Economic Implications OF Naira devaluation by CBN from N360.1/$1 to N380/$1

The central Bank of Nigeria has announced to adjusted the official dollar exchange rate to N380/$1 from N360.1/$1.

This move portends significant implications for Nigeria’s public and private sectors. Before now the exchange rate at  parallel market was ₦485 to dollar , British pound sterling stands at ₦584/₤1 and European euro stands at ₦523/€1.

This information is base on Data collated from various black market dealers on the mainland , Airport road and island of Lagos State where forex is sold.

What is Devaluation of currency

Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation means that the value of the currency falls.

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Now let take a look at the Implications of naira devaluation

Private Sector

1.Most private pubic partnership projects, contracts are negotiated using the CBN official exchange rate. The price will now change to N379/$1 instead  N360

2. With the exchange rate devalued again, fuel prices might increase if the impact of the exchange rate is reflected in the pricing template

3.Custom duties, petroleum profit taxes, and other charges will now be converted at an exchange rate of N379/$1 or whatever new rate the CBN chooses, assuming it will work within the NAFEX band.

4. Government taxes that are priced in forex but converted to naira also stand to gain a major earnings boost.

5. Exports are cheaper to foreign customers
6. Imports more expensive.
7. In the short-term, a devaluation tends to cause inflation, higher growth and increased demand for exports.

8.Inflation is likely to occur following a devaluation because:

Imports are more expensive – causing cost push inflation.
AD is increasing causing demand pull inflation
9. With exports becoming cheaper, manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase.

10 .Reduces the purchasing power of citizen abroad. meaning it is more expensive to go on holiday abroad as a Nigerian.

Government Finances

1.The new exchange rate will increase the amount available to share from the Federal Allocation (FAAC) between the FG and States.

2. Oil proceeds, which is a major source of revenue sharing for the government is deposited at the CBN and then converted to naira using the official exchange rate of N360/$1. The CBN’s latest devaluation suggests more money for the government as the conversion rate is now N379/$1.

3.Economic growth might increase

4. Government taxes that are priced in forex but converted to naira also stand to gain a major earnings boost.

5. Custom duties, petroleum profit taxes, and other charges will now be converted at an exchange rate of N379/$1 or whatever new rate the CBN chooses.

6. government will record cost escalations for some if not all of its capital projects and expenditure. From vehicle purchases to furniture and fittings we should expect a spike except the contracts are fixed-priced.

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