THE NAIRA EXCHANGE RATE DEVALUATION

IMPACT ON THE ECONOMY

Adetilewa AdebajoAPRIL 2020

Currency Devaluation| Overview

This report provides a brief analysis on the currencydevaluation of the Nigeria Naira using relevant dataand graphical trends. The research draws attention tothe currency devaluation 2000-2020 and the negativeimpact on the economy as a result of a static exchangerate mechanism.

The pandemic shock and the Naira devaluation are expected to have a negative impact on the Nigerian economy. With an impending recession looming on the horizon, the impact on households, small and medium scale businesses, and corporates will invariably result in a weaker domestic economy.

We try to proffer mitigants to the impending devaluation and economic downturn. We also advise on how households, businesses and government can manage the risks, to see them through the downturn.

N

Currency Devaluation| Overview

Impact

Causes

Oil Price Shocks Lack of Buffers

Multiple FX Windows

Fiscal & Monetary Policy Inconsistency

High Interest & Inflation Rates

Static Exchange Rate Mechanism

Negative Impact on Local Manufacturing & Agribusiness

Higher Interest & Inflation Rates

Expensive ImportCheaper Export

Cheaper Assets for Foreign Investors

More Expensive for Local Investors

Weak Economic Growth below

Population Growth

Currency Devaluation| Dollar to Naira (2000 – 2020)

Source: Exchange Rates UK, CBN and CFG Analysis

April 2020

CBN380

Pall

NDF515

Parallel420

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

550.00

Dollar (US$) to Naira (₦)

Currency Devaluation| Dollar to Pound (2010 – 2020)

0.5

0.6

0.7

0.8

0.9

Dollar (US$) to Pound (£)

Source: Exchange Rates UK and CFG Analysis

Exchange Rate 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Dollar to Pound 0.65 0.62 0.63 0.64 0.61 0.65 0.74 0.78 0.75 0.78 0.79

Exchange market rates

Year 2020

Jan0.76

Mar 0.80

Apr 0.80

Feb0.77

Currency Devaluation| Dollar to Euro (2010 – 2020)

Source: Exchange Rates UK and CFG Analysis

The Euro has depreciated by approximately 31.2% between 2010 to 2020.

Exchange market rates

Year 2020

Jan0.90

Mar 0.90

Apr 0.92

Feb0.92

0.6

0.7

0.8

0.9

1

Dollar (US$) to Euros (€)

Exchange Rate 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Dollar to Euro 0.76 0.72 0.78 0.75 0.75 0.90 0.90 0.89 0.85 0.89 0.91

Currency Devaluation| Key points

▪ 2016 and 2020 from the chart, shows major devaluation spikes for the =N= /US$ over the past 20 years. Overall, the Naira depreciated on average by approximately 380%, across all windows between 2000 to 2020, 160% between 2010 to 2020 and 100% between 2016 and 2020.

▪ The flat nature of the =N=/$ chart with only significant upward spikes, reflects the static nature of the Naira exchange rate mechanism, showing no revaluation of the Naira in the 20 Years under consideration.

▪ By contrast, the $/£ and $/€ charts show upward and downward movements, within an overall upward trajectory that reflects a market driven exchange rate mechanism.

▪ A critical observation is in the wide margin and band of the =N=/$ devaluation =N=150-400, compared to £/$ devaluation £0.65-0.8 and €/$ devaluation €0.76-0.92 over the last 10 years.

Year Naira Pound Euro

2010 151.10 0.65 0.76

2011 155.93 0.62 0.72

2012 158.79 0.63 0.78

2013 159.26 0.64 0.75

2014 165.14 0.61 0.75

2015 197.89 0.65 0.90

2016 257.40 0.74 0.90

2017 333.61 0.78 0.89

2018 361.29 0.75 0.85

2019 360.05 0.78 0.89

2020 389.29 0.81 0.92

Dollar exchange rates

Currency Devaluation

▪ The Naira has depreciated between 360%-450% in the past 20 years across all windows.

▪ This is primarily due to a static exchange rate mechanism with multiple windows. The staticmechanism is rent seeking and distorts rates. Naira always devalued in low oil price regime butnever revalued in high oil price regime, despite steady annual $25-30bn diaspora inflows. TheStatic exchange rate mechanism cost Nigeria’s exit from The JP Morgan global bond index.

