Richard Guest.

It was a tough Christmas for traders in Nigeria and their international counterparts, as the ongoing dollar crunch limited the ability of many to pay suppliers. Since June, the Central Bank of Nigeria has limited the availability of hard currency to importers and placed restrictions on interbank dealing as it tries to mitigate an oil price crash that has gutted the government’s revenues. There could be more hard times to come.

Analysts predict that the naira will inevitably be revalued this year, causing further pain in a country that is heavily dependent on imports. The currency is trading at nearly 270 to the dollar on the unofficial market, against the official range of 197-199, and the CBN has spent billions from Nigeria’s already dwindling dollar reserves to shore up the currency. “The issue is when, not whether they will [devalue]”, says Gaimin Nonyane, chief macroeconomist at Ecobank Capital.

Currency forwards have been rising; the three-month naira non-deliverable forward price hit 238 this week, suggesting that traders are also increasingly convinced that a devaluation is on the cards. Both the president, Muhammadu Buhari, and the governor of the CBN, Godwin Emefiele, have declared themselves opposed to any devaluation, and may continue to resist the move for as long as possible. The country imports much of its food and refined fuel needs, and consumers and small businesses would suffer price rises in the short term.

The government announced an expanded 2016 budget, which included a doubling of capital expenditure aimed at providing a jolt to the slowing economy. This is also likely to increase the demand for imports of capital goods, giving another powerful disincentive for devaluation. The budget deficit is forecast to expand to $11 billion, and the government is widely expected to return to the international capital markets to raise financing. Yields on frontier market debt have risen substantially over the past two years, and analysts expect that a Nigerian hard currency issue in 2016 would attract a coupon in double-digits.

These countervailing pressures mean that the CBN — which the market believes is mainly taking its cues from the federal government — will resist devaluation as long as it can. “Usually you would expect a rational government to do it on a gradual basis, but given that the president and the central bank governor are opposing devaluation, I think it might come as a sudden surprise to everyone, maybe in Q2,” Nonyane says. “In the short term, things will be rather bleak for Nigeria and its currency.”