CONCERNS AS AMERICA'S BANK FORESEES A 20% DEVALUATION OF THE NAIRA IN 2023

According to the Bank of America (BofA), Nigeria's local currency is expected to weaken even more over the course of the following year because its present exchange rate to the dollar is far higher than fair value.

In a letter, BofA economist Tatonga Rusike stated that the naira is 20% overvalued based on three indicators: the widely-used black-market rate, the central bank's genuine effective exchange rate, and “our own currency fair value research.”

Over the following six to nine months, “we see potential for it to weaken, putting it to as high as N520 per USD,” Rusike added.

Devaluation wont occur until after the February 2023 presidential elections, despite the naira being under increasing pressure, the bank stated.

Nigeria has two main exchange rates: one that is strictly regulated at the official level and one that is freely exchanged on a parallel market.

According to @naira rates, the naira was about N440.95 to the dollar as of 12:15 p.m. on the official spot market and roughly N731.46 in the black market.

According to a BofA analysis, the gap between the parallel and official rates has grown to about 70% while the official rate has declined by less than 10% since December 2021.

According to the bank, there is an increase in the excess demand for foreign currency on the black market “the greater the difference with the official market.”

Analysts are worried about how the elections will affect the Naira's exchange rate to the USD in 2023.

Demand for the dollar reached record highs in May during the party primaries as politicians snatched up the currency for electioneering efforts.

The naira depreciated due to the increase in dollar demand, closing at nearly N600/$1 on the parallel market.

Analysts said that increasing demand for foreign currency could upset the stability of the naira exchange rate.

A major overhaul of the Currently, a foreign exchange ecosystem is needed, according to Dr. Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE).

He asserts that the existing forex policy must be corrected right away and that the economy is being negatively impacted by the historically wide difference between the official exchange rate and the open market rate.

According to Rotimi Olubi, an economist and managing director of Morgan Capital Securities Limited, electioneering for the general elections in 2023 will lead to an increase in foreign portfolio outflows and keep foreign portfolio investors (FPIs) on the sidelines.

Olubi continued by predicting that there will be significant pressure on the foreign exchange due to portfolio withdrawals from developing markets brought on by interest rate increases in advanced nations.

According to Mr. Ayokunle Olubunmi, Head of Financial Institutions' Ratings at Agusto & Co., What we are seeing is not different; it is something we see every election cycle. First off, there is typically high demand for foreign exchange around election times since it is tough to give someone N100 million in naira but simpler if I have it in dollars.

The election industry will continue to thrive in the upcoming months, according to Olubunmi, but other economic sectors unrelated to elections will experience slower development.

He declared that “there is something you may term the election-related industry” for the economy as a whole, adding that “items like printing, advertising, and all those areas will actually be registering a boom right now.”

For the economy as a whole, it's not like 2019 when we knew the president was probably going to run again; now, there would be a new president in 2023, and we don't know who he is or what his views on the economy are. Therefore, the majority of firms are waiting, and nobody is discussing growth. Therefore, there would be a slowdown in economic activity, with the exception of industries like banking that are resilient and tied to elections.