On Tuesday the All Share Index in Lagos dropped for an eighth day. One reason behind this is investors are becoming increasingly wary of putting money in a market which they believe is on the brink of devaluing its currency.

Last week the Central Bank of Nigeria (CBN) announced it had halted US dollar sales to foreign exchange operators. The naira hit lows of over 300 to the dollar on the parallel market, around a 50% difference to the official CBN rate of close to 200 to the dollar.

Economists are expecting a devaluation soon.

“I don’t think they can hold on too much longer to be honest, the country can’t afford it,” said Martyn Davies, managing director of emerging markets and Africa for Deloitte.

During the presentation of the country’s 2016 budget in December, President Muhammadu Buhari hinted a devaluation of the naira could be accepted in the near future, stating that the CBN is “fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflows of foreign currency”.

“I am aware of the problems many Nigerians currently have in accessing foreign exchange for their various purposes… These are clearly due to the current inadequacies in the supply of foreign exchange to Nigerians who need it,” stated Buhari.

“We are carefully assessing our exchange rate regime keeping in mind our willingness to attract foreign investors but, at the same time, managing and controlling inflation to level that will not harm the average Nigerians. Nigeria is open for business. But the interest of all Nigerians must be protected. Indeed, tough decisions will have to be made.”

Protecting the average Nigerian

While a devaluation of the naira might encourage foreign capital inflows back into Nigeria, Edward George, Ecobank’s head of research, noted it will hurt the population.

“If you devalue the currency it means essentially anything that you import into the country becomes much more expensive… it is going to push up inflation. And if you bear in mind that for a lot of politicians that have been elected, their political base is the non-urban population – and they’re the ones who could really feel the pain from a devaluation, as prices go up,” he explained.

“So it is going to be a very difficult one to sell to the population. But the reality is they can’t keep going the way they are.”

However, while How we made it in Africa spoke to a number of professionals who all anticipate a naira devaluation soon, Renaissance Capital’s global chief economist Charles Robertson pointed out that economists have generally been expecting this for almost a year now.

“We thought it would be shortly after February (2015)… And in summer we thought it would be in three or four months, and in autumn we said, okay, in six months. We still think it’s likely [to take place] within a few months. It could happen within a few days.”

Weighing the risk of uncertainty

According to Rory Ord, head of independent valuation at RisCura, the uncertainty surrounding a devaluation of the naira could also result in reluctance by fund managers in brokering private equity deals with naira-based businesses in the country.

“If an investor has to go in at say the official rate, and then it immediately gets weakened to the parallel rate – if it is allowed to weaken – then that’s a straight loss to the investor,” he explained.

“For investors who actually have the choice over which countries they invest in, I think they will have to be really convinced about the opportunity [of a particular deal] and actually take into account those severe currency risks [before investing in a Nigerian company].”