Naira Devaluation or Capitulation – February 06, 2024


Dear Subscriber,

Is the naira jinxed?

No. The naira is undergoing a shift to its true value after almost a decade of forex market imbalance, a cut-throat market structure, uncertain exchange rate expectations, and capital control measures.

The naira’s decline is fueled by rising inflation and a cost-of-living crisis. Key commodity prices have more than doubled since May 2023, contributing to a 27-year high in headline inflation at 28.9%. Additionally, the naira has lost 17% of its value in 2024, following a 39% loss in 2023, with the official rate hitting a record low of N1450/$, compared to N490/$ in 2016.

Why is the naira falling?

Dollar scarcity, fear, lack of confidence in the naira, speculation, negative real rates of return, restrictions, and exchange controls have led to the steep depreciation. The root causes are both structural and transient. Crude oil, a major contributor to Nigeria’s exports, has seen output declines due to theft and vandalism, impacting potential dollar earnings. Loss of confidence in the naira further fuels speculation, arbitrage, and hoarding of dollars, causing market disruptions.

What is the true value of the naira?

Using various methodologies, the naira’s true value falls within N1,430-N1,450 against the US dollar, already reflected in both parallel and official markets. However, delayed complementary market reforms and policy efforts could push the naira to N2,300/$ in the short term. If the dollar supply improves and markets stabilize, the currency could appreciate to around N1,200 in the next 6-24 months.

How can the naira’s issues be resolved?

Rebuilding confidence in the FX markets is the first step. To attract investors, interest rates need to match inflation and narrow negative real rates of return. A minimum 200bps hike is projected at the next MPC meeting on February 26/27. Additionally, the CBN should implement an open auction system, dismantling the monopolistic FX market structure to let demand and supply determine prices.

The CBN believes the naira should trade at N850/$ and our PPP indices corroborate this view, placing the naira at N878/$. However, proactive measures are crucial to achieve this. Ad they say, inaction can lead to chaos, and chaos paves the way to crisis.

In the attached link, Bismarck Rewane unpacks the fundamentals of the naira’s decline, focusing on its outlook and impact on businesses, investors, and consumers.

Enjoy your read!