Thread by @StearsBusiness

Explained: @cenbank devalues the Naira (a thread)
Last week, the Central Bank of Nigeria (CBN) devalued the naira for the second time this year. The official exchange rate is now ₦381/$1. Here’s a thread explaining why they did and what it means for you. (1/20)

Let’s start with the basics. Nigeria operates a managed floating exchange rate system, meaning the CBN intervenes to keep the exchange rate within a particular range by buying and selling forex.  (2/20)

Why would the government want to do this at all? A managed exchange rate keeps prices in the economy stable. Fluctuating prices are not good for growth or business confidence. (3/20)

For the CBN to maintain its desired exchange rate, it needs to have enough forex in reserve. But because of the impact of the COVID-19 pandemic on Nigeria’s main dollar source (crude oil), the CBN is struggling to sustain the managed float. (4/20)

The official rate was devalued from ₦307 to ₦360/$1 in March, and now has been lowered to ₦381/$1. That’s not all that has happened, though. (5/20)

The CBN manages the exchange rate by limiting the number of buyers. You might remember how in 2016, Emefiele restricted the release of forex for the importation of items like rice and oil palm. People importing these items had to get their dollars elsewhere.  (6/20)

The CBN also adopted multiple exchange rates in the economy to manage demand. By partitioning buyers into different windows, it could sell dollars to different people at different rates. (7/20)

If the CBN considered your FX need a priority - because you wanted to pay for school fees or go on a pilgrimage, for example, then, lucky you. If not, you had to get your dollars from the parallel (black) market, which is a lot more expensive. (8/20)

The official exchange rate is determined solely by the CBN and is the rate it converts dollars to naira for the government. (9/20)

Nigeria has other exchange rates, though. Some of them are determined by demand and supply, such as the NAFEX rate for investors & exporters and the black market rate. (10/20)

This multiple exchange rate issue came up again why the government turned to the IMF and World Bank for loans to soften the impact of COVID-19. The IMF and World Bank attached a few conditions. The one relevant here: the CBN needs to unify all the exchange rates. (11/20)

In response, the Finance Ministry promised to make all forex rates the same. We suspect the CBN has been devaluing to achieve this unification goal.  What is the implication of this on everyday Nigerians? (12/20)

Expect a rise in inflation, as most of Nigeria’s inflation is cost-push and imported inflation. Manufacturers face a higher cost of production and would translate into higher prices of goods. Also, expect your forex purchasing power to be weaker. (13/20)

On the plus side, a unified exchange rate would improve foreign investor confidence as it promotes transparency and reduces the possibility of arbitrage. (14/20)

Arbitrage involves people buying forex at a cheaper window and then proceeding to sell at a higher rate in another window. (15/20)

The Nigeria government will also maximise its foreign exchange earnings as just last year, the NNPC was converting dollar receipts at ₦306/$1. Now, its revenues would be converted at ₦381/$1. States and local governments would also benefit from higher allocations. (16/20)

In theory, a devaluation should increase exports as domestic goods become more attractive abroad. This should boost Nigeria’s current account (exports minus imports).(17/20)

However, about 90% of Nigeria exports are oil or crude products. Our non-oil sector exports very little and is not very competitive globally. We don’t expect that to change anytime soon. (18/20)

At the very least, though, a unified exchange would reduce the pressure on the CBN to finance multiple windows and would allow the value of the currency to be determined by supply and demand. (19/20)

Is this the end of our naira woes? We won’t bet on it. For a deeper understanding, read today’s newsletter on Nigeria’s exchange rate. Be sure to subscribe: (20/20)
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