Large naira devaluation, sharp rate hikes appear likely: Capital Economics

With the suspension of the Governor of the Central Bank of Nigeria, Mr Godwin Emefiele, a large devaluation of the naira and sharp interest rate hikes “now appear to be on the cards, Capital Economics has said. 

The UK-based economic research firm said on Monday that the suspension and potential removal of Emefiele raised hopes that there would be a shift away from the current unorthodox and interventionist monetary and exchange rate policies. 

“But we’re not fully convinced yet that this represents a full U-turn from ‘Buharinomics’,” the Deputy Chief, Emerging Markets Economist, Jason Tuvey, said, referring to the economic policies of former President Muhammadu Buhari, who handed over power to Bola Tinubu on May 29.

The firm said investors would no doubt welcome Emefiele’s suspension and potential removal from the CBN, given that he “had overseen a period of unconventional and botched policies, especially the mismanagement of the naira”. 

It said while the currency had fallen by a cumulative 65 percent against the dollar during Emefiele’s tenure, this had occurred through a series of step devaluations and the naira has generally remained overvalued. 

The official exchange rate currently stands at around 460/$, whereas it is currently trading at around 740/$ on the parallel market. 

Capital Economics said, “In order to maintain a tight grip on the currency, Mr. Emefiele has overseen the creation of a convoluted exchange rate system. Multiple exchange rates are used and there is a long list of imported products for which the CBN does not provide dollars. 

“To preserve FX reserves, the CBN has been forced to ration the amount of FX that it provides to commercial banks.”