The Nigerian currency is overvalued by 200% and the Investors and Exporters Window (I&E) exchange rate could be devalued next month, Bismarck Rewane, managing director of Financial Derivatives Company Limited (FDC).
The naira has depreciated against the dollar in the Nigerian foreign exchange market in recent weeks. It fell to N431 per dollar, its lowest since the introduction of the I&E forex window, which is the official window.
It weakened to an all-time high of 710 naira per dollar on the parallel market, commonly known as the black market, last month.
“Most currencies are undervalued but the Nigerian Naira [is] overvalued by 200%,” Rewane said during a breakfast at the Lagos Business School (LBS) in Lagos. “The naira will likely depreciate again towards the N695/$-N700/$ range in the parallel market. The CBN will allow a partial peg in the FX market and bring the I&E rate down to N440/$ in September.
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About 48 countries around the world, including nine African countries, operate floating or flexible exchange rate regimes, he said.
He said the Big Mac index is extreme – considering only one product, but it is used to measure the level of overvalued currency and as a strategy to encourage exports.
Demand pressure and limited foreign exchange inflows triggered a depreciation of the naira, increasing the exchange rate premium, FSDH Research said in its macroeconomic report.
Despite rising oil prices, external reserves came under pressure in the second quarter of 2022, FSDH analysts said.
Nigeria’s external reserves, which stood at $40.52 billion in 2021, fell to $39.18 billion in 2022, according to FDC data.
Nigeria’s rising import bill and weak non-oil export inflows continue to put pressure on the exchange rate and external reserves, Rewane said.
“The Forex market in Nigeria is a price discriminatory monopoly. Barriers between markets are thin and permitted. Multiple exchange rates create arbitrage room and encourage rent-seeking behavior,” he added.
Rewane stressed the need to increase dollar inflows into the country to deal with the naira crisis.
Responding to development, higher rate in the current situation in Nigeria,”
Ayodele Akinwunmi, Relationship Manager, Corporate Banking at FSDH Merchant Bank Limited, said the direction of the naira in the near term will largely depend on the country’s ability to export both oil and non-oil goods and services, to attract foreign direct investment (which can happen through the provision of adequate security of life and property in the country) and the country’s ability to create an enabling environment that will ensure that it produces goods for which it has a competitive advantage over other countries to reduce imports.
“I recognize that the naira is currently misvalued given Nigeria’s rate of inflation and other economic fundamentals relative to the United States,”
Capital market professor Uche Uwaleke said.
He said this has also become evident against the backdrop of the US Fed’s interest rate hikes, the capital flow reversals currently being experienced by most emerging economies, including Nigeria, and the strengthening dollar. US against other world currencies.
He said: “Anyway, it is almost impossible at present to determine the real exchange rate of the naira given the particular behavioral aspects that do not lend themselves to financial modelling.
“To this end, attempting to estimate the degree of overvaluation of the naira is only an academic exercise. More than that, the theoretical basis for determining exchange rates, including purchasing power parity, the rate real effective exchange rate, fundamental equilibrium exchange rate, etc. all have conditions and assumptions that are not met in the present situation in Nigeria.
Uwaleke said: “The creeping peg argument, in which the naira is pegged to a band and allowed to fluctuate within it, sounds compelling, but bear in mind that it does not can succeed only in a low inflation environment supported by multiple flows. otherwise the band breaks down and suffers from frequent adjustments.
“I believe the naira will stabilize and the parallel market premium will reduce over the medium term as a result of improving forex liquidity thanks to the gradual increase in foreign exchange inflows from non-oil sources, largely to because of CBN’s RT 200 FX program.