Analysts at Cordros Research predicted that the Central Bank of Nigeria (CBN) would not devalue the naira any time soon, even though there is currently a N284 difference between the official exchange rate and the parallel market rate. They warned that a lack of flexibility in the foreign exchange market could lead to even more significant misalignment in the future.
The Nigerian naira has dropped in value from last Friday’s closing rate of N461.67 to the dollar in the Nigeria Autonomous Foreign Exchange market (NAFEX), also called the Investors and Exporters window, to today’s rate of N745.
As the shortage of foreign exchange worsened, banks also stopped letting their customers use cards denominated in the naira to pay overseas transactions.
This is due to Godwin Emefiele, governor of the Central Bank of Nigeria, promising late last year that the bank would maintain its policy of intervening in the foreign exchange market to prop up the naira.
According to Cordros’ forecast for 2023, market analysts do not anticipate the central bank’s devaluation of the naira. A new market-oriented fiscal administration is required before the current CBN management devalues the currency. However, the credibility of the policy framework and reform requires a devaluation of the currency on the official forex markets and an increase in both pliableness and openness of the underlying forex framework.
“Without flexibility, it is only a matter of time before the forex misalignments build back up, leading to more pressures to implement another outsized currency devaluation.”
When the government changes hands in 2023, a significant devaluation followed by periodic messages to let the local currency depreciate in line with fundamentals will be feasible.
The analysts said that the CBN could allow the currency to fall annually depending on the external balance assessment, which considers inflation, net foreign assets, the current account gap, and growth. To restore trustworthiness and dramatically lessen currency fluctuations, “clear communication and commitment to this framework will be crucial.”
In the meantime, the CBN’s website shows that the country’s external reserves increased by about $100 million in the first three days of the year.
As of January 5, 2023, the reserves have increased to $37.152 billion from the $37.069 billion recorded on January 3, 2023, the first business day of the year.
Compared to its opening value of $40.52 billion in 2020, it dropped by $3.43 billion in 2022.