Recently, there has been a lot of news and speculations about the Nigerian naira being now valued at N500 = $1 on the bureau de change market. Of course, sentiments have risen on what the naira depreciation means and its impact on the standard of living of citizens and different local industries. This article seeks to explain clearly the causes and effects of the continued naira depreciation and the accompanying opportunities and pitfalls to be encountered in the economy and agriculture.
Why is the Naira depreciating?
Since 2015 the naira has experienced a rapid decline in value due to certain factors. One of the key factors that led to the devaluation of the naira by the CBN in 2015 was the decrease in crude oil price on the international market. For Nigeria being a major import country, crude oil happens to be Nigeria’s main export product and the government’s major source of revenue. The decline in crude oil revenue left the Nigerian foreign exchange market with fewer dollars to trade and a depletion of foreign reserves. The effect of the crude oil price reduction on the Balance of Trade and Balance of Payment (BOT/ BOP) was a supply scarcity for the increasing USD demand which left the CBN with no option than to devalue the national currency to create a balance in the market.
In simple terms, you know how it is when everyone is trying to buy tomatoes at the same time, so the demand exceeds the supply and this causes the price of tomatoes to hike yeah? That’s what happened to the dollar. Nigerians need the dollar to buy international products (imports) but there isn’t enough because we have less of it due to the reduction in crude oil price so the dollar becomes more expensive to buy with the naira.
Over the past 5 years, the Naira has continued to depreciate with no hope for improvement despite the import ban policy and other measures the CBN has put in place to help reduce this negative impact. The recent uproar from the citizens of Nigeria came when the Naira was said to have hit the lowest low of all times in December 2020 with a value of 500 Naira per 1 USD official Bureau De Change rate. The naira now has different rates on different foreign exchange markets. Apart from the official rate, the most prominent Naira exchange rate is the Investors’ and Exporters’ (I&E) rate, otherwise known as the NAFEX Fixing, which serves investors and exporters. The I&E window has been generally regarded as the more liberal market compared to the banks and bureau de change rates.
What is the impact of the Naira depreciation on the life of the ordinary Nigerian?
You may be thinking to yourself, “Oh I’m not importing or exporting so these rates shouldn’t affect me right?”
Well, I have some news for you. Nigeria is a net importing country as opposed to being a net exporter. This means that we import most of the goods and services we use from the foreign market. The depreciation in the value of our currency means we have to spend more Naira to buy goods that were otherwise not as expensive on the foreign market before now. This is why you notice the prices of food, clothes, and electronics among other products and services keep sky-rocketing.
Nigerians traveling or studying abroad are also one of the hardest-hit by the Naira depreciation because now they have more expensive bills to pay.
Even companies producing locally have not been left out in experiencing the serious negative impact of the Naira depreciation. Since most of the raw materials and equipment used for production in Nigeria have to be imported, the Naira depreciation has led to an increased cost of production to the extent that SMEs which are supposed to be the backbone of the economy this period have to shut down production.
All these factors have put the country in a state of reoccurring inflation and poverty, but I believe in opportunities rising in every problem.
What are the possible opportunities that lie in the Naira depreciation?
In 2015, China’s currency devaluation gave it an edge over its international export competitors. Because of the lowered value of China’s currency, its product prices became way cheaper and more affordable to purchase and this drove sales up. The difference between the Chinese and Nigeria is that China doesn’t have to import most of its raw materials and equipment to produce. Another problem with local production for exportation is that Nigeria is plagued with setbacks like lack of electricity, water, and the like that make production too capital intensive, unprofitable, and difficult.
However, there are products that you can export that are not restricted by these limitations. Agriculture for instance isn’t too dependent on electricity or government-supplied water. With the lowered Naira value, we can beat competitor prices in supplying both unprocessed farm produce and processed end products outside the country. Now more than ever, agricultural exportation appears to be more profitable. Presently, there is a global underproduction of food to satisfy the fast increasing world population.
The only major difficulty that Nigerian farmers will experience is in buying imported fertilizers and farm chemicals. We can look inward and find a solution to this by adopting methods like hydroponics that utilize animal manure for farmland fertilization. It is also an opportunity for Nigerian chemists to increase their production of farm chemicals. This is the best time for Nigeria and Nigerians to pursue that dream of feeding the rest of Africa and the world at large.
You can benefit from this Naira depreciation by exporting goods and services at a cheaper rate than other countries with higher currency values on the international market. You just need to find the right products to export and agricultural products are no doubt one of such products, we also have tech skills and products on this list. The key is to earn in dollars. This is why Farmsby is dedicated to its mission of transforming agriculture in Nigeria and Africa at Large. Visit our homepage to see how you can profit from this.