Nigeria may loosen its grip on the naira for the third time since oil prices began a lengthy collapse in mid-2014, Renaissance Capital said in a note on Friday, Feb. 17.
Foreign portfolio inflows slumped 70 percent to a nine-year low last year, as investors shelved naira assets on foreign exchange risks. But from its consultations with policy makers in Abuja, Rencap said a foreign exchange policy adjustment is in the works as more foreign portfolio investors shun naira assets.
If this materialises, it would come as a relief to foreign investors whose funds are trapped in the country due to acute dollar shortages resulting from Nigeria’s management of its FX market and it may set the tone for new inflows into dollar-strapped leading economy in Africa.
“Our key takeaways (from the consultations) were: FX policy may be adjusted in the short term; inflation is likely to slow; any interest rate hikes will be moderate; the economy will grow by less than 1% in 2017; and capital expenditure will pick up, but higher fuel prices imply an increase in the subsidy and upside risk to the budget deficit,” the note penned by Yvonne Mhango, Rencap’s sub-Saharan Africa economist, read.
“We think the most probable outcome of an FX policy adjustment is a managed float, possibly a new peg, but a full float is unlikely,” added Mhango, who sees an exchange rate of NGN447/$1 by year-end.
Despite a devaluation last June, which saw the naira shed almost 40 percent, traders say the naira is still overvalued and have criticised the CBN’s aggressive intervention in the market to defend the naira even when it doesn’t have the firepower.
Manji Cheto, a policy risk analyst and senior vice president at global advisory firm, Teneo Intelligence contends that Nigeria needs a full-float as another rate peg may turn out counter-productive and remain unattractive to foreign portfolio investors.
“I do not think devaluation is the right strategy anymore, Nigeria needs a flexible exchange rate where there is a market-determined naira dollar exchange rate in order to boost autonomous capital inflow, with CBN intervention only at highly volatile times,” Cheto told BusinessDay.
The naira opened at N309.76/1$ at the official market on Friday morning, according to Bloomberg data, while it exchanged for a premium of N510/$1 at the parallel market, where traders say the naira is closer to its true value against the greenback.
Authorities are also talking of replacing the de facto ban on 41 items with import tariffs, according to Rencap.
The blacklisted 41 items, from iron rods to toothpicks; have been banned from accessing dollars at the official market since August 2015 as part of the Central Bank of Nigeria’s dollar management policy, following a dry-up in petrodollars.
Importers of these items resort to the unofficial market to satisfy their dollar needs, making it ever more difficult for officials to rein in on a naira rout.