A Russian investment banking firm, Renaissance Capital, in a research report says the fair value of the naira is 305 against the dollar.
However the bank, which has a base at Victoria Island in Lagos, advised the Central Bank of Nigeria (CBN) to devalue the naira to trade at 240, 250 to the dollar.
“The unofficial market rate is now 266/$. Our Real Effective Exchange Rate (REER) model – which we have our doubts about (we never accept one model as providing a universal “truth”) – suggests NGN305/$ is fair-value for the currency,” the bank said.
“Oil prices are below the long-term average so maybe the naira should be weaker than fair value too. The South African Rand is 30 per cent cheaper than its long-term value and that makes some sense when commodity prices have been flushed down the toilet.”
It advised Nigeria to take a big leap in devaluing the naira, in order to avoid a second devaluation in three to six months’ time.
“I would definitely take a fresh look at Nigeria if the currency is moved to 240-250/$ with perhaps 5-10% bands on either side, but I would favour wider bands, giving Nigeria more flexibility to cope with an oil price that has been highly volatile.
“It would be a shame if Nigeria moved the currency rate now – and then came under more pressure in 3-6 months to do it again.
“It would be a shame if new currency bands had as their weakest point, alevel which is only just touching the current unofficial rate of NGN266/$. Far better if there is some flexibility in the system.” the report said.