The Naira is even weaker against the US Dollar due to a currency devaluation so, expect higher prices of goods and services locally
Since 2016, Nigeria’s Central Bank (CBN) has artificially supported the Naira. It is commonplace for countries to pursue various monetary policy strategies in a bid to gain a competitive edge in global trade and reduce sovereign debt burdens. However, there has been a major development, in the midst of a global pandemic and falling crude oil prices.
On Friday 20 March 2020, the CBN technically readjusted the FX sales rate of the Naira to N380.20/$1.00 from N366.70/$1.00 at the importers and exporters window (which is in effect a devaluation of the naira).
How Much the Naira (vs. US Dollar) has Lost Value in One Week
| FX Window | 25 March 2020 | 18 March 2020 | WoW change (%) |
| CBN Official | N361.00/ $1.00 | N307.00/$1.00 | -17.6% |
| CBN SMIS | N358.51/$1.00 | N358.51/$1.00 | 0.0% |
| I & E | N380.25/$1.00 | N367.57/$1.00 | -3.4% |
| Black Market | N400.00/$1.00 | N380.00/$1.00 | -5.3% |
Source: FMDQ, abokiFX.
What is a devaluation, why is it happening and how does it affect the Nigerian economy?
The devaluation of a currency is when the central bank purposefully adjusts the value of its currency lower against another currency (in this case the US Dollar). A devaluation of the currency usually needs to happen when the central bank doesn’t have the capacity to support the currency (i.e because its economy is weak). Nigeria, a country mostly dependent on oil revenue, has suffered a lot, due to weaker oil prices ( Brent oil price: $30.30 (25 March 2020) ).Notably, oil prices fell to their lowest level in 17 years, dropping below US$25.00 a barrel on 18 March 2020). The covid-19 pandemic led to lower oil demand globally) and dwindling foreign reserves ( $35.71bn as 24 March 2020).
So why did the CBN readjust the Importers & Exporters window rate?
One potential benefit to the Nigerian economy is that importers could find Nigerian goods attractive i.e. the devaluation makes the country’s exports cheaper enabling the country to increase its foreign reserves account over time; an action which is intended to improve the balance of payment position of the country. The best case is that countries that depend on Nigeria will want to buy more (say countries who buy oil from Nigeria).
Need to Know
| Currency Devaluation | a deliberate downward adjustment of the value of a country’s currency against another currency. It usually means a cut in a nation’s standard of living |
| Foreign reserves account | Foreign exchange reserves are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country |
| Purchasing power | Purchasing power is the amount of goods and services that can be purchased with a unit of currency |
| Importers & Exporters window (I&E FX Window) | A market trading segment for Investors, Exporters and End users that allows for FX trades to be made at exchange rates determined based on prevailing market circumstances, The I&E FX Window was established by the CBN on 21 April 2017 |
Source: Google, FMDQ.
How a devaluation of the Naira affects you
The direct impact of the devaluation is a weaker purchasing power of Nigerian citizens. Expect Nigerian citizens to bear the brunt of the devaluation, as goods and services will become more expensive locally. Last week, the black-market rate was N380.00/$1.00. As a result, today (25 March 2020) the black-market rate is N400.00/$1.00 (a depreciation of 5.3%).
Furthermore, the dollar is more expensive. Are you an importer who sources products from other countries? Are you a student going to university abroad? Then as you may already have witnessed the rates have gone up, and you will be forced to consider cheaper alternatives for your business.
In addition, the case of rising inflation. If you review your salary in local currency terms, you are going to be worse off. Case in point: Since the announcement, many online phone stores in Nigeria have revised their prices higher. Expect other vendors to increase prices in the near term.
From an investment standpoint, the key consideration that determines an increase or decrease in investment activities pertains to whether or not investors feel the Naira has been devalued enough. If investors do feel it has been devalued enough, then expect to see investment flows into the market.
It’s worth mentioning that analysts’ sentiments suggest that the real value of the Naira is well above N400.00/$1.00, range. If such is the perception of the market, do not expect to see massive flows into the various market segments until rates begin to signal investors’ sentiments regarding the actual value of the Naira.
The devaluation of the Nigerian naira has a huge impact on the health of the currency, however, the challenge with all this is that the downward adjustment doesn’t address the key issue: which entails Making changes in policies that will move the Nigerian economy in the right direction.
Such policies are required to create full employment and maximise use of the resources available for the Nigerian economy to perform at maximum production, thereby raising the standards of living for Nigerian citizens.
Key takeaway:
- The Nigerian citizens will feel a strain on their income due to increased prices of goods and services in the economy as a result of the devaluation. Expect higher inflation
- Its time to double down on your money management skills: Also Read Titi’s story
- There are opportunities for investing in the market, so keep learning and be on the lookout for them. Read this article on how Warren Buffett approaches his investing
- The currency devaluation doesn’t mean you should take all your money out of stocks and investments. Call your financial advisor to discuss your best options based on your goals and risk appetite