Naira Devaluation: The impact

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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 Africa’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 nation’s foreign currency earnings.
While the CBN’s recent move will see the country’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. Nigeria’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

Disclaimer: The article above does not represent investment advice or an investment proposal and should not be acknowledged as so. The information beforehand does not constitute an encouragement to trade, and it does not warrant or foretell the future performance of the markets. The investor remains singly responsible for the risk of their conclusions. The analysis and remark displayed do not involve any consideration of your particular investment goals, economic situations, or requirements.

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