Bank of America predicts the undervaluation of Nigeria’s naira following recent foreign exchange reforms. Read about the potential impact on the nation’s economy and the strategies needed to strengthen the currency and oil sector.
The Bank of America (BoA) has made a significant observation regarding the value of the naira, predicting that it will settle at N680 to the dollar by the end of this year.
The bank states that the currency has transitioned from an overvalued state to an undervalued one, following recent foreign exchange reforms implemented by the government.
Curbing oil theft is now believed to be the next crucial step for President Bola Ahmed Tinubu, according to the bank. This move is seen as essential to combat the challenges the nation currently faces due to rampant oil theft.
The Bank of America analysts express their perspective on the matter, stating, “We now see a fair value of USDNGN at 680 per USD (previously 580). However, we expect the exchange rate to trade above this level, reaching 700 by the year-end, and returning to a range of 650-680 in early 2024.” The analysts further added, “It will take some time to navigate the transition period, align rates, and introduce more USD into the formal market. Once the dust settles, the naira’s value should strengthen and appreciate.”
The Bank of America highlights that increased oil exports (an additional $12 billion) and a liberalized import regime (resulting in a $10 billion increase in non-oil imports) can potentially lead to consistent current account surpluses in the medium term.
“Considering the ongoing momentum, Tinubu’s next major move should be focused on reducing oil theft by reforming the security sector and engaging host communities residing near the pipelines,” states the Bank of America in a note seen by BusinessDay, Nigeria’s leading business publication.
If successfully implemented, this strategy could potentially elevate Nigeria’s crude production to 1.6 million barrels per day (bpd) within the next 12 to 18 months, surpassing the current production level of 1.2 million bpd, subject to OPEC limits.
The Bank of America further asserts, “In our opinion, achieving a 1.6 million bpd crude oil production within the next 12 months is feasible and would represent a significant structural improvement from the current levels of approximately 1.2 million bpd. Including condensates, the total oil production could rise from the current 1.4 million bpd to 1.8 million bpd within two years, a level similar to Nigeria’s pre-pandemic production.” Nigeria heavily relies on hydrocarbons, which account for 90 percent of its exports, at least half of its fiscal revenues, and approximately 6 percent of its GDP.
“Higher oil revenues and increased efforts towards generating non-oil revenue would alleviate the burden of high debt service,” adds Bank of America.
The Bank of America’s insights shed light on the potential future of the naira and Nigeria’s oil sector, indicating the importance of effective reforms and addressing security challenges to unlock the country’s economic potential. With the proper strategies and actions in place, Nigeria has the opportunity to strengthen its currency and diversify its revenue sources for sustainable growth and development.
