Global investment and financial institution, Goldman Sachs Group Inc., has said the devaluation of the naira by the Central Bank of Nigeria (CBN), though necessary, was not a sufficient condition for unifying the official and parallel market exchange rates.
Specifically, Goldman Sachs noted that the apex bank had failed to "provide any clarity on current/capital account FX restrictions that result in a parallel market exchange rate that is weaker than that offered at the official window(s)".
The global investment body also stated that easing FX restrictions and clearing the FX backlog which it estimated at $12 billion, would be required to achieve a unified naira exchange rate.
It interpreted the recent policy announcements by the CBN as, "significant positive surprises to our and market expectations and as being supportive of a constructive view on sovereign credit".
However, the institution noted that in the broader FX policy set-up, the CBN failed to "provide any guidance on whether the (historically heavily managed) currency regime would be maintained or if there might be any transition toward a more flexible exchange rate.
"In our view, any FX liberalisation or easing of FX restrictions would entail the need for higher local interest rates to lean against currency depreciation pressure."
Goldman Sachs pointed out that it recently examined Nigeria's external balances, and, "our analysis suggested that at current oil prices, the naira adjustment needed to rebalance the current account into a sustainable surplus would entail a devaluation to around NGN 750 vs. the USD."
It added: "Beyond official exchange rate windows and current/capital account restrictions, market participants are focused on whether the CBN might introduce changes to the FX policy regime (historically heavily managed).
"We have no guidance from the authorities on their policy preferences with respect to the FX regime. Additionally, following the suspension of former CBN Governor Emefiele, the new administration has not yet made an appointment for a new governor."Thus, it remains uncertain whether the CBN will re-peg the currency at a new (weaker) level or might move in the direction of introducing some currency flexibility (in an extreme, a free-float)."
Continuing, the group added, "As we have argued previously, introducing currency flexibility and/or easing restrictions on access to FX would very likely need to be accompanied by higher local interest rates (with prevailing short-term market interest rates currently deeply negative in real terms).
"More broadly, we have been positively surprised by the pace of policy changes announced by the Tinubu administration in the last two weeks since the President's inauguration, which in our view are supportive of sovereign credit."While the end-game for monetary/FX policy still remains quite uncertain, we nonetheless interpret the incremental developments as positive."
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