Perverse smiles as the Naira climbs to N1,002/$
There is a Yoruba adage that says, “oro buruku pelu erin,” literally translated to describe an ironic grin that is used to greet bad news.
This is how Nigerians received the news that the naira finally stopped plunging and is now trading at N1,002/$ in the last three days. But the reality is that investors are confused as to why the economy is on the ropes after the lofty policy announcements by the president 120 days ago. Now Nigerians are in pain and awaiting the promised gains. The euphoria is giving way to frustration and anxiety.
The World Bank, in its latest report on the global economy, is forecasting that GDP growth in SSA will fall to 2.5% in 2023. This is because of the declining performance in the three largest economies: Nigeria, South Africa, and Angola. Nigeria is plagued by insecurity, falling currency, and the grip of special interest, whilst South Africa is facing severe power crisis and Angola’s oil output is taking a nosedive (1.115mbpd).
The Nigerian economy is grappling with excruciating debt service, spiraling inflation, and tepid growth. Whilst South Africa announced a decline in its net external reserves to $54.98bn, Nigeria’s gross external reserves remain a subject of controversy. Its published data shows a gross external reserves position of $33.23bn on a 30-day moving average basis. The backlog of unsettled forward contracts is estimated at $6.8bn and airline-trapped funds are approximately $800mn. Therefore, it is baffling to see that our PPP (purchasing power parity) value of the naira is N735.53/$, approximately 27% above the parallel market rate. It shows that the naira is 1.3% undervalued rather than overvalued.
Some economists have questioned the logic and sanity of our analysis, but that is what the PPP analysis discloses as of September 30. We believe that the naira will appreciate to N900/$ before December if and only if, Nigeria comes clean with what its true external reserves minus its encumbrances are to the market. However, we do not expect any tangible appreciation of the Naira until 2024. We are encouraged by the pedigree of the new CBN leadership that they will stop doing the dumb things and start doing some smart things. But those are necessary and not sufficient to salvage the decadence.
We are confident that Nigeria will approach the markets to reschedule its inefficiently structured external debt and talk to the IMF about policy support after the World Bank meetings in Morocco. Some may ask why borrow more money when you are up to your ears in debt. The answer is simply that mismanaged debts & liabilities with no tangible assets to show need to be followed by project-specific borrowing and proper governance going forward.
In a perverse way, we use Karl Marx’s call for workers’ liberation to describe the proposed freedom from debt, “that nations of the world should deal with their creditors strategically because they have nothing to lose but their chains”.
In the latest LBS Breakfast session, Bismarck Rewane and the FDC Think Tank dissect these global and domestic issues and the path of the naira on its way towards a real equilibrium exchange rate in the months ahead.
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