CBN May Swiftly Devalue Naira Post-2023 Election

Latest survey of investors and analysts conducted by globally renowned media outlet, Bloomberg claims the Central Bank of Nigeria (CBN) is likely to devalue the naira after the country’s general elections in February, by the steepest margin in six years to align it with market perceptions.

The news medium on Wednesday 16th of November, 2022, made it known that of the 13 participants in its poll, 11 expected the CBN to devalue the naira after the election, while the remaining 2 predicted that the apex bank would continue with a gradual depreciation of the currency – a process which commenced with the adoption of the more flexible NAFEX – also known as the investors and exporters exchange rate, in 2021.

The report quoted the head of research at SBM Intelligence, Ikemesit Effiong, as saying: “There will be a major devaluation either on President Muhammadu Buhari’s way out or in the first few months of the new administration.”

Median estimate is for the expected devaluation to weaken the naira by as much as a fifth, which would take the local currency to N533 per dollar.

Last month, Bank of America Corp. Economist Tatonga Rusike gave a similar prediction. The median of 10 participants in the Bloomberg poll agreed the fair value of the local unit hovers around 583 per dollar, Investors King understands.

Naira forward contracts are pricing in a depreciation of about one-third over the next year. A markdown between 20 per cent and 33 per cent would be the largest since 2016. The naira has weakened 4.5 per cent against the greenback this year. “A devaluation would likely push up annual inflation that’s at a 17-year high of 21.1 per cent — although it’s already been impacted by the weaker parallel market rate — and cause a one-off increase in the ratio of public debt to gross domestic product,” Mark Bohlund, senior credit research analyst at REDD Intelligence, stated.

According to the Budget Office of the Federation, debt service costs consumed 83 per cent of government revenue in the eight months through Augus. “More materially, the fiscal balance would improve due to the majority of revenue, that is from oil, being dollar-denominated, while expenditure is naira-denominated,” Bohlund added.

Nigeria, priding herself as Africa’s second largest crude producer, after Libya, relies heavily on oil and gas for about 90% of its export revenue. “The scale of the devaluation may be influenced by the winner of presidential election,” said Daniel Sodimu, sub-Saharan Africa analyst at FrontierView, who estimates the naira’s current fair value at N650 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 said.

An incumbent party retaining power may see modest changes such as “the current crawling adjustments to the exchange rate will remain, so it will keep Nigeria as the largest economy, on paper,” Sodimu added.