Bloomberg Reveals Why CBN May Devalue Naira Steeply After 2023 Elections

The Central Bank of Nigeria (CBN) is likely to devalue the naira after elections in February by the steepest margin in six years to align it with market perceptions, according to a survey of investors and analysts conducted by Bloomberg.

In a report yesterday, the news agency said that of the 13 participants in its poll, 11 expected the CBN to devalue the naira after the election while the remaining two predicted that the apex bank would continue with a gradual depreciation of the currency that started with the adoption of the more flexible NAFEX, also known as the investors and exporters exchange rate, last year.

The report quoted head of research at SBM Intelligence, Ikemesit Effiong, as saying: “There will be a major devaluation either on President Muhammadu Buhari’s way out or in the first few months of the new administration.”

The median estimate is for the expected devaluation to weaken the naira by as much as a fifth, that would take the local currency to N533 per dollar.

Last month, Bank of America Corp. Economist Tatonga Rusike gave a similar prediction. The median of 10 participants in the Bloomberg poll sees the fair value of the local unit at 583 per dollar.

Naira forward contracts are pricing in a depreciation of about one third over the next year. A markdown between 20 per cent and 33 per cent would be the largest since 2016. The naira has weakened 4.5 per cent against the greenback this year. A devaluation would likely push up annual inflation that’s at a 17-year high of 21.1 per cent — although it’s already been impacted by the weaker parallel market rate — and cause a one-off increase in the ratio of public debt to gross domestic product, said Mark Bohlund, senior credit research analyst at REDD Intelligence.

Debtservice costs consumed 83 per cent of government revenue in the eight months through August, according to the budget office. “More materially, the fiscal balance would improve due to the majority of revenue, that is from oil, being dollar-denominated, while expenditure is naira-denominated,” Bohlund said. Nigeria, Africa’s secondlargest crude producer, relies on oil and gas for about 90% of its export revenue. The scale of the devaluation may be influenced by who wins the presidential vote, said Daniel Sodimu, sub-Saharan Africa analyst at FrontierView, who estimates the naira’s fair value at N650 against the dollar.

“If a pro-business leader wins the election, then it is likely a devaluation would be sizable enough to make Nigeria’s economy smaller than South Africa’s, using the official rate to convert,” Sodimu said. Such a move would help stop the shortage and rationing of dollars, which have been a drag on business operations in the country and an overall disincentive to invest in Nigeria, he said. Anincumbentpartyretaining power may see modest changes such as “the current crawling adjustments to the exchange rate will remain, so it will keep Nigeria as the largest economy, on paper,” Sodimu said.