₦airaland Forum

This piece breaks down all the powerful economic jargon from CBN's Naira devaluation into simple A, B, and Cs.

Reading it will enable even the man on the street realise what effect this will have to the N1,000 in his pocket.

THE BRICKLAYER’S EXPLANATION TO OIL PRICE FALL, NAIRA DEVALUATION & EVERYTHING ELSE

So I logged onto Nigerian Twitter yesterday afternoon and found people abusing economists and financial analysts for speaking in jargons about the CBN’s actions. So for those who’re still confused about what’s going on with Nigeria’s economy and are trying to understand the implications, here’s a simplified version. No bricklayers were insulted in the writing of this post…at least, not explicitly.

So How Did This All Start?

First thing first, oil price fell. Why? Everyone’s increased their production of oil and no one plans on cutting back. In the US, shale oil’s getting cheaper, so there’s more oil out there…and we all know what happens when you have a lot more of a product — price falls. When price falls, consumers are happy and producers are unhappy. Consequently, nations that are consumers of oil are have a lovely time, and oil producer countries …a not so lovely time.

So? What Does This Have to Do With the Naira?

Before we go on, a little info on currency and exchange markets. It’s important to note that our currency doesn’t exist in a vacuum. Essentially, a unit of our currency is exchanged for a unit of another currency. Hence the term, Foreign Exchange or Forex or FX, for short. When we buy products from outside Nigeria, we have to exchange our Naira for Dollars. Your Naira is useless outside of Nigeria. It’s why you convert your Naira to Dollars before you travel. You want to test it? Travel to Dubai with only Naira.

Back to the question you raised. Nigeria is fortunate(?) to be an oil producing nation…when oil prices are high. Presently, oil prices are not high and that’s bad for us. Nigeria’s economy is dependent on oil revenue: about 75% of Government revenue comes from our crude oil sales. So when oil prices fall, oil revenue falls too, and that bad for the economy.

In the currency market, exchange rates are often centered on the health of a country’s economy. When the economy of a country is strong, its currency is also strong in the foreign exchange market. When the economy appears to be weak, its currency loses value in the currency exchange rate. Nigeria’s dependent on oil, so when oil prices are weak, so our currency loses value in the foreign exchange market. This loss of value of Naira is called a ‘depreciation’ in currency value.

Here’s a simple example. If we began with a dollar exchange for a Naira, both are in a sense equal. However, once I have to give out 2 of my Naira for just 1 of your dollar then the value of Naira has fallen. In the past months, the exchange rate was $1 dollar to roughly N150. Thanks to depreciation and eventually devaluation (we’ll get to that later), it’s now $1 to N168.

Alright. I Get the Currency Part, But What Does Our External Reserves Have to Do with our Naira Value?

To explain this, we’ll have to look into what the External Reserves is and why it exists. Think of your External Reserves as a Savings account where you put some portion of your salary every month. That money gets saved for something later: paying your children’s university fees, buying a house, or importantly, in case things get bad in the future (perhaps you lose your job).

Likewise, countries keep these reserves, but mainly to safeguard the value of their domestic currency, boost their credit worthiness, protect against external shocks and provide a cushion for a rainy day when national revenue plummets. When Nigeria earns revenue from oil, it gets paid in dollars, so we simply stash a portion of the money in our reserves.

Moreover, the reserves of oil producing countries like Nigeria tend to benefit economically from higher oil prices. The higher the price of oil, the more money oil producing countries like Nigeria get to earn and save.

So if We Have an External Reserve, Why’re We Worried?

Well, having a bank account doesn’t mean you have money. We have a reserve, but our money no plenty. Nigeria has been dancing shoki with its reserves. When oil price was high, we apparently weren’t saving that much into our reserves. In fact, our reserves have been on a downward trend for years. We’ve been using our External Reserves to keep the value of Naira stable for months. When our currency appears to be falling, we take out some dollars from our external reserves and purchase Naira. Increased demand for Naira leads to increased value of Naira, and that’s how we stabilize our currency.

However, we sacrifice a portion of our External Reserves to pull this off. For instance, “while the central bank stepped in Nov. 7 to send the Naira to its biggest one-day gain in three years, intervening in the market has reduced foreign reserves to a four-month low of $37.8 billion.” In the last few months, even Russia with their large reserves had to devalue their currency by 23%.

So is This why Everyone Was Making Noise About CBN Devaluing the Naira?

Yes. Now there’s only so much spending from the reserves that the CBN can do, especially given that we’ve really sucked at growing our reserves when oil price was in the $100 range. It’s like when your office was paying you N100k, you were clubbing every weekend rather than saving some money. Then the minute your office decided to increase your income tax, that’s when your jobless relative comes to live with you too. So now, your salary is not only less, it’s burning faster cause there’s an extra mouth to feed.

