JP Morgan, a prominent US multinational financial services firm, has projected that the Nigerian naira will reach a trading rate of approximately N850 to the US dollar by the conclusion of 2023. The financial institution’s outlook is based on a combination of tighter monetary policies, more appealing interest rates, and foreign exchange levels that discourage additional dollarization while attracting foreign capital. JP Morgan also suggested that oil-exporting companies should consider selling forex proceeds on the interbank market, rather than directly to the Central Bank of Nigeria, to help stabilize the foreign exchange market.
Key Points:
- Factors Driving the Projection: Achieving the N850/$ foreign exchange rate will necessitate tighter policy measures, higher interest rates, and FX levels that deter additional dollarization while possibly drawing foreign capital.
- Flexible FX Regime: JP Morgan anticipates that the recent efforts to reinstate a flexible foreign exchange regime may persist, supported by a commitment to pair it with stricter monetary conditions.
- Optimizing Forex Proceeds: The financial institution recommended encouraging oil-exporting companies to sell forex proceeds on the interbank market instead of directly to the Central Bank of Nigeria. This approach could contribute to stabilizing the forex market.
- Addressing Willing Buyer-Willing Seller Model: JP Morgan noted that the current willing buyer-willing seller nature of the foreign exchange market is leading to extreme volatility. The report suggests that this model hinders price discovery, prompting the financial regulator to reconsider its strategy.
- Challenges in Raising Foreign Currency Inflows: JP Morgan expressed skepticism regarding Nigeria’s plan to secure $10 billion in foreign currency inflows in the coming weeks to ease liquidity in the forex market. The bank pointed out challenges, such as delays in expected funds from Afrexim and shortfalls in historical dividends from Nigeria LNG Limited.
- Additional Policy Measures: To further stabilize the foreign exchange market, JP Morgan proposed measures like enforcing regulatory limits on FX net open positions for commercial banks and exploring the introduction of a cash reserve ratio (CRR) on FX deposits. They also suggested issuing dollar-denominated assets onshore and requiring all taxes to be paid in local currency.
Conclusion: JP Morgan’s forecast of the naira trading at N850 to the US dollar by the end of 2023 is contingent on a combination of tighter monetary policies, attractive interest rates, and FX levels that discourage dollarization. Additionally, the bank provided recommendations to optimize forex proceeds and stabilize the forex market further. These proposed measures, if implemented effectively, could contribute to a more stable and sustainable foreign exchange environment in Nigeria.
