Sovereign Analysis /

Nigeria: Stealth devaluation possibly underway

  • NGN has displayed some volatility of late, with an increasing amount of quotes in the c440-450/US$ range

  • The CBN may be testing the waters for a deval, with a rise in reserves allowing increased intervention in the market

  • Devaluation would be welcome step, but will only be a temporary FX fix without allowing NGN to float thereafter

Nigeria: Stealth devaluation possibly underway
Ayobami Omole
Janet Ogunkoya
Tellimer Research
2 November 2021
Published byTellimer Research

Following suggestions that the Central Bank of Nigeria (CBN) would move towards a flexible exchange rate regime in mid-2022, there is increasing evidence that a naira devaluation could be in the works.

NGN has displayed significant volatility over the past couple of weeks, with the currency widening slightly in the I&E window from its de facto peg of c411/US$ to c413/US$ from September to October, before temporarily spiking above c420/US$ at the end of the month.


Further, there has been increasing divergence between the daily high and low quotes in the I&E window reported by FMDQ, with high quotes rising above 450/US$ on the past five consecutive trading days.

While not unprecedented, both of these phenomena were seen ahead of the February 2021 devaluation, which could suggest the CBN is testing the waters for another devaluation in the coming weeks or months.

High and low quotes

Spread between quotes

The CBN may see the current economic backdrop as an opportunity to devalue from a position of strength. Rising oil prices, alongside the US$3.4bn SDR allocation in August and the US$4bn eurobond issuance in September, have pushed reserves up to US$41.8bn from a low of US$33.4bn in August (on a 30-day moving average basis), a level not seen since September 2019. This gives the CBN more ample resources to begin clearing the backlog of FX demand from foreign portfolio investors.


Indeed, the CBN sold over US$790mn in the I&E widow in the month through 22 October, already above this year’s previous monthly high of US$515mn in September and nearly 3x the ytd average. Average daily turnover has also picked up to cUS$150mn-250mn of late, versus levels closer to US$50mn at the beginning of the year and US$100mn-150mn over the summer.

I&E inflows

I&E turnover

With some of the CBN’s interventions for both foreign portfolio investors and local corporates reportedly taking place in the c440-450/US$ range, well wide of the official exchange rate of c410-415/US$, there is growing speculation that the bank is in the process of an unofficial/stealth devaluation to somewhere in that area. This is being reflected in exceptional volatility in the NDF market, with forward NGN rates rising across all time horizons.


A devaluation would be a major step in the right direction, but it is unclear if the CBN will go far enough to restore balance in the FX market. The IMF projected a fair value of c460-465/US$ for NGN in February, and with Nigeria’s CPI running at 16.6% yoy in September and the CPI index rising by c8% since February versus a c4% rise for the US CPI index, we think fair value is probably somewhere closer to c475-480/US$ (albeit possibly offset in part or in full by the ongoing rise in oil prices).

And, of course, fair value is a moving target. As we have repeatedly emphasised (see Related reading, below), even if the CBN devalues to a “market clearing” exchange rate, misalignment will build back up if it is not allowed to float afterwards. The IMF projects inflation will average 12% over the next five years in Nigeria versus nearly 3% in the US, which means NGN should depreciate by nearly 10% annually to hold its ground in PPP terms.

While we would welcome a devaluation of NGN, we, therefore, continue to believe that the only sustainable solution to Nigeria’s endemic FX issues is to devalue the currency and allow it to float. This remains unlikely until mid-2022 at the earliest, and probably later given the current administration’s obsession with FX stability. That said, with evidence now growing for an impending devaluation, we remain vigilant and will reassess the situation if and when the policy is made official.

Related reading

Nigeria: FX overhaul promised post-Dangote refinery, October 2021

Nigeria: Ban of abokiFX furthers FX folly, September 2021

Nigeria’s central bank takes another sing at fintechs in the naira’s defence, August 2021 (Jeje & Ogunkoya)

Central Bank of Nigeria adds fuel to the fire by banning BDCs, July 2021 (Curran & Ogunkoya)

Stagflation will continue without major policy shift, July 2021

Central Bank of Nigeria makes dovish shift and affirms FX unification, May 2021

Nigeria: Another meaningless naira devaluation, May 2021

Our discussion with Nigeria’s IMF Mission Chief, April 2021

Nigeria policy rate and FX regime left intact, March 2021

Nigeria devalues official exchange rate, but impact will be limited, March 2021