The drop in oil price does not only send our currency downwards, it also makes it difficult for the CBN to defend our currency. It’s a double whammy. Essentially, if the CBN keeps trying to defend the rate at N150, it’ll burn through the reserves pretty fast and then we’ll be screwed. So relaxing this currency threshold to N168 means they can relax a bit. They don’t have to keep using as much of the reserves to prop up the Naira. If you’re still curious on how it all works, Feyi goes into the intricacies of devaluation in his fantastic post here.

Okayyy! I Think I Understand Now, But How Does This Affect Me?

Like many other economic events, devalution creates winners and losers. Let’s start with the losers. If you generate revenue in Naira and incur costs in dollars, this is a bad time for you. Any activity that has you converting Naira for Dollars will hurt you way more than a few months ago.

Let’s have a moment of silence for our Igbo brother who will be ‘importing containers’ this christmas. Life just got harder for them. Given that importers have to pay for their imported goods in dollars…and dollars just got more expensive, the cost of their goods have increased overnight.

Same thing happens to those Behind parents who’ve got their kids in Nigerian schools that only accept their fees in dollars. If you like flying, shopping or doing anything abroad, your cost of doing so has risen. On the contrary, if you earn in dollars and pay in Naira, life is looking pretty good at the moment.

Exporters also benefit. The fall in value of Naira means more exports because our exports have gotten cheaper. But ermm…what exactly are we exporting?

Phew. So It Doesn’t Affect Me Like That

Don’t be so sure. Nigeria’s an import-dependent nation, which means that most of what you purchase is produced abroad. I heard we import our toothpick too. If the prices of imports have risen, trust your Nigerian brothers and sisters to increase their prices too…leading to what’s popularly known as inflation.

I Was Hearing All These Oversabies Saying CRR, MPR. What Does This Mean?

CRR stands for Cash Reserve Ratio. It’s the proportion of what a bank can lend, to what it has in its coffers. So if the bank has N1000 and its ratio is 50%, can only use 50% of that money (N500) for business. Given that awon banks do not mess around with profit making, they will make sure that N500 brings back maximum profit. Banks are like the servant in Jesus’ parable that got 10 talents from his master, not the lazy one that got 1 talent. So to make max profit off the N500, they will raise interest rate if you want to borrow their money.

MPR stands for Monetary Policy Rate. The Central Bank uses the MPR to control base interest rate. The higher the rate, the less money in circulation. How? If interest rate is higher, will you borrow money from the bank knowing that you’ll pay much more later on? Nope. Instead, you’ll take your money from your pocket and give it to the bank, so they’ll make you more money.

Remember that thanks to devaluation, awon boys will be increasing prices left and right. General price increase in a given period leads to inflation. To tackle this, CBN increases CRR and MPR to reduce demand for money. This way, they prevent inflationary rise.

Okayy. I think I Understand That Part, So What’s This Austerity Thing Aunt Ngozi was Talking About?

That one is another long story. So, we’ve all been in situations when we’re broke. Ok, maybe just some of us. We adjust our lifestyle around the middle of the month when our salary hasn’t been paid. You go from eating jollof rice to drinking garri. When friends tell you to come out and party, you form ‘I’m very busy’.

Nigeria’s proposed austerity measures are similar…except on a grander scale. To cushion the effect of the falling crude oil prices, we have to cut back on spending and quite literally tighten our belts. The Government is cutting back on wastage (less government traveling and all that sort). The Government’s also raising taxes on luxury goods such as private jets, yachts and champagne. Somewhere in this luxury tax is the amusing observation that the revenue from taxes on the rich will still go back to the rich.

For the proletariat, the sweet subsidy you enjoy when you fuel your car will also get cut. Prepare to pay more for fuel. This is a good thing. Subsidy has to go anyways.

Wow. That was Long. So, Any Lesson to Learn from All This?

Yes. First lesson: Nigeria is the most reactive and least proactive nation you could’ve been born into. This isn’t the first time oil prices have fallen. Government should’ve gotten used to fluctuating oil price and prepared accordingly. And, since oil is the figurative oil in Nigeria’s economic engine, judicious and prudent management of oil revenue should’ve been practiced. However, we largely mismanaged our wealth during the time of booms and we’re now trying to behave ourselves in the time of slump. Let’s see how that goes.

The second lesson to be learnt is that we should’ve diversified our economic sources of revenue a long time ago to prevent price shock of primary products from affecting us drastically. Also, State Governments should’ve been pressured to increase their internally generated revenue much sooner. We can’t keep reacting to every economic shock that hits us.

