Who benefits or loses from Naira devaluation?

Posted by Felix Okoli on Friday December 12, 2014 at 11:54:44:

What is Naira devaluation? Well it is an action that reduced the value of the Naira relative to foreign currencies such as the US dollar. When the Naira is devalued, it means that more Naira will be used to purchase foreign currency or items sold in foreign currency.

The Central Bank of Nigeria recently devalued the Naira in the last quarter of 2014 and many Nigerians are worried about this. Does Nigerians really stand to gain anything from this latest action? Who are those likely to benefit from the reduced value of the Nigerian Naira? Well, I'm going to list some of them below.

Gainers of Naira devaluation:
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1. The Nigerian government: Since the Nigerian government receives most of her revenue in US dollars, she is less likely to be affected by the reduced value of the Naira since the government will have more financial strength to fund projects and pay bills. It will be easier for the government to make up for deficits in her budget by simply withdrawing money from foreign accounts which are kept in US dollars. Spending the money in Nigeria will allow the government do more since salaries, bills and contracts are already fixed in Naira amounts and withdrawing from their foreign account will provide them with more Naira.

2. Foreign account holders: Nigerians who have foreign accounts will also be able to cushion the effects of the Naira devaluation depending on how much of their money is held in those accounts. In Nigeria, it's common for rich people, politicians, government officials and so on to have foreign accounts and these are normally held in stronger currencies such as the US dollar.

3. Foreign currency account holders: Nigerians who have foreign currency or domiciliary bank accounts in Nigeria will also be safe from losing money as a result of the CBN's action. In fact, they've been made richer by about 8%.

4. Debtors: If you were owing someone money and have not yet paid back before it was devalued, by the time you pay back, you will actually be paying back the same amount of money in Naira but with a lower value since it has lost value relative to global currencies. This is mostly the case with countries that are import dependent like Nigeria. What a debtor's debt will be able to buy after the devaluation will be less that what it was able to buy before it was devalued e.g. imported clothes, imported shoes, imported cars, imported electronics and so on.

5. Stock owners: People who have stock of goods in their warehouse or stocks in the form of shares would also not be so affected by the currency devaluation since the stocks would appreciate by the time inflation sets in but selling their stock immediately before they appreciate might result in a loss.

Losers of the Naira devaluation action
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Just as we had some people who benefited from the CBN action, there are also people who lost money as a result of these and I'm going to group them below:

1. Fixed income workers: If you are an employee or a worker of a company or business and your salary is already fixed, you will still be earning the same salary despite the fact that your income has just lost value. The only remedy would be a salary increase relative to the Naira devaluation rate but that is highly unlikely in the short term.

2. Naira Bank account holders: Nigerians who have bank accounts that are kept in Naira have also lost some money because their funds have lost value. Savings account holders would be worse off since they come with the lowest rates in the banking industry. When Naira loses value, it loses a value in it's purchasing power too.

3. Cash holders: Those who were holding cash in Naira as at the time it was devalued have also lost some value in their money. It would have been better if they were holding something like physical assets.

4. Creditors: If you lent someone some money in Naira and the person has not paid back before the devaluation, chances are that you've also lost some value of your money since if he paid back afterwards, the money will only have a lower purchasing power given the fact that Nigerians buy mostly imported goods. Some banks who offer loans cushion the effect of this by simply increasing their interest rates.

The bottomline is that it appears that the devaluation made poor Nigerians poorer and rich ones richer.