Bottom line: The Central Bank of Nigeria (CBN) devalued the Naira from NGN 470 vs. the USD to between NGN 610-650 according to Bloomberg/Reuters, while press reports citing local bank transactions indicated that the currency ultimately traded near NGN 750. The weaker end of the range (NGN 750) is consistent with our estimates for what would be required to rebalance the current account into a sustainable surplus at current oil prices.
In addition to the devaluation, the CBN issued a communique specifying that it has collapsed all of its (multiple) official FX rates into the Investors and Exporters (I&E) window, but did not provide any clarity on current/capital account FX restrictions that result in a parallel market exchange rate that is weaker than that offered at the official window(s). In our view, devaluing the currency is a necessary but not sufficient condition for unifying the official and parallel-market exchange rates. We think that easing FX restrictions and clearing the FX backlog (that we estimate at US$12bn) would be required to achieve a unified Naira exchange rate.
In terms of the broader FX policy set-up, the CBN did not provide any guidance on whether the (historically heavily managed) currency regime would be maintained or if there might be any transition toward a more flexible exchange rate. In our view, any FX liberalization or easing of FX restrictions would entail the need for higher local interest rates to lean against currency depreciation pressure. More broadly, however, we interpret the pace and content of recent policy announcements as significant positive surprises to our and market expectations and as being supportive of a constructive view on sovereign credit.
Main Points:
- The CBN allowed the Naira to weaken sharply today, devaluing it from the prior official market rate of NGN 470 vs. the USD. Sources reported multiple degrees of weakening: to NGN 610 according to Bloomberg, to NGN 650 according to Reuters, and to NGN 750 according to local and international press reports on transactions undertaken by local banks. This compares to the parallel market rate of around NGN 760 vs. the USD prior to today’s devaluation.
- The CBN issued a communique in which it abolished exchange rate segmentation, thereby collapsing all official exchange rates into the Investors and Exporters (I&E) window. This is a step in the direction of unifying several of Nigeria’s multiple exchange rates, a stated policy objective of newly-instated President Tinubu (as indicated in his inauguration speech).
Andrew Matheny
+44(20)7051-6069 | andrew.matheny@gs.com Goldman Sachs International
Bojosi Morule
+44(20)7051-0851 | bojosi.morule@gs.com Goldman Sachs International
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