 3rd devaluation of the year.
However, on Monday it reversed the move, which makes Tellimer to believe that the CBN may be testing the water for another devaluation soon.
Analysts explained that with the parallel rate and 12-month non-deliverable forwards (NDFs) trading at about 470 to dollar and FX liquidity limited, further flexibility is needed.
On 31 December, 2020 the local currency depreciated by 4.25% in the Investors’ & Exporters’ (I&E) window, rising from 393.5/US$ to 410.25/US$, according to FMDQ data.
The devaluation was the third such move in the I&E window in 2020 and brought total deprecation in the I&E window to about 12.5% in 2020.
Over the same period, the CBN has moved its official exchange rate from 306.5/US$ to 360.5/US$ in January and again to 379.5/US$ in August (about 24% in total) to bring it closer to the I&E rate.
The apex bank also adjusted the Bureau De Change (BDC) exchange rate and permitted residents to withdraw remittances in foreign currency last month, helping to ease some pressure on the parallel exchange rate.
However, Tellimer noted that the latest devaluation in the I&E window was quickly reversed on the first trading day of 2021, with Naira moving back to 394.3/US$ by close of business on 4 January (in line with its December average).
Analysts said the reversal has left markets confused, as it seems clear that CBN sales drove the move in both directions.
“It is possible the CBN was testing the market reaction ahead of another devaluation but remains reluctant to pull the trigger.
“But even if Naira was devalued to 410/US$ it would still be overvalued, with the parallel exchange rate and 12-month NDFs still trading around 470/US$”, Tellimer hinted.
Tellimer reckoned that a one-off move without further flexibility afterwards is only a temporary solution anyway, as imbalances would simply build back up amid high inflation differentials and external funding needs.
Read Also: FX Inflow into Investors/Exporters Window Plunged 47%
Reversed FX Adjustment Prompts Confusion over Naira Valuation
