June 21 (Lagos) - The Naira weakened to 280 against the US Dollar yesterday when the peg was removed and the currency was floated. The value of Naira is now determined by the forces of demand and supply.
So it was not surprising when the Naira fell to 280 yesterday from 199 that it was fixed at by the Cental Bank till last week. It was expected by us that Naira will decline to 280 (any many other analysts) this week. We posted about it and also faced flak from some readers who were not happy or ready to accept the reality.
Among discussions following yesterday's decline in Naira is whether the currency was devalued or not. There are many who are countering the argument that the currency is not devalued, and they are technically correct.
What is a devaluation?
Devaluation is something which happens in Countries with fixed exchange rate. The Central Bank plans an active role in fixing the value of the currency. So let us say if the CBN came out and said that they will now peg the currency at 280 then it would be a devaluation.
Right now it is only a depreciation.
What is a depreciation?
Depreciation of the currency happens when the country follows a flexible exchange rate. It means that value of the currency is determined by forces of demand and supply and not the Central Bank.
But what is most important is whether the currency depreciated or devalued, it lost the same out of value. The banks, insurance Companies and other Companies lost the same value the currency lost.
So anybody feeling happy that the Naira was not devalued should be told that Naira was in fact depreciated.
Either way, we are now poorer and worth less than what we had last week.
On the brighter side, Naira has been trading at levels close to 400 to 1 Dollar in the parallel market. And now it is somewhere closer to 350 on the parallel market. So from that angle, it is a good news.
Believe what you like. Naira is now 280 to 1 dollar and will change value on a daily basis (round the clock really).
reporting for easykobo.com on Tuesday, June 21 2016 from Lagos, Nigeria
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