Lagos - The Nigerian naira’s recovery in the forwards market may be deceptive. The currency is destined to weaken, however long policymakers hold out.
Last week six-month contracts declined to their lowest level since last September as crude oil advanced about 20percent after Opec agreed a production cut in November.
A drop in forwards would be a sign of growing confidence in a nation’s economy and currency, but not this time. Even as oil prices advanced, Standard Chartered and Duet Asset Management said the nation needed to devalue the naira and loosen capital controls.
With dollars becoming scarcer and the economy on the brink of its first full-year recession since 1991, businesses are being forced into the black market. There, each dollar costs 493 naira (R21), almost 60percent more than the official rate.
“Oil’s rise is not enough to eliminate the need for a change,” said Ayodele Salami, the chief investment officer at Duet. Nigeria would not attract inflows until it weakened its currency.
While the naira has plummeted almost 40percent since central bank governor, Godwin Emefiele, last June ended a 15-month peg to the US dollar, traders said it was still being managed by the government. President Muhammadu Buhari, who has likened devaluation to “murder”, said he was still against floating the currency, Cable Newspaper reported.
“Eventually, they will have to revert to a more flexible currency regime,” said Samir Gadio, the head of Africa strategy at Standard Chartered, which forecasts the official exchange rate will be steady for at least the first half of this year. “But for the time being, there’s no indication from policymakers that this will happen.”
Forward contracts maturing in a month closed at 318.5 a dollar last Friday.