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Bank of America: Naira Undervalued Following Currency Float

Following Nigeria’s decision to float the naira, analysts at Bank of America, a US-based bank, have stated that the Nigerian naira has transitioned from being overvalued to undervalued. In a note to clients on June 28, the analysts expressed their view that the fair value of USDNGN (the exchange rate between the US dollar and the Nigerian naira) now stands at 680 per USD, compared to their previous estimate of 580. They anticipate that the USDNGN rate will likely trade above this level, reaching 700 by year-end, and then returning to a range of 650-680 in early 2024.

Since the currency float on June 14, the naira has experienced a significant depreciation of over 60% when compared to its pre-reform level of N460 per USD. On Tuesday, the currency closed at N780 per USD, according to data from FMDQ.

Bank of America’s assessment of the fair value estimate at N680 indicates that the naira is currently undervalued by approximately 12%. However, the analysts cautioned that it would take some time for the transition to fully take effect, as aligning rates and increasing USD inflows into the formal market will require additional time. They expressed optimism that once the dust settles, the value of the naira should strengthen and appreciate.

Bank of America also pointed out that Nigeria could experience consistent current account surpluses in the medium term due to higher oil exports and a liberalized import regime. They projected that higher oil production could contribute an additional $12-13 billion in export revenues, which would be balanced by an increase of $10 billion in non-oil imports. This net gain of $2-3 billion would strengthen the current account surplus, supporting the naira.

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Standard Chartered Bank shares a similar perspective, also considering the naira undervalued after the float. They expect the currency to strengthen to N685 per US dollar as Nigeria accelerates the implementation of reforms necessary to stabilize its foreign exchange market.

Nigeria’s decision to float the naira represents a significant departure from years of maintaining a currency peg, which had discouraged foreign investors and had adverse effects on the economy. This move towards achieving a unified exchange rate, along with other reforms implemented by President Bola Tinubu, such as the removal of a costly petrol subsidy program, showcases Nigeria’s commitment to addressing economic challenges and attracting foreign investment.