WEALTH managers view investing in assets denominated in the local currency as risky to portfolio building as the Nigerian naira has lost its cool and is having an impact on families and businesses.
The lack of hard currency inflows into the economy has caused the naira, the indigenous currency of Nigeria, to continue losing value, making it a stormy day for the foreign exchange (FX) markets.
The lack of foreign currencies is one of several concerns that FX markets are dealing with, and the naira is currently trading in the eye of the storm, rising from N415 to N425 in just six months, according to statistics from the FMDQ Exchange.
Given the likelihood that pre-election demand for foreign currencies may worsen rates even further, the Central Bank of Nigeria (CBN) may decide to devalue the naira in 2022 as a result of the worsening exchange rate.
Even though devaluation is undesirable in an economy with high levels of poverty and few exportable goods, it is becoming more common as international investors avoid the Nigerian economy.
In its most recent publication, MSCI Index warned that Nigerian indices would be downgraded following a consultation that began last week, citing difficulties in getting the dollars out of the country due to restrictions on currency repatriation.
All policy attempts to maintain the naira’s strength, albeit far from approaching Zimbabwe’s currency crisis, have fallen flat as the top bank looks to have lost authority over overseeing the local currency.
Due to the limited input of foreign cash during the just-completed week, economists believe there would be no improvement in the exchange rate for the local currency.
Despite the leadership’s admission that the local currency is overvalued, the Nigerian monetary policy authority unmistakably remains committed to not devaluing the naira.
The Naira has been tracking lower in the recently ended week to N425 to a US dollar in the Investors and Exporters foreign exchange window. Nigeria’s foreign reserves continued to grow for the fifth week in a row as of June 30 as the gross reserve position increased by US$230.14 million to US$39.16 billion.
The naira lost ground versus the US dollar across all FX windows, falling 1.1 percent week over week to N425.00, a level that suggests the local currency may be under more stress than the market had anticipated.
Although the Bureau de Change (BDC) operators have other rate variables available to them, such as demand or supply volume, the exchange rate at the parallel market worsens to N615–N616.
Based on reports, foreign currencies with lower denominations command lower prices, regardless of volume.
The Central Bank of Nigeria (CBN) has employed a variety of fashionable sub-devaluation measures, such as naira4dollar and N65 rebates, to reduce demand pressures in the foreign exchange markets. These unconventional methods have been used to ensure that the naira holds strong against other foreign currencies.
However according to statistics on currencies tracked by MarketForces Africa, the market has been repricing the local currency in the official window, losing significantly against all foreign currency pairs, particularly the US dollar.
Would the naira withstand the next market assault against major currencies? Numerous analysts and currency dealers have revealed that they already anticipate the CBN to devalue the naira, making this unlikely.
A local currency devaluation would impact market performance negatively for the home economy. However, further market-absorbed pressures in the form of higher prices will be felt by Nigerian consumers.
Price and currency stability remain the key goals of monetary policy, but the CBN has failed to achieve either goal. According to analysts’ predictions, Nigeria would likely experience a spike in headline inflation in the third quarter of the year, which printed at 17.71 percent in May.
This may encourage significant foreign investment in the Nigerian economy in addition to the tightening of monetary policy. An continued increase in interest rates in the US, however, poses a problem.
How ought Emefiele to treat Naira? According to experts, Nigeria must continue to produce foreign currency inflows to sustain domestic dollar demand. Or, to promote stable exchange rates, the Naira would need to be redenominated.
The Nigerian government has found it to be a monumental undertaking to increase export revenues, and the CBN is unconcerned by market pressure to devalue the naira. The final alternative, which some analysts believe is unworkable, is to severely reduce imports.
Would the naira withstand the next market assault against major currencies? Numerous analysts and currency dealers however reveal that they already anticipate the CBN to devalue the naira, making this unlikely.
As local currency devaluation would impact market performance negatively for the home economy. However, further market-absorbed pressures in the form of higher prices will be felt by Nigerian consumers.
Price and currency stability remain the key goals of monetary policy, but the CBN has failed to achieve either goal. According to analysts’ predictions, Nigeria would likely experience a spike in headline inflation in the third quarter of the year, which printed at 17.71 percent in May.
