The Central Bank of Nigeria recently, increased the total package to stimulate the Nigeria economy following the growing COVID-19 scourge in the country. The total package is now N3.5 trillion from N1.1 trillion; (I guess the CBN will still do more.) The CBN has devalued the Naira official rate from N305/$ to N360/$. The rate at the Import & Export (I&E) window is now N380/$ from the mid N360. I believe the gap existing between the official rate and the I&E window is still large but I appreciate its efforts.
The gap used to be about N50-N55. Now it is about N20; this makes sense. The CBN prefers not to call these recent moves devaluation. It calls them “adjustments”. On the other hand, the I&E window is the market trading segment for investors (foreign), exporters, end-users, which allows foreign exchange trade to be made at the exchange rates determined based on the prevailing market conditions. According to the CBN, the purpose of this window is to boost liquidity in the foreign exchange market and ensure timely execution and settlement for eligible transactions. It was established in April 2017.
The following are the implications, and the ancillary explanations for some of the steps taken by the apex bank. In the first place, the CBN has increased the size of its balance sheet. But who cares about the size now. The country and its economy are in a crisis, so survival is the first thing to think about. Second, your N305,000 for $1,000 at the official rate (if you are one of the privileged few with access previously) is now worth about N847.22. What this means is that with N305/$ previously you would buy $1,000 for N305, 000. Now however, your N305, 000 will fetch you about $847.22. Before now, your N360, 000 would buy you about $ 1,180.03; now it would buy you $1,000. The same price movements will play out at I&E window if we consider the pre and post CBN interventions.
Next is that exporters (who bill in dollars) can now exchange more naira for same dollar. On the flipside, importers will require more naira to obtain same dollar, while the domestic debt (in dollar term) has shrunk (though Nigeria does not have a problem here as she does not pay local debt in dollar). Next important point is the fact that the value of foreign debt in naira terms has increased. Again, the foreign lenders do not have problems as they are paid in dollars. However, Nigeria may seek a repackaging of her foreign debt. The reason for this is the shortage of dollars. Bad enough however, the Nigerian corporate entities that borrowed in dollars but earn/invoice in naira will be hit hard.
The reason is that the dollar value of their debts has gone up. The Federal and State governments will earn more in naira per the existing dollar. There will be more naira per the existing and new dollar this will likely result in higher inflation. But that should not be a problem as long as the rise is mild. Besides, if Nigeria’s foreign reserve coughs more than necessary, Nigeria can talk to IMF for a stabilization fund for its foreign exchange needs. Nigeria can also talk to the Federal Reserve in the United States for some dollar swap lines. More big central banks in the world are increasingly turning to the Feds for such swap lines in these uncertain times.
