Above: Neville Mandimika in conversation about the Nigerian naira



Naira over 250% overvalued according to RMB Milk Index

Nigeria’s currency continues to be one of the most overvalued currencies tracked by RMB – currently over 250% overvalued. This continues to persist, despite its structural changes this past year.

This is according to RMB’s most recent Milk Index, released today. The Economist’s Big Mac Index measures purchasing power parity between currencies and looks at how market exchange rates impact the price of goods in various countries.

The Milk Index does the same. But it measures not on Big Macs, but on milk – available and accessible across Africa.

RMB’s Milk Index compares the price of milk on the African continent. While the Milk Index methodology is an interesting point of departure to evaluating the risks associated with taking foreign exchange exposure in Africa, it’s important to marry these results with other techniques to assess valuation.

Says RMB Africa Economist and Strategist Neville Mandimika: “We juxtapose the results from the Milk Index with other techniques like the Real Effective Exchange Rate (REER). The results assist investors and corporates with operations in African countries with decisions around hedging their foreign exchange risk.”

Milk prices have trended up, and this year’s main finding is that COVID-19 exacerbated the valuation of certain currencies. In the last few months food prices have accelerated globally and have played their part in higher inflation prints in most of RMB’s coverage countries.

The naira continues to be one of the most overvalued currencies within the basket of currencies that RMB tracks, with the unit currently over 250% overvalued. “This valuation continues to persist, despite the structural changes the currency has undergone in the last year,” Mandimika says. “These were the unification of the official rate and the NAFEX rate – and then more recently, the suspension of FX sales to Bureau De Changes.”

This number changes though with the REER valuation applied. “A REER perspective paints a slightly different picture, the methodology suggesting that the unit is only 6% overvalued.” The RMB house view leans closer to the REER assessment: RMB Economist Daniel Kavishe believes that the unit will depreciate modestly over the remainder of this year to potentially close the year 425 against the dollar from the current spot rate of 411 – a 3.4% depreciation.



Neville Mandimika l RMB l neville.mandimika@rmb.co.za

RMB is a leading African Corporate and Investment Bank.


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