• Wednesday, April 10, 2024
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BusinessDay

The silent destruction of the Nigerian naira

Burger king whopper index shows naira overvalued

Staring at the ceiling looking wary and dejected, John absently hears the cock crow in the early hours of the morning, sleepless, restless and exhausted.
As a youthful and vibrant teenager who was doing his BSc program at Yale university, he is now in quite the dilemma given the prolonged foreign exchange (FX) challenges faced by Nigeria following the coronavirus pandemic.

At the beginning of 2020 before the COVID-19 pandemic hit full force, the naira was valued at N306 to $1. This meant that his tuition fees of $10,000 was equivalent to N3.06 million asides other costs such as feeding, transportation among others.
Already, the cost of light and water bills that comes with accommodation expenses had been taken care of because he was staying with his aunt abroad.
However, the rhythm of the music had changed from a thrilling tune and come to a reeling and abrupt halt as the future looked bleak to say the least.
In the space of the first 8 months of the year 2020, the naira has officially been devalued twice by the apex bank – the Central Bank of Nigeria (CBN).

The naira was first devalued on March 20th to N360 from N307 and further devalued to N381/$1 in August. These timelines fell during the global lockdown and COVID-induced difficulties to cater for revenue shortfalls experienced by diverse sectors of the Nigerian economy.
Specifically, the foreign exchange reserves account lost $454 million between June 1st and July 15th, and as at September stood at $35billion as against $36billion in July. This further increases the pressure on exchange rate.

Read Also: Naira strengthens to N457 on black market

Initially, John did not understand the magnitude of what this devaluation really meant for him, his family and other Nigerians – not until he and his dad were discussing the likelihood of resuming school and the cost implications.
John was speechless to realize that his school fees had now escalated to N3.81million, which is N750,000 (25 percent) higher than it was at the beginning of the year.
He was still trying to remain positive until his dad reminded him that commercial banks would definitely charge higher than this official rate talk less of the other numerous exchange rates including the black market which currently stands at N458/$1, that is, N77 higher than the official rates per dollar.
This implied that any international transaction made during this period would be much more than the already increased official exchange rate of N381 per $1.

According to his dad, an online course which he registered for last month at $49 cost about N19,355, indicating exchange rate of N395/$1 – almost N400 per dollar.
His dad then started reminiscing about the good old days when naira had much more value at N2/$1 in 1973. That would mean paying just N20,000 for John’s tuition fees as against the almost N4 million that he is currently paying on just fees alone, asides other basic needs.
This numerous devaluations of the naira in 47 years now indicates that naira has lost its value by over 190 times, that is, a depreciation of the Nigerian currency by almost 19,000 percent. Outrageous right? Well, this is the dilemma of Nigeria as a whole.

How does the naira depreciation affect me?
Coupled with the fact that John recently lost his aunt abroad due to the pandemic, he and his family have to now add accommodation costs, light and water bills to their itinerary, accompanied by worsening socioeconomic conditions as his parents are struggling to keep their businesses afloat.
In response to the exchange rate difficulties and efforts to reduce dollar inflows to prevent further naira depreciation, banks have reduced the amount of foreign transactions permitted monthly. For instance, Guaranty Trust bank has restricted this to $100 monthly as against its former $300.

A recent BusinessDay report analysed that the new exchange rate figures would imply extra N2 million for tuition fees of Nigerian students schooling abroad.
Perhaps it is convenient for us to think that somehow, things might get better soon. But given projections by one of the leading global investment banking and investment management firms – Goldman Sachs in August 2020, that Nigerians should expect a significant further devaluation to N550/$1 within 12-18 months, the future holds lots of uncertainties.
Of course, this disheartening situation does not just apply to the dollar but to the euros for those dealing with UK-related transactions, and other currencies such as the Japanese Yen, Canadian dollars, swiss franc among others.

To make matters worse, this naira depreciation has snatched away the hopes of his older brother, Jude who wanted to pursue his masters’ program as well as his younger sister, Lily who dreamt of going abroad for her undergraduate studies overseas.
Even the alternative to physical learning which is online courses is greatly affected by the naira depreciation over the years, especially the magnitude of almost N100/$1 increase that has occurred this year alone.

Worse off, this naira depreciation extends to not just affect costs for academics but all forms of businesses across various industries (entertainment, agriculture, oil & gas, real estate, the health sector and other services) that deal in dollars because most global transactions are invoiced in dollars.
This would lead to much higher prices as already seen in the case of rising inflation as lower revenues and higher costs would be transferred to consumers who are already drowning in slashed incomes and higher expenses.
One way forward that would be helpful to Nigerians is for the CBN to unify exchange rates across all platforms in Nigeria, which will serve as a cushion to Nigerians.