Speculation Rises Over Impending Naira Devaluation Following Removal of Policy Chief

The Nigerian naira is under intense scrutiny as financial analysts delve into the likelihood and potential impact of an imminent devaluation.

The heightened speculation follows the unexpected removal of policy chief Emefiele on Friday, whose unorthodox measures aimed at supporting the naira and limiting foreign exchange access for imports have been called into question.

Over the past few weeks, the Nigerian currency has experienced a tumultuous decline, plunging to an unprecedented low before finally stabilizing at 471.80 per dollar on Monday. In the wake of this volatility, experts and economists are diligently examining the consequences of Emefiele’s departure and the far-reaching effects it could have on the naira’s future.

Bloomberg reported on Monday that since the election of President Bola Tinubu in February, speculation regarding a potential devaluation has been on the rise. Tinubu, who pledged to review and optimize the naira system, promptly removed Emefiele, further fueling the speculations.

Nigeria, Africa’s largest economy, currently operates a multiple exchange rate regime, with the official rate tightly controlled, leading to heightened demand on the black market, Investors King reports.

Economists and money managers have been quick to share their insights on Emefiele’s removal and its potential implications for the naira.

Patrick Curran, a senior economist at Tellimer in London, believes that the removal of Emefiele is a necessary step towards establishing a functioning monetary policy and exchange rate regime, which will be favorably received by the markets.

However, the form and extent of the exchange rate adjustment remain uncertain. Curran raises questions about whether the adjustment will be significant enough to clear the market and whether it will continue to float or be a one-time devaluation, which could result in the reemergence of imbalances.

Mark Bohlund, a senior credit research analyst at REDD Intelligence, expresses his dissatisfaction with the Central Bank of Nigeria’s policymaking under Emefiele, stating that he expects a devaluation to occur in the next six months, specifically in the second half of 2023, once the inflationary effects of reducing fuel subsidies have subsided. Bohlund predicts a devaluation to reach a range of NGN 650-700/USD.

Bojosi Morule, an economist at Goldman Sachs International in London, sees Emefiele’s suspension as an indicator of a significant policy shift, following the transition from the previous administration. Morule identifies the overvalued naira and the multiple exchange rate regime as key negative factors for the macroeconomic environment and investment.

With the change in leadership at the Central Bank of Nigeria, Morule believes that the probability of a near-term devaluation of the naira has increased, especially considering Tinubu’s preference for a “unified exchange rate.”

Thys Louw, a portfolio manager at asset manager Ninety One in London, commends President Tinubu for his proactive approach to address two critical concerns for investors: fuel subsidies and foreign exchange reform. Louw suggests that Emefiele’s removal, seen as an obstacle to FX reform, is a positive step towards implementation.

While Louw does not anticipate a substantial change in Nigeria’s credit position due to bonds already factoring in some reform momentum, the move does indicate the potential for continued outperformance.