Analysts at Renaissance Capital (RenCap), a financial advisory and research firm, have stated that it would be good to see Nigeria shift its currency this month to about $250/$1.
Adjusting the naira to the aforementioned rate, according to RenCap, would make the investor case about Nigeria more optimistic, even as they also recommended wide band around the naira in order to allow for “maximum flexibility.”
They argued that it would be a shame if Nigeria’s central bank move its currency rate slightly at its monetary policy committee (MPC) meeting this month and then do so again when pressure resurfaces again in three to six months’ time.
Analysts at RenCap revealed that after their meetings with Nigeria’s policy makers in Abuja in May 2015, they believed that a currency shift to around N230-240/$ with perhaps 5-10 percent bands on either side was both appropriate and in the back of the minds of the Central Bank of Nigeria (CBN), when the present government was sworn-in place, and the fiscal outlook was clarified.
“But since May 2015 the oil price has plunged further. The unofficial market rate is now 266/$. Our Real Effective Exchange Rate (REER) model – which we have our doubts about (we never accept one model as providing a universal “truth”) – suggests NGN305/$ is fair-value for the currency.
“And yet oil prices are below the long-term average so maybe the naira should be weaker than fair value too. The South African Rand is 30 per cent cheaper than its long-term value and that makes some sense when commodity prices have been flushed down the toilet.
“I would definitely take a fresh look at Nigeria if the currency is moved to 240-250/$ with perhaps 5-10% bands on either side, but I would favour wider bands, giving Nigeria more flexibility to cope with an oil price that has been highly volatile.
“It would be a shame if Nigeria moved the currency rate now – and then came under more pressure in 3-6 months to do it again. It would be a shame if new currency bands had as their weakest point, alevel which is only just touching the current unofficial rate of NGN266/$. Far better if there is some flexibility in the system,” they stated.
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