"Biggest devaluation in six years may be on the cards for naira

" Biggest devaluation in six years may be on the cards for naira - Bloomberg \u00a0 \r\nAfrica\u2019s largest economy is expected to devalue its currency after elections in February by the steepest margin in six years to align it with market perceptions, according to a survey of investors and analysts.\r\n\r\nNigeria operates a multiple exchange regime dominated by a tightly controlled official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market. This has led the spread between the managed and parallel markets to significantly widen. The difference is almost 77%.\r\n\r\nOf the 13 participants in the Bloomberg poll, 11 expect the Central Bank of Nigeria to devalue the naira after the election. The remaining two predict it will continue with a gradual depreciation of the currency that started with the adoption of the more flexible NAFEX, also known as the investors and exporters exchange rate, last year.\r\n\r\n \u201cThere will be a major devaluation either on President Muhammadu Buhari\u2019s way out or in the first few months of the new administration,\u201d Ikemesit Effiong, head of research at SBM Intelligence in Lagos, the nation\u2019s commercial hub, said in an emailed response to questions.\r\n\r\n <img class=\"alignnone wp-image-1430381 size-medium\" src=\"https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-555x339.jpg\" sizes=\"(max-width: 555px) 100vw, 555px\" srcset=\"https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-555x339.jpg 555w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-1024x626.jpg 1024w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-150x92.jpg 150w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-185x113.jpg 185w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-230x141.jpg 230w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244-744x455.jpg 744w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393428244.jpg 1296w\" alt=\"Naira, Nigeria, elections 2023, \" width=\"555\" height=\"339\" \/> \r\n\r\nNigeria adopted a multiple exchange-rate regime to avoid an outright devaluation of the naira by keeping a stronger pegged rate for official transactions and weaker exchange for non-government related transactions. The central bank has maintained the currency management system despite entreaties from the International Monetary Fund and the World Bank to scrap the practice.\r\n\r\nLast year, the central bank devalued the currency by 7.6% in a move toward a single exchange-rate system.\r\n\r\nThe median estimate is for the next devaluation to weaken the currency by as much as a fifth, that would take the naira to 533 per dollar. Last month, Bank of America Corp. Economist Tatonga Rusike gave a similar prediction. The median of 10 participants in the Bloomberg poll sees the fair value of the local unit at 583 per dollar.\r\n\r\nNaira forward contracts are pricing in a depreciation of about one third over the next year. A markdown between 20% and 33% would be the largest since 2016. The naira has weakened 4.5% against the greenback this year.\r\n\r\nA devaluation would likely push up annual inflation that\u2019s at a 17-year high of 21.1% \u2014 although it\u2019s already been impacted by the weaker black-market rate \u2014 and cause a one-off increase in the ratio of public debt to gross domestic product, said Mark Bohlund, senior credit research analyst at REDD Intelligence. Debt-service costs consumed 83% of government revenue in the eight months through August, according to the budget office.\r\n\r\n \u201cMore materially, the fiscal balance would improve due to the majority of revenue, that is from oil, being dollar-denominated, while expenditure is naira-denominated,\u201d Bohlund said. Africa\u2019s second-largest crude producer relies on oil and gas for about 90% of its export revenue.\r\n\r\n Different paths \r\n\r\nThe scale of the devaluation may be influenced by who wins the presidential vote, said Daniel Sodimu, sub-Saharan Africa analyst at FrontierView, who estimates the naira\u2019s fair value at 650 against the dollar.\r\n\r\n\u201cIf a pro-business leader wins the election, then it is likely a devaluation would be sizable enough to make Nigeria\u2019s economy smaller than South Africa\u2019s, using the official rate to convert,\u201d 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.\r\n\r\nAn incumbent party retaining power may see modest changes such as \u201cthe current crawling adjustments to the exchange rate will remain, so it will keep Nigeria as the largest economy, on paper,\u201d Sodimu said.\r\n\r\n <img class=\"alignnone wp-image-1430382 size-medium\" src=\"https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-555x348.jpg\" sizes=\"(max-width: 555px) 100vw, 555px\" srcset=\"https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-555x348.jpg 555w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-1024x642.jpg 1024w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-150x94.jpg 150w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-180x113.jpg 180w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-230x144.jpg 230w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204-744x466.jpg 744w, https:\/\/www.moneyweb.co.za\/wp-content\/uploads\/2022\/11\/393493204.jpg 1296w\" alt=\"market rate, Naira, nigeria, Naira spot rate, market rate\" width=\"555\" height=\"348\" \/> \r\n\r\nThe naira traded at 443.99 to the dollar in the official spot market as of 6.45 p.m. local time on Tuesday. It changed hands at about 785 in the parallel market, according to Abubakar Mohammed, operator of a bureau de change that tracks the data in Lagos."

"Biggest devaluation in six years may be on the cards for naira

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