FSDH Lists Impact of CBN’s Naira Devaluation to N380/$1
Image Credit: Jean Chung/Bloomberg
By Dipo Olowookere
Last Friday, the Central Bank of Nigeria (CBN) made the second devaluation of the Naira in 2020, crashing the value of the local currency to N380/$1 from N360/$1.
This move, according to insiders, was to adhere to the demands of the World Bank and the International Monetary Fund (IMF), who have insisted that until the exchange rate system is unified, it may not release loans to the country.
Nigeria has struggled to earn forex as a result of the low prices of crude oil at the global market. The country largely depends on the sale of the commodity for revenue.
As a result of the low prices of the product since the beginning of this year, Nigeria, which is Africa’s largest economy and producer of oil, has recorded a huge shortfall in forex inflows.
This has consequently put too much pressure on the Naira at the foreign currencies market, selling at about N460/$1 at the black market.
Before the adjustment of the domestic currency last Friday by the CBN, it was first devalued to N360/$1 from N307/$1 earlier in the year.
But the latest move by the apex bank has generated mixed reactions, with some analysts projecting another devaluation probably later in 2020 so as to align with the parallel market rate, which the government still describes as illegal.
Analysts at FDSH Research, while commenting on the development, opined that the devaluation will favour government because it will earn more in Naira, but warned that it could raise the inflation rate.
The firm also noted that the adjustment was in line with the government’s agenda as contained in the Economic Sustainability Plan (ESP) launched in June in response to the COVID-19 pandemic.
FSDH, while listing the expected of the devaluation by the central bank, noted that it will have positive implications on government revenue and in turn, reduce pressure on the exchange rate in the short term.
“However, other markets are expected to adjust accordingly, the move would translate to higher pressures in other markets like the parallel market, raising speculative concerns in the coming months.
“With the reserves at $36 billion and relatively stable oil price, there appears to be a considerable amount of firepower to intervene in the markets.
“But as economic activities improve, higher imports and lower foreign investment inflows relative to 2019 will add pressure on the reserves.
“Despite the adjustments, the CBN will continue to intervene to maintain exchange rate stability and prevent large FX fluctuations.
“The move is also expected to trigger a marginal increase in the inflation rate, particularly imported food inflation,” it submitted in its report titled Macroeconomic Review for 2020 Q2 and Outlook.
