Nigeria Devalues The Naira

Nigeria Devalues The Naira

As I predicted multiple times, ignoring all the denials, the Central Bank of Nigeria has devalued the naira: “The apex bank on Friday sold dollars to deposit money banks at the rate of N380 to one dollar signaling the official return of a single exchange rate regime in the country’s foreign exchange market”. I do hope those who have been reading me took action. It is the only option available to the nation. What the CBN has done is the right call because in a national budget of $14 billion (effective, using my model) with more than $7 billion going to service debts, the only option for Nigeria is to sell the little dollars it has to have tons of naira to pay contractors and settle local bills, even though those recipients will not smile home happy. Going forward, this is what I expect to happen: the black market will move to N420 per dollar by the end of July 2020 despite any efforts the CBN would put to create a single exchange rate in the nation.

The much-vaunted devaluation of the Naira came into force on Friday despite the denial by the Central Bank of Nigeria (CBN) last week that same was not on the cards.

The apex bank on Friday sold dollars to deposit money banks at the rate of N380 to one dollar signaling the official return of a single exchange rate regime in the country’s foreign exchange market.

An official circular by the Director, Trade and Exchange department of the CBN, Ozoemena Nnaji, said the development is part of efforts by the apex bank to establish a uniform rate between the official and the parallel market rates for bureau de change operators.

The circular was on the disbursement of the proceeds of the International Money Transfer Operator (IMTO).

With the new rate, the CBN has effectively collapsed the multiple exchange rate policy used in determining the value of the Naira since June 2016.

The country will now have a single exchange rate for official transactions and bureau de change operators as well as for importers and exporters of goods and services, amongst others.

This is the highest official exchange rate between the dollar and naira in the last two years.

Henceforth, dollars sold to banks will be at the rate of N376 per dollar, while banks to CBN will be at N377 per dollar.

Also, the rate by CBN to Bureau de change operators will be N378 per dollar, while BDCs to end-users should not be more than N380 per dollar. and the volume of sales for each market is $20, 000 per BDC

Single exchange rate will not work in Nigeria because of the nature of Nigeria’s economy. Most of our  devaluations typically begin with that intent but since demand and supply cannot hit equilibrium optimally, there is always a dislocation on pricing parity. If more people are asking for USD than CBN can provide through our banks and official vehicles, the exchange rate cannot be constant (i.e. track official rate). People will begin to use black market at all costs to settle market obligations and save time which could be lost waiting for the official exchange rate from banks.

Simply, CBN has no power to maintain a single currency rate because it cannot control all the elements involved. We produce nothing in Nigeria except crude oil, and that product is already massively wounded at the moment. Just a few days ago, the apex bank boasted that it would not devalue naira as “the market fundamentals do not support Naira devaluation at this time.” (see below for press release)

It is key to understand that this does not affect naira velocity. Yes, inflation will scale up and the impact of the marginal positive impact of the minimum wage has been neutralized with this devaluation. You do not need to withdraw your money from the bank as it changes nothing: Naira is naira either in the bank or under the pillow. The key thing is recalibration as Nigeria enters a dark period of economic uncertainty.

This should not surprise any keen observer. I wrote two weeks ago thus: “Nigeria opened 2020 with $43.1 billion in its foreign reserve. Today, that number has dropped to $38.6 billion. Typically, CBN fights until it hits $30 billion, by them it releases the magic armour – devaluation. Devaluation is a crunch time call: we cannot continue defending the naira to the point where our “bank balance” goes to zero. Yes, a time will come when we will have to leave naira to lose value, necessary to keep balance in that bank account.”

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6 thoughts on “Nigeria Devalues The Naira

  1. Yes,
    The demand for dollar is in disequilibrium with the supply of dollars and demand for naira.

    Demand for dollars is higher than its supply.

    The supply of Naira is higher than its demand.

    This is why there will be a parallel market that’ll exist hand in hand with the official rate.

    Multiple exchange rate vs single exchange rate system. The former is obtainable in Nigeria.

    !Boom the chain reaction effect of this policy

    Reply
  2. This is the time that all Nigerian need to prioritize locally made goods so that at least foreign exchange will be preserve within Nigeria.

    Reply

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