Anyways, this is getting too long and no one’s probably got to the end, so no need for a witty or wise ending. But, if you reached this point, congrats! After spending all that time reading this, make sure you show off your new macroeconomic knowledge to your friends. And please, stop abusing econ-nerds. We have feelings too. Selah.

http://naijanomics.me/2014/11/26/the-bricklayers-explanation-to-oil-price-fall-naira-devaluation-everything-else/

I think 1.5m is too expensive for the i10. In response to these locally made cars, KIA has crashed the price of the new Picanto to btw 1m - 1.2m, Kia Rio now goes for between 1.9m to 2.5m.

Hyundai needs to do better

FarmTech: ..
Where are these government silos located and how do they operate with farmers?

I don't have that information. But I heard in the news especially around the end of Obasanjo administration right into Yar Adua's about govt opening a number of the around the country, especially in the north. The ministry of Agriculture should be able to provide that information to you.

dayosaurus: Instead of you displaying your ignorance and wallowing in stupidity, why don't you do a little research? . Do you think snow falls for falling sake?. Their is a rationale behind snowfalls, and it's impossible in nigerià.

Wonder why I'm exchanging words with this small boy on a faceless online forum?

Could you explain d rationale please, "Researcher". And brush your teeth before insulting people next time. Maybe better words will slip into your brain.

dayosaurus: SNOWFALL??

Oga. Before reading it here,did you even know that a place called Gembu ever exist?

I put here what I was told by a friend who did his NYSC in that locality over 10 years ago. If you have facts to the contrary please provide it instead of displaying your ignorance for all to see.

Why don't you visit the Institute of Tropical Agriculture in Ibadan? If apples can be grown here I'm sure they will know about it.

Also, I'm aware that there is an area called Gembu in Taraba or Adamawa state where some Nigerian big men have apple farms. Heard that the place is cooler than Jos and they do experience snowfall some years.

authority2006: Well, it goes beyond sitting down in our chairs and criticising @op. He deliberately left out the risk aspects of the business for the reasons best known to him which was very bad. Agricultural produce storage in Nigeria is highly unpredictable but did he tell them all this? No. The question is why? I'm saying this as an authority in this business. Additional risk to this particular melon things here is storing your goods in crisis prone area.

I agree with you that the OP left out the risks associated with the business. There are soon many of them and its quite unpredictable. Government now has silos all around the country where they store produce. Supposing they decide to flood the market at the time you feel you should sell nko? What of having your produce destroyed by mould despite your best attempts at storage. But a simple lesson I have learnt in life is that you can never make it easily. All businesses have their ups and downs. Even if you are told all the pros and cons to a business, you can never fully understand it till you experience it first hand.

Filling your head with every little detail will discourage you, and waste precious time. Only the determined will make a success out of it.

I still feel it's worth a try. Any interested party should try first with a little amount, learn as much as you can quickly and take it up from there. The north produces most of our food, unfortunately most of that region is unstable. When you get the hang of the business, launch out and look for other markets to get your produce from.

Well, I read all the posts in this thread from the top.

This business is as old as I can remember. Even my parents did the beans thing briefly when I was a kid but stopped cos it wasn't as profitable as they thought.

The truth is that this is a business opportunity just like any other. There are inherent risks associated with any venture. Some will hit it big, some will lose everything. For those who will succeed, it will require tenacity and determination.

Even for those of us with supposedly paid and secure jobs, we face the risk of being told to go at short notice. I know quite well as I was a victim of this in the banking industry.

I commend the OP cos he has presented another business opportunity for the multitude who need what to do. And he is giving this information out for free on this forum. This is what some people who have no real experience of the business sell books and seminars on.

Instead of sitting down in your chair and criticising, let those who want to do this get out there and get started!

I've been watching the programme Star The Winner Is hosted by Uti for some weeks now.

I seriously doubt that the show was recorded in Nigeria cos the audience do not look like Nigerians one bit. They look more like South Africans.

And this makes me ask. Star is brewed and sold in Nigeria. What would make Nigerian Breweries flu Uti and The contestants to South Africa to shoot this show. Don't we have a studio that can accommodate them?

I feel it's quite unfortunate.

unclesamtech: THE BB Z3 OS COMES WITH OS 10.1 AND YOU NEED TO UPGRADE IT OS 10.2.1 BEFORE TAKING APK FILES

That's the first thing I did after purchasing the phone. It's now running OS 10.2.1.2977.

Thanks Lexusgs,

Tried it. Some apk files work after installation while others don't. Guess I'll have to live with that.

