Source: BUSINESS DAY
Yemi Cardoso, governor of the Central Bank of Nigeria (CBN), declared last Wednesday that the naira was undervalued.
Two weeks ago, Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, said the naira was undervalued by 26.56 percent at the official market.
In October 2023,Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, said the government would see a “fair price” for the dollar at “N650 to N750”.
In August, during his ministerial screening, Wale Edun, who is now the finance minister and coordinating minister of economy, said naira’s fair value was 700/$1.
In June, the Bank of America said: “We now see a USDNGN fair value of 680 per USD (previously 580). However, USDNGN is likely to trade above this level, with year-end 700, and a return to 650-680 in early 2024.”
What does fair value mean?
In today’s financial landscape, the concept of fair value has emerged as a pivotal factor in determining the estimated price at which assets are exchanged between willing buyers and sellers. Financial experts and analysts underscore the significance of fair value, considering it a cornerstone in fostering transparent and equitable transactions.
Fair value is defined as the estimated price at which an asset can be bought or sold, provided both parties are willing and informed and are entering into the transaction without any compulsion. This principle is designed to ensure that assets are accurately valued, promoting a fair and balanced marketplace.
Financial professionals highlight the role of fair value in mitigating information asymmetry between buyers and sellers, enabling both parties to make informed decisions based on the true worth of an asset. This approach fosters trust and confidence in the marketplace, as it reflects a genuine representation of an asset’s value.
What is the naira’s fair value?
Razia Khan, managing director/chief economist, Africa and Middle East Global Research at Standard Chartered Bank, pointed out that before the foreign exchange reform in June, Nigeria’s parallel market served as an unrestricted FX market, characterized by sellers having the liberty to set their prices.
She said the fair value of the naira would have been lower than the USD-NGN rate observed in the parallel market at that time.
Since the reform, Nigeria has faced persistent high inflation, although there are signs of moderation in the month-on-month changes. The parallel market rate has experienced a rapid surge, raising concerns that it may continue to influence the pricing of numerous imported goods, excluding fuel.
Despite the current highs in the FX market, approximately around N1,300)$, Khan argued that any reasonable assessment of fair value for the currency would suggest a lower USD-NGN rate than both the official market rate and the prevailing parallel market rate. According to her, the CBN governor’s assertion that the fair value for USD-NGN is lower aligns with the perspective that the USD is overvalued while the NGN is undervalued.
Looking forward, Khan anticipates a potential appreciation in the naira, projecting a return to at least around N1,000. However, she emphasized that this positive shift would only materialize with a concerted effort towards economy-wide monetary tightening. Such measures are seen as essential to restore positive real rates and counter the challenges posed by inflation in the country. As Nigeria navigates its economic landscape, the call for further reforms and strategic monetary policies remains at the forefront of discussions.
“We think the fair value for the naira is around 860,” said Charlie Robertson, head of macro-strategy, FIM Partners, UK.
How is it estimated?
FIM Partners measures the average exchange rate vs the last 25 years – stripping out inflation. “And on average, in today’s money, the naira has averaged about 860/$. Because of inflation, that may rise to N1,000 by the end of 2024 – but today it suggests people getting N1,200\$ at the Bureau De Change are getting a good deal,” Robertson said.
What is the current naira-dollar exchange rate?
The naira has persistently depreciated at the official market, which is the Nigerian Autonomous Foreign Exchange Market (NAFEM), and the parallel market, popularly called the black market. As of Thursday, the naira continued its slide, marking a 2.08 percent loss against the dollar. The closing rate stood at N900.96, down from the N882.24 recorded on Wednesday at the NAFEM. Naira fell to a record low of N1,416 per dollar on the black market following strong demand by end users.
Why is the naira falling?
The root of the issue lies in the declining inflow of dollars to Nigeria over the past few years. This downward trend is attributed to a combination of factors, including reduced foreign investment and a decrease in crude oil exports, which historically contribute to over 90 percent of the country’s export income.
Nigeria’s heavy reliance on crude oil exports has left its foreign exchange reserves vulnerable to fluctuations in global oil prices. As these exports decline, the country faces a substantial reduction in its dollar inflows, exacerbating the challenges of meeting the growing demand for foreign currency.
In a challenging economic landscape, the CBN finds itself contending with a mounting backlog of forex demand on the official market. The consequence is an increasing number of individuals and businesses resorting to the black market to fulfill their dollar requirements.
The official market, intended to be the primary avenue for foreign exchange transactions, has been hampered by the accumulation of unresolved FX demands. This has created a situation where entities are compelled to seek alternative avenues, such as the black market, to access dollars promptly.
The impact is felt acutely by businesses and individuals, as the backlog of forex demand on the official market persists. Without a swift resolution, the gap between demand and supply on the official market is pushing more entities toward the black market, where the availability of dollars may be uncertain, and transactions often occur at less favorable rates.
Analysts suggest that addressing the root causes, such as attracting more foreign investment and diversifying the economy, is essential for Nigeria to stabilize its foreign exchange market. Until then, the CBN grapples with the complex task of balancing forex demand and supply, while businesses and individuals navigate the challenges posed by the evolving economic landscape.
Are there any plans by the CBN to stabilize the naira?
Cardoso conveyed an optimistic outlook regarding the stabilization of the foreign exchange market. This positive sentiment is anchored in the ongoing collaborative efforts to attract more dollars into the system and augment the reserves, which currently stand at approximately $33.34 billion as of Monday.
He highlighted the fruitful collaboration with the Ministry of Finance and the Nigeria National Petroleum Company Limited to implement measures ensuring that all FX inflows are directed back to the central bank. This strategic and coordinated effort is expected to significantly bolster the bank’s FX flows and contribute to the accumulation of reserves.
The focus on redirecting all FX inflows to the Central Bank is a pivotal aspect of this initiative. By streamlining the process and ensuring that all foreign exchange returns to the central authority, the partners aim to create a more efficient and robust FX market. This concerted effort is anticipated to have a positive impact on market stability and enhance the overall resilience of the country’s foreign exchange reserves.
THE AUTHOR: Hope Moses-Ashike
