The Central Bank of Naira (CBN) recently devalued the naira by 5.54 percent. While the new rate has not been readjusted on the website of the apex bank, there are indications that exchange has been raised to ₦381/$1 in place of the previous official rate of ₦360/$1. However, the new rate has been updated on the website of FMDQ OTC Securities Exchange, a platform that oversees foreign-exchange trading.
About four months ago, Nigeria’s apex bank had readjusted the official exchange rate in what appeared to be a technical devaluation. In March, CBN stated that the perceived devaluation was merely an adjustment of price. However, from many angles, the increase in the exchange rate appears to be Nigeria’s first devaluation attempt in 2020. Note that the first devaluation featured an exchange rate increase of over 17 percent.
While the second devaluation involves a mere increase of 5.54 percent, a cumulative percentage increase of over 24 percent has been recorded in Nigeria’s exchange value in 2020 alone. Although experts are uncertain about the prospects of Nigeria’s naira in the coming months, the series of economic assaults facing the country suggest a gloomier fate.
Within the current realities, the devaluation has diverse dimensions. On a positive note, CBN has described it as an attempt to unify and harmonize Nigeria’s multiple exchange rate to improve the transparency of the currency management system. Experts have described this as a good move because as the multiple-rate regime ends, so will parallel and discriminatory prices.
Thus, the move will give the naira some stability in the immediate term. It should also promote the accessibility of the foreign exchange and provide a levelled ground for all entrants to compete and trade.
However, many are still uncertain about its ability to truly eliminate the parallel exchange market. For instance, Ademola Adigun, an economic policy expert, noted that while the purported exchange harmonization is a positive development, further devaluations may be expected in the coming months to achieve true harmonization.
On the other hand of the devaluation is its economic effects on households and businesses. For example, the devaluation in March worsened inflationary pressure and interest rate. A DATAPHYTE report in June highlighted a jump of 0.97 percent between April 2019 and April 2020. Data from the Central Bank has also shown a persistent rise in inflation rate in 2020.
While the inflation rate stood at 12.26 percent in March, it leapt to 12.34 percent in April and further jumped to 12.40 by May. Impliedly, the recent devaluation attempt may further worsen inflationary pressure and dampen the hopes of many Nigerians. Increases in food prices and the prices of other commodities may be expected in the short run. This is amidst the reality of the food insecurity that has adversely impacted on many children across the country.
But this readjustment also means that many Nigerians have suddenly become poorer. To provide a context, the ₦30,000 minimum wage which was about $98 at CBN’s standard rate of ₦306.5/$1 at the end of January became $83 in March. Now, at same ₦30,000 exchanges to only $78 at ₦380/$1. This is a shortage of about $20 on the minimum wage which is even inadequate amidst the current realities. By extension, more Nigerians may have fallen below the poverty line between March and now.
The series of readjustment also means a deal to businesses. Exchange volatility may distort the business font and result in price instability. On a general note, there are fears that continuous devaluation will worsen the living standards of Nigerians. According to Abiodun Keripe, the Head of Investment Research at Afrinvest Securities, the latest devaluation would certainly trigger a higher inflation rate.