After a riotous February, naira seems to be on a new price-discovery path even as multiple estimates agree the currency is currently trading below its “fair value”, suggesting a significant appreciation that will raise the exchange rate to about N1400/$ before the end of the year.
At the weekend, Goldman Sachs, a global leading investment bank, bet on the naira to rally to N1200/$ in the next one year on the strength of return of positive real interest yields, capital inflows and shift to a more orthodox monetary policy framework.
“We think that Nigeria is turning the corner following its recent currency crisis. These developments have prompted us to shift to a constructive outlook for the Naira, which our FX strategists expect to appreciate to NGN 1200 vs the USD in 12 months. Nigeria is finally emerging from a period of monetary policy transition characterised by an absence of a credible policy anchor and deeply negative real interest rates,” the United States-based institution said. Goldman Sachs’ forecast even understates the value of naira what Bismarck Rewane, a Nigerian leading economist, considered as the fair value of naira. Using the purchasing power parity (PPP) model, Rewane, during a breakfast session at the Lagos Business School, valued naira at N910/$.
This suggests that the currency is currently 44 per cent on discount at the Nigerian Autonomous Foreign Exchange Market (NAFEM), the single market window platform of the Central Bank of Nigeria (CBN).
Last week, NAFEM, which has cancelled out the gap between the official and unofficial rate, closed at N1627.4 to a dollar. At the black market, which is trading at a discount compared to the official segment, naira exchanged at between N1550 and N1620 to a dollar at the weekend.
Treating naira as a liquidated entity, an extreme pessimist view of the outlook of the currency, Rewane put the value of the naira at N2,265/$. The method assesses the value of the currency, using the total money base given the country’s external reserve.
But as a going concern, he said, the value could be assessed using the relative strength of adjusted money supply against total exports. That would put the value of the current at the region of Goldman Sachs’ near-term value – N1203/$.
Dancing to the tune of neoliberal economists, the Monetary Policy Committee (MPC) at the Yemi Cardoso’s (the CBN governor) inaugural meeting raised the anchor interest by 400 basis points to 22.75 per cent, a move that seems to align with the current administration’s extraversion posturing.
The interest rate hike and recent treasury bill auction had raised the interest yields to 27 per cent, leading to a positive real rate of interest. Until recently, real interest rates were in negative territory – a reason many foreign investors distanced themselves from the Nigerian market with downside risks to naira.
The increase in the benchmark interest has attracted investors to the country’s debt instruments and led to an upsurge in Diaspora remittances, which rose by over three per cent month-on-month in February, from $300 to $1.3 billion.
The external reserves have been uptick, adding about $1.1 trillion year-to-date (YTD) to hit $34.1 billion – the highest value since last July. Strong reserves mean more confidence in the local economy, which further strengthens the country’s reserves and currency.
Goldman Sachs’ assessment has reactivated the old debate on the true value of naira and how it matters. All things being equal, an econometrician at the University of Lagos, Dr Ernest Odior, said the near-term future path of naira would depend on what the monetary authority and government do about the speculative activities. He admitted that the current exchange rate does not reflect the true value of the currency but noted that speculation is a key variable the government must necessarily isolate for a true price discovery.
“It is possible for the naira to appreciate to N1200/$. But there are a lot of speculators who trade and hoard foreign currencies. We are an import-dependent country. But speculation is a major variable that needs to be controlled. If the government can keep the speculator in check, naira can even rally to N1000/$ before the end of the year,” the economist noted.
Beyond speculation, Odior said, there are no justifiable structural deficiencies to explain the sharp depreciation the currency witnessed in the past year. Without speculation and other manipulative tendencies, he said, naira would find its true value within a short time frame.
Another economist, Dr Chiwuike Uba, argued that MPR is necessary but a sufficient condition to stabilise the local currency. He said interest rates would be more efficient if the country were a credit-driven economy.
“Most individuals do not transact based on credit they have accessed from banks. Every kobo most people spend is money they worked for or what they steal, which is the reason rate increase has not had any impact on inflation,” Uba noted.
To earn more FX and produce local substitutes for imported goods, Nigeria would also need to increase its local productive capacity. This was the argument that informed the now-rested RT200 Scheme. The interest rate hike, unfortunately, would have a negative consequence on the performance of the local firms.
According to the Manufacturers Association of Nigeria (MAN) 767 manufacturing companies shut down last year alone owing to the unbearable increasing cost of operations, which is fed by both inflation and FX crisis as well as other structural challenges.
The impacts of the structural challenges, experts have noted, have led to a significant divergence of the actual value of naira from its fair and long-term equilibrium path. The contributions of the structural deficiencies are not referenced in Goldman Sachs’s report, which conditioned its projects on the CBN’s commitment to sustaining its reforms.
Outward-looking policies could cripple the real sector. First, it has raised the opportunity cost of consumption, which is important for a robust industrial sector, to high heavens. Also, funding investment in plant expansion, according to Rewane, will be unaffordable to many companies, which could increase the unemployment rate and further constrain consumption.
These suggest that the desperation to prioritise external funds with attractive interest rates has an expensive trade-off for the local economy – poor-performing critical sectors. In the long run, perhaps, fewer goods will be produced locally while more FX would be needed to buy from abroad to feed the country, a possibility that will increase pressure on the local currency the current policy intends to stabilise.
Earlier, the International Monetary Fund (IMF), which is now sceptical about the Nigerian government’s commitment to its economic reforms, had pegged naira value at N2,081/$ while the Economic Intelligence Unit (EIU) projected N2,000 to a dollar. A 1400/$ exchange rate, an average of the most recent different estimates – from the most conservative Goldman Sachs monetary base approach to the most extreme liquidated naira modeling – is still 75 per cent or N600/$ above the exchange rate benchmark of the 2024 budget, a document sources in government circle told The Guardian at the weekend would be necessarily reviewed in the coming weeks to reflect the current reality.
A budget review would ultimately increase proceeds from oil revenue when monetised. But the perception that the government’s spending power would increase may be nothing short of a mere money illusion as the price shock has also chopped a huge chunk of the real value of the expected public revenue.
(Guardian)
