How devaluation of the naira affects you

By UGODRE OBI-CHUKWU

In a much anticipated press briefing the Central
Bank Governor, Godwin Emefiele yesterday
announced that the Monetary Policy Committee
had taken a decision to effectively devalue the
Naira. The CBN also took a decision to increase
the Monetary Policy rate to 13 per cent from 12
per cent which in financial terms is quite a huge
jump.

The MPR is the rate at which the CBN
essentially lends money to banks and is in turn
a benchmark for bank lending to the wider
economy. The CBN also decided it was going to
increase Private Sector Cash Reserve
Requirement to 20 per cent from 15 per cent.

The CRR is a limit imposed on private sector
deposits that the bank will have to keep with
the CBN effectively meaning they only get to
lend out 80 per cent of our deposits with them.

Just like many have asked me on twitter, in my
blog and via messages, I am sure you must be
wondering too, what does this all mean to me?
How does it affect my savings, spending and
investments? I will attempt to explain in
practical terms.

I want to buy or sell forex

Travel allowance – For those looking to travel
abroad and looking to buy dollars from the bank,
the exchange rate for you is perhaps between
N173 and N177 assuming the naira does not
crash further. If you use our local debit and
credit cards abroad, then you are essentially
paying the same amount with the interbank
rate.

Black market buyers – For those who prefer to
buy or sell dollars at the black market, this new
rule could only affect you if the naira crashes
further. Visitors into Nigeria who have dollars
with them are set to benefit immensely. It
means their money is worth much more now
than before. Salary earners in dollars also earn
more when they convert to naira.

I have a bank loan or I am looking to secure
one
The increase in MPR as explained above means
the CBN has now effectively increased lending
rate in the country. Usually when this occurs,
commercial banks also increase their lending
rate to borrowers.

For those who have consumer loans such as car
loans, mortgages, credit card debts, personal
loans etc. don’t be surprised if your bank sends
you a letter this week or next week informing
you of an increase in your borrowing cost.

This also extends to small businesses with loans
that are kept at floating rates (which changes
with market conditions). The banks may decide
to increase your borrowing rates depending on
how they perceive your risk profile.

Those who have dollar denominated loans are
also heavily exposed to higher pay out
especially if you took out a dollar loan even
when you earn your income in naira. Your
income has now effectively reduced in dollar
terms meaning you have to spend more to pay
off your dollar loans.

What happens to my investment in Treasury
Bills, Fixed and savings?

The money market has been relatively volatile
as investors reacts to the wave of economic
news. With this MPC decision, particularly the
one increasing MPR as well as CRR, I believe
TB rates will increase in the primary market. If
you got 10 per cent for six month treasury bills
investment, then it might just increase to 12 per
cent in reaction to tightening liquidity.

This of course depends on the diverse
expectations of bidders for treasury bills. Fixed
deposits from banks will also likely increase in
response to the increase in CRR as well as
increase in lending rates. You should attempt to
renegotiate your rates with your bank to also
reflect the current market conditions.

Remember, the naira is worth less now in dollar
terms so you need to grab as much value as
possible.

What happens to my stocks?
Many believe the stock market has probably
become pricey in the devaluation of the naira.

This is because the stock market is like a
leading indicator and reflects the mood of
things to come before any other market does
so. However, some stocks do come under
scrutiny considering the outcome of the MPC
meeting. Companies that have heavy dollar
exposures are examples as they may need to
incur higher forex cost by year end, if they had
not hedged. Banking stocks also come under
further pressure due to the increase in CRR as
their Net Interest Margins may reduce thus
affecting profits. However, it is thought that
loss may be neutralised by gains in the forex market.

Oil and gas stocks are also at risk of
reporting lower earnings if the price of oil
continues to slide further.

Spending and family budget
As we approach the Christmas season, it’s not
unlikely that prices of goods and services will go
up. Examples are foreign goods which most
people rely on, gift items, baby products etc.

Luxury items might also be even more
expensive with the devaluation of the naira. The
Nigerian economy is essentially ‘dollarised’ due
to our high taste for imports, so I won’t be
surprised if things get more expensive. It may
therefore be wise to buy your Christmas goods
early enough as consignments coming in from
next week will probably be more expensive
when they are sold.
source : punchng.com

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