I just got a BlackBerry Z3. The manufacturer claims that it is android app compatible but I do not know how to get those apps to my phone.

I'll appreciate guidance on how to download android apps onto the device

Beautiful race by blessing. So happy for her. She has greatly improved over the past years when her start was her downfall.

Proud that our national anthem will be played in that stadium.

You won't believe this. But I'm watching bloomberg right now on dstv and they are seriously discussing the chinese phone makers xiaomi.

These guys have outsold apple in China, they have a unique business model and are going into 10 new countries soon. For bloomberg to have a panel sit down to discuss these guys they must be a threat to the majors.

Hi Ikenna,

Would appreciate if you could check the vin of my Peugeot 206 for me.
VF32AK6F847733099

I'm not the techy type but from what I gathered here, the fan shouldn't be working all the time. Could you advise on where I can get this corrected on the car safely.

Lastly, I'm based in Abuja and would appreciate if you could let me bring the car to you for scanning.

I once met a lady who works at this govt agency responsible for child trafficking and prostitution. In short, you will cry at what is happening. These people are ready to traffic any girl that is not their immediate child.

CHESSBOARD: 750k..... can i give a call

@Chessboard, of course do call. But I believe you will do better once you inspect the ride.

Keep the calls coming 08089099362

Bright2: I passed through Rumuokoro to Rumuokwurusi tank,@ least we are using the road now compare to previous years. I thank God for every thing.

I've been in PH since Sunday and I've been travelling between Opkoro road to Rumuodara/Tank/Rumukurushi....I'm not even impressed with the equipment I've seen on ground in comparison to what I've see on other construction sites in the country. Not to talk of the completion of the job. It seems as if Min of Niger Delta hired some disorganised labourers to do the job instead of established construction companies. You can't even identify the name of the firm doing the job. Fresh air my foot!

Still Available.

Hi Folks,

I just got the Peugeot 206 that I asked for advise on a while ago on this thread.

I was informed that the fuel gauge is not functioning. The guy who checked it advised that the car be scanned in order to properly isolate the issue and fix it. I would appreciate advise on what to do please.

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Hyundai Elantra For Sale in Lagos

Auto Transmission
Mileage of 67,244 kms
Fabric Interior
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Jerribasil: My name is Basil,
I received an sms from nnpc requiring that I resubmit my credentials but I have tried to login or even reset my password but to no avail! I need assistance please! What does this mean; "your Login has been denied" or your account have not been activated?
Please, who has solution let him link me up!
obasibasil22@gmail.com

Im in the same shoes as you, Got an sms, visited the website, could not log on, could not reset my password. Send a mail to the one provided, it bounced back.
These guys are just grossly inefficient. The tin wey dem wan chop no let dem kno work again.

Bau3r: If u were given same sort of passes would u have spaced well or even score a goal,or u think beating the offside trap isn't part of knowin hw 2 play footbal?

Look at your ignorance...And did you read what I wrote? I said any world class striker worth his pay!

I wonder why everybody is shouting Ronaldo. Any world class striker worth his pay would have scored those goals. Rather, I am interested in knowing who the Portuguese midfielder is that made those passes. If you watch the build up to the three goals carefully, you will notice that they came from three defence piercing passes made from the midfield, all Ronaldo had to do was place himself at the right place, run up to the goal and shoot.

I would rather be singing the praises of the midfielder IMO.

This period was when Nigerian lecturers took pride in their work. The quality of staff then was unparalleled. I remember going through the school handbook as a fresh underG. The qualifications and achievements of the lecturers was amazing. Most of them topped their classes in the foreign universities where they studied. Its so unfortunate that they have lost their edge due to the situation and circumstances in our country. I'm aware that some of these lecturers are now in foreign countries plying their trade.

I was going through my alma maters facebook page (which they have failed to update since 2012) and I came across this picture of the Department of Mathematics in 1980. Included is Dr Pastor EA Adeboye.

I have tried to list the names of the other lecturers as shown on the facebook page. The names are not properly outlined but I guess we all recognise Pastor Adeboye quite easily.

University of Ilorin Maths Dept c. Feb 1980

Dr E O Ogunsulire, ?, Mr. Adewumi, ?;
Dr. (Pastor) Enoch Adeboye, ?, Dr Samson Adeleke, Don Nicolson, Mrs Peters (?), Dr E A Bangudu (Head of Dept)

2 storeyed Terrace duplex available at Utako. Direct connection to owner. Call 0818 579 0528

Please I need some advice. I'm presently considering the purchase of a used Peugeot 206.

Some acquaintances have advised me against going for it, saying its not rugged like the 406. I understand that might be true to some extent but would appreciate guidance on what to look out for
when inspecting the car.