JP Morgan, the prominent global financial services company headquartered in the United States, has released a significant forecast suggesting that the value of the Nigerian naira could appreciate to N850 per U.S. dollar by December 2023, specifically within the Investors’ and Exporters’ Forex window.
The US-based bank underscored that this prediction is contingent on the ongoing efforts to uphold a flexible foreign exchange (FX) regime in Nigeria and the introduction of more stringent monetary conditions.
These endeavors, according to JP Morgan, may contribute to sustaining the nascent progress towards a more flexible FX market.
The interbank FX rate in Nigeria recently rose to over 900, up from 750, thereby significantly narrowing the gap with the parallel market rate, which currently hovers slightly above 1,000 naira per dollar.
JP Morgan anticipates that the USD/NGN exchange rate will gradually decrease towards 850 by the end of the year. The bank attributes this projected decline to the combination of tighter monetary policies, more appealing interest rates, and favorable FX levels.
These factors may discourage incremental dollarization while potentially attracting foreign capital into the Nigerian market.
JP Morgan has recommended additional policy actions to further stabilize the foreign exchange market.
These measures include enforcing regulatory limits on FX net open positions for commercial banks and exploring the introduction of a cash reserve ratio on FX deposits. The issuance of dollar-denominated assets onshore is also suggested.
On the fiscal front, JP Morgan advises the Nigerian government to mandate all taxes to be paid in the local currency.
These recommendations, the bank suggests, may already be part of the Federal Government’s forthcoming revision of guidelines governing the forex market’s operations.
Moreover, JP Morgan urges oil-exporting companies to consider selling their foreign exchange proceeds on the interbank market rather than directly to the Central Bank of Nigeria, a move that could enhance liquidity and stability.
Finally, the bank highlights concerns about the willing buyer-willing seller nature of the foreign exchange market, citing its contribution to extreme volatility.
JP Morgan recommends a reconsideration of this approach, suggesting that it impedes price discovery and could be adjusted for more effective regulation.