The Central Bank of Nigeria (CBN) has devalued the Naira against the dollar in a bid to harmonies the multiple exchange rates which was adopted to avoid outright devaluation. The apex bank has replaced the official rate of 380 naira to a dollar with the NAFEX rate (also known as investors and exporters exchange rate) of 410 naira to dollar, indicating a 7.6% devaluation of the currency.
Before now, Nigeria operated a multiple exchange rate regime which has been criticized by the International Monetary Fund (IMF) and is reported that one of the requirements for World Bank (WB) to approve the $1.5billion loan to Nigeria is if it unifies its multiple exchange rates. Nigeria adopted the multiple exchange rate regime to allow controlled but flexible dollar rates for investors, exporters and government transactions and a pegged official rate of 380 naira to a dollar. However, this policy has made one of Africaâ€™s largest economy less attractive for investors, making it difficult for business to thrive.
The naira had to be devalued twice last year to meet up with rising dollar demand as the nation was hit hard by the coronavirus pandemic that led to the plunge in crude oil price which serves as a major source of the nationâ€™s foreign currency earnings.
While the CBNâ€™s recent move will see the countryâ€™s earnings boost from sales of crude oil with the current exchange rate and also attract investment, it is certain that there is going to be an inflation surge. Nigeriaâ€™s inflation rate defied the law of gravity as the numbers maintained an uptick in the last 9 months. It increased to 18.17% in March 2021 from 17.33% in February 2021, representing an increase of 0.8%. While the month of April saw inflation rate drop to 18.12% indicating a decline after many months, the current devaluation of the local currency will spike up inflation numbers which in turn will see Nigerians spend more on goods and services. This will see the spending power of Nigerians dwindle in the coming months.
Adegbotolu Kehinde Erastus – Market and Research Analyst