Value of the naira could fall as low as N2,300 to the dollar if reforms are not attended to quickly, Bismarck Rewane, Financial Derivatives Company (FDC) Limited has warned.
“Using various methodologies, the naira’s true value falls within N1,430-N1,450 against the US dollar, already reflected in both parallel and official markets.
“However, delayed complementary market reforms and policy efforts could push the naira to N2,300/$ in the short term”, said Rewane.
He however said that, if the dollar supply improves and markets stabilise, the currency could appreciate to around N1,200 in the next 6-24 months.
He said that the naira can bounce back by rebuilding confidence in the foreign exchange (forex) markets is the first step. To attract investors, interest rates need to match inflation and narrow negative real rates of return. A minimum 200bps hike is projected at the next MPC meeting on February 26/27.
“Additionally, the CBN should implement an open auction system, dismantling the monopolistic FX market structure to let demand and supply determine prices”, said the lastest FDC publication.
He agrees with the CBN that the naira should trade at N850/$ and our PPP indices corroborate this view, placing the naira at N878/$. However, proactive measures are crucial to achieve this. Ad they say, inaction can lead to chaos, and chaos paves the way to crisis.
Rewane said the naira is undergoing a shift to its true value after almost a decade of forex market imbalance, a cut-throat market structure, uncertain exchange rate expectations, and capital control measures.
“The naira’s decline is fueled by rising inflation and a cost-of-living crisis. Key commodity prices have more than doubled since May 2023, contributing to a 27-year high in headline inflation at 28.9 per cent. Additionally, the naira has lost 17% of its value in 2024, following a 39 per cent loss in 2023, with the official rate hitting a record low of N1450/$, compared to N490/$ in 2016.
On why the naira is falling, he pointed fingers at dollar sacarcity, fear, lack of confidence in the naira, speculation, negative real rates of return, restrictions, and exchange controls have led to the steep depreciation. The root causes are both structural and transient.