Connect with us

Economy

Has Nigeria Currency Been Devalued?

Published

on

Has the Naira been devalued? Well Yes and No…stay with me, I will explain.

A devaluation occurs when a nation operates a fixed exchange rate, and then officially downwardly adjusts the value of the local currency in relation to a reserve currency like the United States Dollar (USD). E.g. the 2020 Federal Government of Nigeria (FGN) budget initially earmarked a $1 to N305 exchange rate, but as the Coronavirus developed and commerce was restricted, the Central Bank of Nigeria (CBN) and FGN both revised the exchange rate and 2020 budget assumptions for the Naira, and the Naira was subsequently devalued to N360.

The CBN last week adopted a “flexible exchange rate policy” for official transactions, consequently, the Federation will “start to use the flexible rate as per the NAFEX rate for government transactions” this was a quote from Finance Minister Zainab Amed. So the official CBN rate is $1 to N379, the NAFEX rate is about $1 to 410. Is this is a devaluation? A downward review? No.

So the question is why is this downward move from N379 to N410 for $1, not a devaluation? Let us do the background.

Nigeria’s Federal Government’s main source of foreign reserves is the sale of crude oil and gas, it is estimated this makes up close to 80% of the total forex the FGN earns. The process is simple. The Nigerian National Petroleum Corporation (NNPC) via her Joint Venture partners and others sells crude internationally and pays the USD proceeds into a joint account held with the CBN at the JP Morgan Chase bank in the US. Once these sales proceeds are collected the CBN funds the Consolidated Revenue Fund (CRF) of the Federation in Naira, at the official exchange rate and retains the USD cash. So to be clear, when Nigeria sells crude oil, the actual USD cash is swapped for Naira by the CBN at the official rate which in this instance is N379. Next, the CRF is debited to the Federation Account Allocation Committee FAAC, and the Naira is shared with the Federal, States, and LGAs in a pre-agreed formula.

Hence if the oil prices rise, CRF/FAAC gets more Naira cash, if oil prices fall, CRF/FAAC gets less Naira cash. Let us use a simple example to drive this home, let us assume in Yr 2020 the total oil production was about 1.0mbpd, let us assume oil price was $50 per barrel, let us ignore the benchmark for now, this will mean the total sales recognized in the budget for distribution will be $18.25b (1mbpdx $50x 365days). Now if CBN used the initial yr 2020 official exchange rate of $1 to N305, then the amount credited to CRF/FAAC for distribution to federating units will be N5.58t (Five Trillion, Five Hundred and Eighty-Four Billion, Five Hundred Million). However, if the current exchange rate of $1 to N379 is used, the amount in Naira available to be distributed is N6.91t (Six Trillion Nine Hundred and Sixteen Billion, Seven Hundred and Fifty Million), the difference is almost N1.4t. Note, we have not changed the crude oil prices, nor the oil production in our example, we only changed the rate the CBN is using to credit the CRF/FAAC.

What even the untrained eye can see is that a “weaker” naira, is good for the FGN as it allows her to close her budget deficits by earning more Naira, a “strong” naira means fewer Naira for the federating units and of course more local borrowing in Naira to fund the budget.

So the question must have been asked somewhere, “why do we have a ‘strong naira’ receive lower Naira exchange from CBN, and then turn around and borrow locally from the same CBN?” it’s a good question.

The solution was also quite elegant.

Nigeria cannot control international oil prices, even internal crude production is based on OPEC oil quotas, Nigeria cannot simply pump 3mbpd and cover her budget deficit, the only variable in our example Nigeria has control over is the exchange rate. Hence the “flexible rate policy “simply goes to that variable and “flexes” it, replace the “strong naira” rate of N379 used by the CBN with the much weaker NAFEX rate.

Like our example above, this “flex” means more Naira cash will flow to the federating units, and also reduce local borrowing from CBN and others. This point was underscored by Vice President Yemi Osinbanjo during a seminar with the London-based Chatham House where he said “funds that are shared between the Federal and the State governments….the market rate will be used,”

Hence, back to our question, has the Naira been devalued? Not exactly. The CBN which has oversight of the Naira has not officially devalued the Naira, it’s still N379 on her website, but the Naira exchange rate used internally has been devalued, in effect, the federating units have agreed that the devalued Naira favours the local economy.

So who will still get the CBN dollars at @ N379, many sectors will including Dangote Refineries which at this moment is still enjoying the preferred exchange rates the CBN announced the refinery will receive. One can only wonder at what price the Dangote Refinery will be billed for Nigerian crude oil, N379 or N410.

BlazeNewz Disclaimer

The information contained in this post is for general information purposes only. Opinion articles, comments are solely the responsibility of the author and does not necessarily reflect the views of BlazeNewz while we endeavour to keep the information accurate with objectivity as we adhere to global practice of journalism. Read our full Disclaimer.

Hammed Tajudeen is the editor in-chief of Blaze News, holds Higher National Diploma(HND) in Mass Communication, graduated from Osun State Polytechnic, Iree.

Olaiya Flyover Inauguration

Advertisement
Advertisement
Advertisement
Advertisement

Trending

0
Would love your thoughts, please comment.x
()
x