Friday, 30 September 2016

This Analysis Explains How The Exchange Rate Could Be N752/$1 By Xmas, If Things Remain As It Is


The Naira hit yet another all time low on Thursday after it sold for as low as N490/$1 in some sections of the black market. The local currency has been on a steady decline since the start of the month following a repertoire of bad policies by the Central Bank of Nigeria.
As Nigerians approach the last quarter of the year and look forward to Christmas, Nairametrics readers have been asking us how much they think the exchange rate will trade for by the end of the year. It’s a tough question to answer considering the quantum of factors that influence the direction of the exchange rate. One of the most important of course is liquidity. If liquidity continues to dry up like we have been seeing, then expect the value of the naira against the dollar to continue to plummet.
Nevertheless, our analysts tried to dig in using the trajectory of the rate of depreciation of the naira to project what it will be by Xmas assuming the status quo remains. Status Quo being that liquidity is
still paltry, the current CBN Governor remains in power, oil prices below $50, foreign investors remain away etc.
As at September 1 the exchange rate of the Naira was N424/$1 and by September 29 it was N490/$1. This gives us a Compounded Annual Growth Rate (CAGR) of 0.5% daily for 29 days. Using that same growth rate, we can extrapolate to determine what the exchange rate will be by Christmas.
Since we currently have about 86 days to Christmas, at today’s rate of N490 and a CAGR of 0.5% daily the exchange rate could trade at a whopping N752/$1 by Xmas.
Remarkably, the exchange rate has been growing at a rate of 0.45% since the introduction of the flexible exchange rate system (otherwise called floating of the naira). The exchange rate was officially floated on the 20th of June 2016. According to our records, the black market traded at N345/$1. 72 days later and it is trading at N490/$1 giving us a CAGR of 0.48%. This is also close to the 0.5% CAGR calculated on a daily basis above.

Source: Nairametrics.com

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