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Bank of America says Naira overvalued by about 15%, may depreciate to N430/$1



Customs increases FX rate for collection of duties from N770/$ to N783/$


The Bank of America has said Nigeria’s currency, the naira is overvalued by about 15 percent, and will likely depreciate to N430/$1 next year.

The Bank’s analysts Rukayat Yusuf and Andrew MacFarlane who made the projection in the global bank’s latest report looking at Nigeria’s FX unification and shortages, said the country’s current foreign exchange pressure is likely to gain momentum in 2021 as the economy and imports recover will trigger a future adjustment of the nation’s currency to N430/$ next year,

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“We estimate NGN fair value at 451/$, implying 15% overvaluation from current levels. Our baseline is for a 3.5% recession, 13.2% inflation and current account deficit of 3.9% of GDP this year. CBN to remain on hold with a 6% deficit covered by foreign loans and domestic issuance,” the duo said in the report.

The Bank revised its previous naira/dollar forecast to 390/$1 by year-end from 430/$1 with foreign reserves at $28bn from $22bn on higher oil prices, lower imports and its expectations of a $1.5bn of World Bank loans expected to arrive Nigeria in October.

The Central Bank of Nigeria (CBN) last month weakened the naira by more than 5% in response to mounting pressure from external lenders, a slump in oil prices that tanked the country’s budget as well as dollar shortages.

The CBN devalued its official exchange rate from N360/$1 to N379/$1, in what the Governor Godwin Emefiele said is close the gap with unofficial rates in the country.

The July devaluation followed a March cut in the value of the country’s naira triggered by the height of global market volatility when the price of oil collapsed. The country’s official exchange rate was devalued from N307/$1 to N360/$1 at the time.

Dollar shortages had pushed rates at the parallel market to as high as N477/$1, but the decision of the apex bank to resume sell to Bureau De Change (BDC) operators at the rate of N384/$1 and the instruction that the BDCs sell to end users at the rate of N386/$1 starting from September 7, has triggered panic sell off by speculators, bringing the parallel market rate to N440/$1 on Tuesday.

But analysts suggest the policy is not sustainable in the long run. Goldman Sachs analysts earlier in the month said they see the naira dipping to 500 to the dollar in a “reasonable target” of a year on “high and sticky” inflation in the country, as well as persistent outflows from official reserves.

“In response to the COVID-19 and oil shocks, the Central Bank of Nigeria (CBN) further adjusted the official exchange rate from N360 to N380/$ on August 6th. NGN rates have therefore converged around the N380-390/$ range (Chart of the Day) but dollar shortages in the formal interbank market and broader economy persist. In particular, the CBN continues to impose import restrictions, border closures and bans on offshore trading which have pushed demand to the parallel market with rates as high as N475/$,” analysts at Bank of America said.

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