▪ With the onset of the Pandemic, the Non Deliverable Forward Rate NDF at ₦515 to $1; indicates a negative FX valuation trajectory and bleak economic outlook.

▪ Concerns mounting over the stability of US$27.7bn short term investments held by offshoreportfolio investors, as a result of Nigeria’s weak fiscal regime and the global downturn.

▪ With oil prices at an all time low and a health crisis to deal with, uncertainty mounts over thestability of the current US$34bn declining reserves. Discounting the swaps component worsensthe reserve position picture.

▪ The Nigerian economy, already fragile with GDP growth rates of 2.5%, lower than populationgrowth rates of 3.5%. With 100 Million Nigerians living in poverty and 30% unemployed, mostanalyst project a GDP contraction of 2.5-8.5% and an impending recession by year end 2020.

▪ Both S&P and Fitch have also downgraded Nigerian to “B” from B+ Outlook Negative.

Currency Devaluation|

▪ The Fiscal and Monetary Regime

▪ A weak fiscal regime and feeble revenue mobilisation has increased the budget deficit from 4% to 6% of GDP from 2019 to 2020.

▪ The pandemic shock, amidst a distorted monetary policy and the inability to tame inflation, manage interest and exchange rates has exacerbated the situation, inviting a recession.

▪ The debt profile of US$85bn with a 60% debt service ratio is unsustainable. The debt to revenue ratio also increased from 371% to 551% from 2019 to 2020.

▪ MPC static; no significant rate shifts in two years. Has monetary policy reached its limits?

▪ The FGN Response

▪ As a result of oil price crash, the FGN adjusted the budget benchmark from US$57 to US$30 resulting in a 90% reduction in projected oil revenues from the initial budget of ₦2.6tn to ₦244.2bn. US$133 is the Fiscal Break Even oil price.

▪ The FGN, traditionally averse to the IMF, is now seeking $3.4bn in emergency fiscal support,with an additional shopping list of $2.5bn from the World Bank and $1bn from the ADB US$1bntotalling $6.9bn to help plug the deficit. The CBN is also under pressure, as monetary financinghas increased from 0% to 4% of GDP from 2019 to 2020.

▪ The CBN announced palliatives policies which include interest reduction on concessionaryloans, and new facilities of N50bn for SMEs, ₦100bn for Healthcare and Pharma, and ₦1tn forlocal Manufacturing. The CBN also created an Infrastructure Development Vehicle,InfraCO PLC with ₦15tn in tier 1 and 2 in take off capital.

Double Jeopardy| Survive Pandemic and Economic Crisis

▪ The Outlook▪ There was a 100% devaluation between 2016 and 2020, unmatched by increase in our incomes

and asset valuations.=N=200m fetched US$1m in 2016. Today we require =N=400m. Time toeliminate multiple exchange windows, to ensure availability and a sustainable market drivenexchange rate mechanism.

▪ The Economy is likely heading into a recession and another round of devaluation is certain. Arecovery will not be likely till Q1 2022. The impact of devaluation and the Pandemic Shock arelikely to spike Inflation to between 18-20% by year end. The MPC as a result, might face thedilemma of considering interest rate hikes in the midst of a recession.

▪ FX is a major cost of production and invariably devaluation increases prices which businessesattempt to pass on to consumers. This leads to inflation and thinning profit margins as therecan be a lag in prices catching up with devaluation. Rising input costs make our industries lesscompetitive globally, and our assets cheaper for foreign investors.

▪ First we have to survive a Corona Virus Pandemic. How prepared are we for Double Jeopardy; Pandemic and Economic Crisis?

▪ Financial Institutions, Large Corporates and Multinationals already have their Devaluation andRecession Playbook. Exporters and Hard Currency Income earners are also immune.

▪ How do Households and SMEs survive? Ensure business continuity; protect and invest in your existing income generating assets, retain market share, go digital, diversify-seek new opportunities, save in FX, cut costs, stay calm and position for distressed assets.

Double Jeopardy| Survive Pandemic and Economic Crisis

MAY THE FORCE BE WITH YOU