Plan for naira weakening and consider offering flexible payment terms to local partners facing FX shortages
Firms should plan for NAFEX weakening in 2022 and consider offering flexible payment terms to local partners facing FX shortages. They can also consider increasing the cadence of their pricing cycles to better manage the pass-through costs of FX volatility. Where possible, firms should consider localizing production to mitigate FX risk. Lastly, MNCs should remain alert to sudden rule changes by the Central Bank of Nigeria (CBN), such as a new FX ban for selected imports, as it tries to shore up FX reserves.
Overview
On December 31, the CBN allowed the naira to weaken to a historical low of 435 per US dollar but has since supported it around its previous value of 415 per US dollar.
The NAFEX has been the official rate for the naira since the CBN ceased its previously official “CBN rate” in May 2021; this was a de facto devaluation.
After the CBN’s decision to limit its FX sales to bureaux de change in September 2021, the parallel-market premium has ranged between 35% and 40%, up from a range of 21% to 27% in the previous three months.
Our View
The NAFEX will stay the benchmark naira rate for MNCs for the foreseeable future, following the removal of the CBN rate. While authorities will continue to send mixed messages regarding the naira, we expect further devaluations this year—one each in H1 and H2—bringing the average for the year to around N 430 per US dollar, against N 410 per US dollar in 2021. Sustained downward pressure on the naira will be caused by domestic oil production challenges (undermining the effect of high global oil prices), longstanding US-dollar demand backlogs, dwindling FX reserves, and remittances that remain below pre-pandemic levels. MNCs should also anticipate persistent dollar shortages (albeit improving mildly and temporarily following devaluations). Moreover, the CBN will maintain bans on FX access for the import of selected goods that it feels should be produced domestically. This will maintain pressure on the parallel-market exchange rate.
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