• Friday, April 12, 2024
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Burger King Whopper index shows naira overvalued

Burger king whopper index shows naira overvalued

The naira is overvalued by 11.8 percent, a BusinessDay analysis using the price of a Burger King Whopper as an index has shown.

Inspired by the Big Mac index created by The Economist in 1986, the BusinessDay version compares the cost of buying a Burger King Whopper in six African countries – Nigeria, Egypt, Ghana, Kenya, South Africa, and Morocco.

The BusinessDay Burger King Whopper index is calculated by dividing the price of a Whopper in one country in its local currency by the price of a Whopper in the US to obtain an exchange rate.

A Burger King Whopper in Nigeria costs N3,000 while it is sold for $6.49 in the US. When the price in Nigeria is divided by the price in the US, a Burger King Whopper index exchange rate of 462 is obtained.

This figure is then compared to the actual foreign exchange rate of N413 and it shows that the naira is overvalued by 11.86 percent.

An overvalued exchange rate implies that a country’s currency is too high for the state of the economy. This means goods are relatively more expensive in that country.

While Nigeria’s exchange rate is overvalued, the Whopper index shows that South Africa’s currency is undervalued. The currency of a country is said to be undervalued when its value in foreign exchange is low. This means goods are relatively cheap in the country.

In South Africa, a Burger King Whopper costs 62.9 rand. When compared to the price in the US, a Whopper index of 9.69 is obtained. With an exchange rate of 15.92, the index suggests the rand is undervalued by 39.1 percent.

In 2021, the Big Mac index for the rand was 67 percent, making it one of the most undervalued currencies in the world.

Read also: Burger King opens another outlet in Lagos

“South Africa has a business environment that is friendlier in terms of regulation and this increases their chance of attracting investment and FX,” Mosope Arubayi, SSA Economist & Market Strategist, IC Group.

Unlike Nigeria, Arubayi says the most developed economy in Africa is able to “produce more locally and as a result can export more.”

South Africa’s rate of change in prices climbed to 5.5 percent, the highest in 5 years but two times lower than Nigeria’s 15.4 percent inflation rate in November 2021.

Acknowledging that both countries are in two different terrains Ayo Ebo, head, retail investment, Chapel Hill Denham said South Africa has relatively stable currency and is more of an exporting country than Nigeria.

“South Africa does not have insecurity challenges like Nigeria, it also does not have exchange rate volatility,” Ebo said.

By narrowing down to a specific product, the Whopper, which is common to the African countries where Burger King is present, differences in costs of goods and services is eliminated.

This is because the burger contains the same ingredients in every country where it is made. The BusinessDay Burger King Whopper index is based on the principle of purchasing-power parity (PPP) that economists use to compare the currencies of countries based on a similar basket of goods and services.

The Economist created its now famous Big Mac Index, a guide to the fair value of a currency based on the principle of PPP.

In June 2021 while addressing a meeting, Godwin Emefiele, Governor of the Central Bank told the conference that Nigeria’s spot naira rate was overvalued by up to 10 percent.

Nigeria relies on oil for 90 percent of foreign exchange and the price crash last year severely limited its access to dollars.

Since last year, the Central Bank of Nigeria has devalued the naira three times. The first adjustment on Naira occurred in March 2020, when the CBN moved the official exchange rate from N306/$1 to N360.

Three months later, the second adjustment on Naira occurred as CBN adjusted the exchange rate from N360/$1 to N381/$. This year the currency has been devalued 8.6 percent to N414/$ today since the beginning of 2021.

Despite this, the wide gap between the official naira exchange rate and the parallel market has persisted. Naira is trading at 573/$ in the black market today.

The Central Bank of Nigeria in July also ended the sales of foreign exchange to Bureau De Change operators citing that the parallel market has become conduit for illicit forex flow and graft.

Nigeria currently operates a managed float exchange regime, where the CBN can intervene in the market whenever it deems appropriate.

The Vice President of Nigeria, Yemi Osinbajo recently asked if the CBN needs to move rates to reflect the market as much as possible to improve supply.

The BusinessDay Burger King Whopper Index also shows that Kenya’s currency is also over valued by 2.3 percent while the currencies in Egypt, Ghana and Morocco are undervalued by 39.8 percent, 11.4 percent and 8.8 percent respectively.

Burger King, the world’s second-largest fast-food hamburger chain behind McDonald’s, recently entered the Nigerian market.