In a recent report released by Bank of America, analysts have suggested that the Nigerian currency, the Naira, is presently undervalued. The report highlights several factors that have contributed to the devaluation of the currency and discusses potential implications for the Nigerian economy. Bank of America analysts are projecting it to trade at approximately NGN680 per dollar by the end of the year. The analysts predict that Nigeria is expected to achieve current account surpluses in the medium term due to increased oil revenues and the implementation of a more liberalized import regime.
Furthermore, the report points out that Nigeria’s fiscal deficit and high inflation rates have also contributed to the devaluation of the Naira. The country has faced challenges in managing its fiscal deficit, which has led to increased borrowing and heightened concerns among investors. Additionally, high inflation rates erode the purchasing power of the Naira, making it less attractive to foreign investors.
Naira Embraces Flexible Exchange Rate System
Less than a month after Nigerian monetary authorities transitioned away from the fixed exchange rate regime, Bank of America analysts have recently asserted that the Nigerian currency, the naira, is currently undervalued. Despite the naira currently hovering above NGN700 per US dollar, analysts predict that by the end of the year, it will likely trade at around NGN680 per US dollar.
Bank of America analysts have recently released their latest forecast, which comes over nine months after an economist from the financial institution predicted a 20% devaluation of the naira. This devaluation was projected to result in an exchange rate of NGN520 to USD1.
Nevertheless, as stated in a mid-June report by Bitcoin.com News, when the Central Bank of Nigeria (CBN) initially implemented the policy to allow the naira to float freely, the currency experienced a significant decline, dropping from slightly below NGN470 per dollar to NGN634 per dollar. Subsequently, the naira has continued to depreciate against the dollar.
The Weight of Nigeria’s Heavy Debt Load
In their most recent analysis of Nigeria, the analysts provided insights into their reasoning for projecting that the naira will begin trading at approximately 680 per dollar in 2024. They highlighted the following factors as contributing to their conclusion:
“The caution is transition time, aligning rates and still to unlock more USD into the formal market will take some time. When the dust has settled, the value of the naira should be stronger and appreciating.”
Furthermore, in their most recent assessment of Nigeria, the analysts additionally emphasized that the country could potentially achieve sustained current account surpluses through higher oil revenues, which could amount to an additional $12 billion, and the implementation of a more liberalized import regime.
The analysts’ note also called upon Nigerian President Bola Ahmed Tinubu to address the issue of oil theft, as doing so could substantially increase the country’s earnings from hydrocarbons. By effectively combating oil theft, Nigeria could alleviate its heavy debt service burden since the Nigerian currency is presently undervalued.
Bank of America analysts have suggested that the Nigerian currency is presently undervalued. Factors such as declining oil prices, fiscal deficits, and high inflation rates have contributed to this devaluation. While an undervalued currency can boost exports and attract foreign investment, risks such as imported inflation and reduced investor confidence must be carefully considered.
The analysts recommend proactive measures by the Nigerian government to diversify the economy, reduce reliance on oil, and improve the business environment. They also propose a more flexible exchange rate regime to achieve a market-determined value for the naira. Overall, addressing the undervaluation of the naira is crucial to restore stability and promote sustainable economic growth in Nigeria.
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