Nigerians who bet against the local currency by converting some of their naira savings into dollars earlier this year are now in the money.

As of December 31, 2021, the parallel market exchange rate closed at approximately N565/$1. However, the rapid depreciation of the naira over the past few months has seen the exchange rate fall to a huge low. N720/$1 on the black market at the time of writing.

The massive depreciation of the currency over the past seven months has made those who bet against the naira earlier in the year massively wealthy when they convert their dollar savings back into naira.

This includes Nigerians with savings in domiciled accounts, investment trading apps, cryptocurrency wallets, bonds or any US dollar denominated investment. CBN data indicates that the total amount of dollars deposited in domiciled accounts of Nigerian banks as of December 2021 is estimated at $20 billion.

This amount was classified as 8.5 trillion naira by the CBN using its official exchange rate and would have been worth 11.3 trillion naira on the black market. It is worth now 14.4 trillion naira in the same market assuming an exchange rate of 720 naira/$1. Similarly, a $10,000 investment in January that was worth 5.65 million naira is now worth 7.2 million naira assuming the latest exchange rate.

Nigerians who saved in dollars

Nairametrics conducted interviews with Nigerians who anticipated and hedged their savings against the fall of the Naira. Due to the sensitivity of the subject, they agreed to speak only under the use of their first names.

Bennita told Nairametrics that she started buying dollars monthly and saving in her home accounts in response to the price dropping to N/$500 in 2021.

• “It was like a revelation for me when the dollar hit N500,” she said. “So I decided to transfer most of my savings to my home account. I also started buying dollars every month when I get paid.

She claimed her actions were driven by Nigeria’s failed monetary policy as evidenced by soaring inflation and falling naira.

• “The CBN was more focused on the official rate, which was mostly inaccessible to most Nigerians, rather than the parallel market rate,” she explained. It meant trouble, so I had to take steps to protect myself,” she says.

Another saviour, Akintope, explained that most of his free money is in dollars or cryptocurrency.

• “I don’t see any point in saving in Naira as it is not a stable currency, I keep the majority of my savings in stablecoins or cryptocurrency.”
• He added, “Even though we have just experienced a bear market, there is more hope for crypto than there is for Naira.”

What traders are saying

According Aminu Gwadabe, President of the Association of Bureau de Change Operators of Nigeria, more and more people are buying cryptocurrencies because they are losing faith in the naira.

• “The USD rate on the crypto floor is used to determine the value of the local currency,” said Gwadabe.

People are buying dollars to buy digital assets, Gwadabe added. “The USD buy rate on the crypto floor moves together with the local rate,”

In response to the lawmaker’s summons from the Governor of the Central Bank of Nigeria, Godwin Emefiele, about the “free fall of the naira”, the bank said:

• “The CBN has remained committed to addressing the currency issues facing the nation and as such has worked to manage both demand and supply challenges.”

The bank also said demand from manufacturers and individuals paying overseas school and hospital fees was high and it was looking for ways to earn foreign exchange following the fall in oil prices.

Other currencies are also struggling against the dollar.

Nigeria is not the only country feeling the effects of a stronger dollar.

In Africa

• The Kenyan shilling, the currency of East Africa’s largest economy, fell to its lowest level in 5 years to trade at 118.85, representing a 5.97% decline since the beginning of the year, at the time of writing this article.
• The Ghana cedi has also lost 37.18% against the US dollar since the start of the year. While the Dollar Index (DXY) maintains its bullish momentum, the Cedi appears to be heading in the opposite direction. As of this writing, USD/GHS is trading at 8.29 Cedi.
• The South African rand also plunged as the dollar hit new highs, pushed by the US Federal Reserve’s hawkish stance. South The African rand (ZAR/USD) has fallen -3.92% since the start of the year.

South America

• So far in 2022, the Brazilian real (BRL) has been highly volatile against the US dollar (USD), going from being one of the best performers against the greenback earlier in the year to a sell-off that l pushed to the bottom of the index. performance of emerging market currencies. Despite this, the Brazilian real (BRL) is still 7.61% stronger against the US dollar.
• Similarly, the Mexican peso fell to 20.36 to the dollar after peaking at 19.56 in early July. The Chilean peso also fell more than 20% last month, briefly hitting 1,050 pesos to the dollar for the first time, sparking concern. The Chilean peso was trading at around 900 pesos to the US dollar at the time of writing.

Developed economies

• The greenback also gained ground against other developed countries. The Dollar Index (DXY), which measures the value of the US dollar against a basket of foreign currencies, has been trending higher.
• At the time of writing, the DXY is up 10.27% year-to-date. This means that the US dollar gained 10% against the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK) and to the Swiss franc (CHF) combined.

Dollarization issues

Although Nigerians holding the dollar as a hedge against the free fall of the Naira is plausible, this action tends to accelerate the rate of dollarization of the Nigerian economy.

• Dollarization usually occurs when the local currency has become unstable and lost its usefulness as a medium of exchange in market transactions. However, the only fully dollarized countries remain Panama and Liberia.
• When a government adopts a foreign currency as its primary or sole legal tender, it is known as official dollarization.
• On the other hand, unofficial dollarization occurs when individuals hold bank deposits or banknotes in foreign currencies to protect against high inflation of the national currency, as is the case in Zimbabwe.

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