LONDON, Nov 26 (Reuters) - Nigeria’s decision to devalue the naira this week may be insufficient to address the oil exporting economy’s problems, with the naira still appearing overvalued when inflation and the currencies of trade partners are factored in.
A comparison of the real effective exchange rates (REER) of a number of emerging market currencies up to the end of October shows the Nigerian naira was the most overvalued currency, trading around 34 percent above its own 10-year average, the following graphic shows:
That was before the central bank devalued the currency by 8 percent on Tuesday.
REER is commonly used to determine whether an exchange rate is overvalued or undervalued, and IMF research suggests REERs have been a useful signal for upcoming financial crises in the past.
The charts raise the question if the central bank has done enough, said Jack Allen at Capital Economics.
“If you look at the currencies of other oil exporters, they have fallen more than the naira, so they may need to allow some more depreciation,” said Jack Allen, an economist at Capital Economics.
He was referring to currencies such as the Russian rouble, the Kazakh tenge and Colombian peso .
“The naira still looks overvalued in REER terms (because) it appreciated massively in the past 10 years, more than most other emerging markets and the appreciation effect was very strong in recent years,” he added.
The naira rose 75 percent in REER terms in the past 10 years until before this week’s move, the following graphic shows:
Nigeria’s central bank also widened and weakened the trading band for the naira against the dollar, though markets set out to test the boundaries immediately, with the naira trading at record lows in nominal terms and closing at 176.80 against the greenback on Wednesday, just outside the 176 limit.
Reporting By Karin Strohecker and Sujata Rao, Graphics by Vincent Flasseur