Last updated on October 19th, 2022 at 06:42 pm
The reduction in the official value of a currency in relation to other currencies at the foreign exchange market is called devaluation. This is one of the economic challenges Nigeria is currently passing through.
Devaluation is peculiar to an importing-dependent economy that is also battling with insecurity and leadership catastrophe.
For instance, if a crate of eggs you bought for NGN600 in 2018/2019 is now worth NGN2,000 in 2020, it can be described as hyperinflation. The reduction in the value of Naira is one of the implications of devaluations.
Devaluation of Naira
At the time of publication, 1USD is worth NGN417 at the officiate CBN rate while it’s between NGN420 to NGN420 at PTA/BTA rate at banks.
For other needs like making purchases on an e-commerce website, the buyer from Nigeria could pay as much as NGN490 per USD.
At the black market rate, a USD is between NGN575 to NGN580.
Though the Central Bank of Nigeria (CBN) says it doesn’t recognise the parallel market any longer since the ban of Bureau De Change (BDC), the unofficial market remains the most accessible market to source forex.
The difference between the official rate and the parallel rate is NGN163, that’s huge and ridiculous to an economy.
Implications of Devaluation:
Devaluation makes a country’s exports relatively less expensive for foreigners and makes imported products relatively more expensive thereby discouraging imports.
But in Nigeria, instead of discouraging high demand for foreign products, the reverse is the case because the environment at home isn’t even conducive to domestic production.
As such, Nigerian consumers bear the consequences. The implications of devaluation is enormous, not just on the country’s foreign reserves, the average man on the street will also feel the impact as discussed below:
Inflation
For an importer of a mobile phone who bought USD at NGN200 in 2015 and now buys at NGN420 (which is even being rationed), there is NO way he could sell the same product at the price as it was in 2015.
So, if you are wondering why there is so much margin between what you bought in 2015 and now.
So, inflation is one of the implications of devaluation. There is going to be a more terrible devaluation of the naira if the leadership fails to address the fundamentals of its economy.
Pressure on foreign exchange
External reserves, a country’s assets held in foreign currencies, will be affected when the official legal tender continues to lose its value.
A decline in foreign reserves puts heavy pressure on foreign exchange. We’ve seen this happen when the CBN allegedly used foreign reserves to service the forex market.
Financial analysts have doubted the ability of the apex bank and Nigeria to fulfil its foreign currency financial obligations.
Room for speculations
Ordinarily, demand should be a major determining factor, but it is speculation in Nigeria
What do you expect when the policy of an apex bank looks speculative? Its unpredictable monetary policies have also given room for stakeholders in the forex market to speculate.
Free for all
When a country’s economy has no clear economic direction, there will be free for all. For instance, the USD exchange rate at Access Bank is different from what one gets from Union Bank. All Nigerian banks have varying exchange rates for online buyers.
For instance, the ban on the sale of foreign exchange by the CBN to BDC operators in August 20121 reduced the supply of forex and had an effect on the depreciation of the naira.
Higher Production Cost
As earlier pointed out, most of the manufacturing companies in Nigeria import raw materials from abroad. They need dollars to meet this obligation.
This means that they would need more naira to get dollars to purchase their raw materials and other input for production.
The implication is that the final consumers will bear the production cost.
Should I be worried about devaluation?
If you are wondering how the devaluation of the naira would affect you, you need to use the scenario of an importer we highlighted above.
Again, if you have obligations in foreign currency like paying for your child’s school fees in a UK university, you are definitely not going to get pounds the same price you bought it in 2014 or 20 years ago.
5 ways to reduce the effect of devaluation
1) One of the ways to escape from Nigeria’s naira devaluation is to invest in foreign stocks in the United States, and the United Kingdom.
By doing this, you’ll continue to earn dividends in a currency that has more value than the naira.
In case you don’t know, the naira is one of the currencies with poor value in Africa, it’s weak compared to more than a dozen currencies on the continent.
2) Offer online services that pay in dollars, GBP or Euro. If you are a content creator, one such is to offer freelance service to foreign companies that need SEO-friendly content
3) Invest in dollar mutual funds
4) Invest in dollar fixed income,
5) Purchase of Eurobonds
6) Have a blog with great content that is appealing to foreign advertisers, they will be ready to buy advertisement space on your blog and they would pay in dollars
7) Research and invest in stocks that have stronger currency value in Africa compared to the naira.
What is the implication of the devaluation of naira?
Instead of expanding domestic production, the devaluation of naira is causing more job loss and culminating in hyper-inflation.
What causes the devaluation of naira?
Higher demand for forex has put pressure on the forex, thus causing scarcity forex because of increased forex outflows. For instance, demand for education forex for foreign school fees increased from $500 million to $6 billion between 2015 to 2021.
Thankfully, forex applicants who need them for PTA, BTA, foreign school fees, and settle foreign medical bills can now do so by submitting forex applications on Trade Monitoring System.
Can the Naira regain its value against other currencies?
The naira may not regain its value against its competitors if it remained inconsistent with its monetary policies.
In October 2021, Vice President Yemi Osinbajo smartly pointed out one of the many monetary policies of the apex bank when he said there was a need to allow naira to reflect market realities.
Recap:
Devaluation occurs when the legal tender of a country has a poor value when compared or exchanged for another currency using the official rate.
Devaluation of a country’s currency has some economic implications which include inflation, giving room for speculations, free for all at the fx market, a decline in foreign reserves, and high cost of production for manufacturing companies that depend on foreign raw materials.
One of the best ways to reduce the impact of devaluation is to invest in foreign stocks like United States’ equities which have stable and reliable economic policies.
