The official exchange rate of the naira may tumble by about 31 per cent to 400 per United States dollar before the end of this year, a Nigeria-based investment bank and research advisory firm, Afrinvest West Africa Limited, has said.
In its 2017 economic outlook released on Tuesday, the firm said the CBN might be forced by possible developments in the currency market to devalue the naira from the current 305/dollar to around 400/dollar.
“If you think about the monetary policy environment, we think that the CBN will be forced by the market to make a change.
Currently, the naira is pegged at 305/dollar; we see it moving towards 400/dollar by the end of the year,” the Group Managing Director, Afrinvest, Mr. Ike Chioke, said at a press conference announcing the firm’s economic outlook.
Chioke stressed the need for key reforms in the currency market, petroleum downstream sector, power and other key sectors of the economy in order to put the ailing economy on the path of growth.
“If the CBN did take a plunge to make it really market-driven, we can see that even the 400/dollar rate may appreciate later on, bringing to something below 400/dollar,” the expert said.
According to the Afrinvest boss, the outlook on price levels suggests that inflation will remain in the double-digit region due to potential new shocks from an increase in energy prices (fuel and electricity) and currency devaluation.
In the economic outlook, which was entitled, ‘reform or be relegated’, the research firm stressed the need for economic reforms that would help the country to overcome its economic challenges.
According to the 65-page outlook, other commodity-exporting countries such as Russia, Brazil and Egypt have carried out major economic reforms including currency reform and have since overcome the challenges that came with the fall in commodity prices.
The Afrinvest economic outlook read in part, “A major revelation from our analysis is that the economic and financial market outlook for Nigeria in 2017 will be hinged on the resolve to implement tough but necessary structural reforms.
“We note that the Nigerian economy, which is regarded as the largest in Africa as well as one of the most viable investment destinations, has been on a slippery slide downhill following the crash in commodity prices in the second half of 2014.
“However, a number of other commodity exporting countries, affected by lower commodity prices, have since taken tough but necessary steps to boost their economies. The reluctance of Nigeria to impose appropriate policy reforms is perhaps most reflected in the currency market where a severe liquidity crunch has lingered after the CBN imposed capital control measures on FX transactions and fixed FX rate at N199.10/dollar in 2015 before moving the peg to N305.05/dollar in 2016.
“This was against the much-needed reform to adopt a flexible exchange rate policy allowing for appropriate pricing of the domestic currency which the CBN adamantly resisted.”
It further said, “Increased monetary stimulus by a number of central banks in the advanced economies alongside an uptick in commodity prices drove funds flow into emerging and frontier markets in 2016 and moderated the damaging impact of lower commodity prices in the year. Nonetheless, Nigeria was an outlier as capital flows dried up due to inappropriate policy responses, especially in relation to FX.
“Foreign Direct Investment into Nigeria tumbled 63.2 per cent in 2016 to $2.1bn from $5.7bn in 2015 and $9.9bn in 2014 while Foreign Portfolio Investment into equities in 2016 slid 51.4 per cent (from N973.7bn to N473.5bn), weakening demand for domestic equities significantly. As such, the NSE ASI further depreciated 6.2 per cent in 2016 after plunging 16.9 per cent in 2015 and 16.1 per cent in 2014.”
Afrinvest concluded that the medium-term outlook of the economy would be highly dependent on the ability of policymakers to deliver incremental oil output in 2017 while also reviewing the current structure of the currency market.
It added, ”The 2017 budget proposal, which is broadly optimistic given current macroeconomic realities, will require the focused commitment of both the executive and legislative arms of government in order to get passed into law so that timely implementation can begin in order to achieve the objective of stimulating economic recovery through increased infrastructure spending.”
