Nigeria is expected to devalue its currency after elections in February by the steepest margin in six years to align it with market perceptions, according to a survey of investors and analysts.
Nigeria, Africa’s largest economy, operates a multiple exchange regime dominated by a tightly controlled official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorised black market. This has led the spread between the managed and parallel markets to significantly widen. The difference is almost 77%.
Of the 13 participants in the Bloomberg poll, 11 expect the Central Bank of Nigeria (CBN) to devalue the Naira after the election. The remaining two predicts that it will continue with a gradual depreciation of the currency that started with the adoption of the more flexible NAFEX, also known as the investors and exporters exchange rate, last year.
Nigeria adopted a multiple exchange-rate regime to avoid an outright devaluation of the naira by keeping a stronger pegged rate for official transactions and weaker exchange for non-government related transactions. The central bank has maintained the currency management system despite entreaties from the International Monetary Fund and the World Bank to scrap the practice.
Last year, the CBN devalued the currency by 7.6% in a move toward a single exchange-rate system.
The median estimate is for the next devaluation to weaken the currency by as much as a fifth, which would take the naira to 533 per dollar. Last month, Bank of America Corp. An economist, Tatonga Rusike, gave a similar prediction. The median of 10 participants in the Bloomberg poll sees the fair value of the local unit at 583 per dollar.
A devaluation would likely push up annual inflation that’s at a 17-year high of 21.1% – although it’s already been impacted by the weaker black-market rate – and cause a one-off increase in the ratio of public debt to gross domestic product, according to a senior credit research analyst.
Debt-service costs consumed 83% of government’s revenue in the eight months through August, according to the budget office. The scale of the devaluation may be influenced by who wins the presidential vote, said a sub-Saharan Africa analyst, Daniel Sodimu, who estimates the Naira’s fair value at 650 against the dollar.
“If a pro-business leader wins the election, then it is likely a devaluation would be sizable enough to make Nigeria’s economy smaller than South Africa’s, using the official rate to convert”, Sodimu said. “Such a move would help stop the shortage and rationing of dollars, which have been a drag on business operations in the country and an overall disincentive to invest in Nigeria”, he added.
The Naira traded at 443.99 to the dollar in the official spot market as of Tuesday. It changed hands at about 785 in the parallel market, according to Abubakar Mohammed, an operator of a Bureau-de-change that tracks the data, in Lagos.
