Monday 21st August, 2017
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Risk of Naira devaluation rising, but it won't float freely - Analysts

Risk of Naira devaluation rising, but it won't float freely - Analysts

The Federal Government may soon devalue the Naira but won’t fully re­linquish control over it, instead taking steps to narrow the gap between the official and black market rates to boost confi­dence in the economy, a Reuter’s poll showed on Friday.

A shortage of dollars in Ni­geria - for big and small needs including capital imports to the manufacturing process, trav­el and school fees - has led the black market to charge a high­er premium in compensation for that scarcity in the official market.

A Reuter’s survey of 18 ana­lysts taken in the past two days showed they are sceptical of the extent officials can fully liber­alise the currency after it made dollars available on Monday to a few private individuals.

The poll suggests there is a 45 percent chance that the Central Bank of Nigeria (CBN) will de­value the Naira in coming weeks amid speculation that the government is stepping closer to liberalising it.

The central bank this week effectively devalued the Naira for private individuals by of­fering them dollars at a rate of N366, instead of the offi­cial 305 rate which it has held since last summer at the behest of President Muhammadu Bu­hari.

Still, the survey further sug­gested that if the Naira were to be devalued, any float would still be managed as the cen­tral bank intervenes to keep it within desired levels.

“We don’t expect the au­thorities to ever fully relin­quish control over the Naira. A gap to the black market is a permanent feature,” said Phil­ip Walker of the Economist In­telligence Unit.

“However, the size of this gap will come down over time as the market realities force the hand of the authorities and the Naira is repeatedly devalued over time,” Walker added.

The CBN auctioned $230 million in forward contracts on the official market on Thursday after selling $370 million earlier in the week to boost dollar liquidity and help narrow the gap between the of­ficial and black market rates.

The poll showed that the timing for how long it would take to narrow that gap is un­certain. Analysts say it de­pends on how far the central bank is willing to go, although a free float would take months instead of years to squeeze the spread between the two rates.

Devaluations are painful, mostly to the poor, as the cost of living increases. But analysts say they are necessary to fix the broader economy.

Egypt floated its currency in November, and it subsequent­ly halved in value against the dollar. But it is now more than 20 percent above its low at 15.7 per greenback.

Financial Derivatives Com­pany, a research think-tank in Nigeria, wrote that the only reasonable way to reduce the disparity between the inter­bank and black market is by restoring market confidence through the consistent imple­mentation of transparent and market-driven policies.

“A float of the Naira is not necessarily a magic wand which will resolve the current economic malaise. Instead, it will simply provide a premise for the introduction of policies, which will encourage inward investment and support eco­nomic growth.”

 

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