Bank of America analysts have recently stated that the Nigerian currency, the naira, is presently undervalued and is expected to reach a trading value of approximately NGN680 per U.S. dollar by the end of the year. These analysts believe that the country’s medium-term prospects include current account surpluses due to higher oil revenues and a more liberalized import system.
Shift to a Freely Floating Naira
Less than a month after Nigerian monetary authorities abandoned the fixed exchange rate regime, Bank of America analysts now argue that the naira is currently undervalued. Despite its current value of over NGN700 per U.S. dollar, they anticipate that the naira will trade at around NGN680 per U.S. dollar by the end of the year.
This updated forecast from Bank of America analysts follows an earlier prediction made by an economist at the institution, nine months ago, which suggested a 20% devaluation of the naira, resulting in an exchange rate of NGN520 to USD1.
However, in mid-June, following the Central Bank of Nigeria’s decision to allow the naira to freely float, its value plummeted from just under NGN470 per dollar to NGN634 per dollar. Since then, the naira has continued to depreciate against the dollar.
In their recent analysis of Nigeria, the Bank of America analysts provided some reasons for their prediction that the naira will begin trading at around 680 per dollar in 2024. They emphasized the need for a transitional period to align rates and unlock more U.S. dollars into the formal market, which will take time. Once this process has settled, the naira’s value is expected to strengthen and appreciate.
Additionally, the analysts noted that Nigeria could experience consistent current account surpluses due to higher oil revenues (an additional $12 billion) and a more liberalized import regime. They also urged Nigerian President Bola Ahmed Tinubu to address oil theft, as this could increase the country’s earnings from hydrocarbons and alleviate Nigeria’s high debt service burden.
Frequently Asked Questions (FAQs) about undervalued currency
What is the prediction of Bank of America analysts regarding Nigeria’s currency?
Bank of America analysts predict that Nigeria’s currency, the naira, is currently undervalued and is expected to reach a trading value of around NGN680 per U.S. dollar by the end of the year.
What factors are expected to contribute to the strengthening of Nigeria’s currency?
How has the value of the naira changed since the shift to a freely floating exchange rate?
Following the decision to allow the naira to freely float, its value initially dropped from just under NGN470 per dollar to NGN634 per dollar. Since then, the naira has continued to lose ground against the U.S. dollar.
What is the current exchange rate for the naira to U.S. dollar?
As of the latest data from the Central Bank of Nigeria on June 26, the exchange rate stands at NGN753 to USD1. On the parallel market, as of July 1, 2023, one U.S. dollar is buying NGN768.
What is the recommendation given by Bank of America analysts regarding Nigeria’s high debt burden?
The analysts suggest that tackling oil theft could result in Nigeria earning more from hydrocarbons, which, in turn, could help alleviate the country’s high debt service burden.
More about undervalued currency
- Bank of America
- Central Bank of Nigeria
- Nigerian Naira (NGN) Exchange Rates
- Nigeria’s Oil Revenues
- Nigeria’s Import Reforms
- Current Account Surplus
- Nigeria’s Debt Burden