The Naira has been devalued and black market rate on Wednesday closed at N186 in some parts of Lagos. Surely, there musst be winners and losers in all of this as you mostly expect in a free market economy. But just who stands to gain in all of this? Here are a few that comes to mind.
The Government – The FG and states stands to gain from devaluation when they share money arising from the sale of crude oil. This is possible because when the government sells crude oil, it earns revenue in dollars which it in turn converts to naira to fund government business. It sort of seems unfair, that the government can stand to gain from this more so when prices of goods and services are expected to rise for the larger populace. But that’s how the system is designed really. With oil price falling and exchange rate getting devalued the government basically eats its cake and have some it back. The money it loses from a dip in oil revenue will be cushioned by a devaluation of the naira. For example, when the Oil was trading for $100 it earned like N15,500 for each barrel of oil. Now that Oil is $70 it will earn N11,760 (@N168) for that same barrel instead of N10,850 had it decided to continue to stick to N155.
Foreign Portfolio Investors – These are foreigners who invest in Nigerian stock market, treasury bills, bonds and other money market instruments. Suddenly, for every $1billion of portfolio investment introduced into Nigeria (post devaluation) they get at least N168billion instead of N155 billion. That N13billion difference gives them more financial muscle to price stocks than local investors with naira portfolios could ever have been able to do. Though they still are exposed to exchange rate risk, its minimal in my opinion when compared to the gain they are making now. These investors, have basically seen their financial muscle rise by 8% in a little under a month.
Nigerian Banks – Nigerian Banks with net dollar assets will also benefit immensely from this devaluation. A bank that has $100million dollars would have seen that equivalent in naira increase by 8% in just a month. They also get to earn more from interest income from dollar lending which will help boost their profitability.
Companies that earn in dollars – There will also be a windfall for most firms such as lawyers, accountants, consulting firms, financial advisers etc. Some of them charge their fees in dollars and should expect their profits to be higher when they translate their bank account to naira. Some Real Estate companies with luxury apartments in high brow areas of the country will also reap immensely from this devaluation. They mostly charge dollars and come year end most of their tenants will renew.
People who earn salary in dollars – Some Nigerians earn their salaries in dollars even though they live in Nigeria or spend most of their time here. These guys have now seen an increase in their purchasing power that can’t be neglected. Agreed that inflation may rise due to this devaluation, it still gives them a huge advantage over those who earn in naira.
Speculators and those with dollar savings – Some people are quite good with speculating and some a few months ago started accumulating dollar positions in anticipation of the devaluation of the naira. Now that it has been devalued, they can exchange that money to naira and post good profits. Same goes for those who are used to saving in dollars. Their savings also just got a nice bump in view of the devaluation.
Note: I updated this post on 28/11/2014. I got messages which suggest some people didn’t understand which of the FPIs I was referring to. I was referring to those who are going to be investing in Nigeria post devaluation. I had to succinctly highlight it in the post.