Nigerian Naira (NGN) and Depreciation?

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NGN is the currency language for the Nigerian naira, the standard currency for the Federal Republic of Nigeria. The Nigerian naira is formed up of 100 kobos. As of December 2020, 1 U.S. dollar is similar to about 380 NGN.

Understanding the Nigerian Naira

The Nigerian naira replaced the country’s use of the British pound in 1973. Pound to Naira exchange was set at a rate of two nairas for each pound. By 2008, inflation had dramatically devalued the currency. The government made plans to redenominate the currency from 100 old nairas to 1 new naira but rejected those plans.

Depreciation – what is it? Causes and effects

 When it comes to exchanging rates, you can come across terms such as appreciation or depreciation. Because it is a financial language, not everyone knows what they mean. It is certainly worth delving into, however. This is true for those who are involved in investing in the forex market.

What is depreciation?

Depreciation is one of the most important economic terms. It is defined as a decrease in the value of a commodity or other good. The term is used very often about currencies. Nevertheless, only and exclusively about the system of floating exchange rates, that is, put, those that are regulated by the market.

It is worth mentioning that the fall in the value of a domestic currency against a foreign currency is called depreciation of the currency or a depreciation of the money.

Currency depreciation

As we have already mentioned, depreciation of a currency decreases the value of a national currency about the foreign currency. It can also be described as a weakening. When are we dealing with it? It is worth explaining this with a short example.

 The depreciation of the zloty takes place when the EUR / PLN exchange rate increases. This means that we have to pay more zlotys for one euro than before, which means that they are worthless about a foreign currency.

Depreciation and devaluation

A very similar concept to depreciation is devaluation. Interestingly, the similarity concerns not only their sound but also their meaning. Some people even think that currency depreciation and devaluation are the same things. However, it is not so.

What is devaluation?

Devaluation is a drop in the rate of a currency against a foreign currency but about a system of constant exchange rates. This means that it occurs due to the state’s action, specifically the government or monetary authorities.

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The reasons

Economic phenomena can have many causes. This is also the case with depreciation. As we have already mentioned, the market has a large influence on the currency price. How much it is worth depends on whether there is a greater demand or supply for it. The level of interest rates also has a significant impact on the exchange rate relationsWhen it comes to depreciation, it happens when these are lowered.

Low-interest rates

The level of interest rates affects the entire economy, including the value of money. When the Monetary Policy Council decides to lower them, the currency may weaken in a short time, i.e., depreciate. How does it happen?

When interest rates are lowered, there is a decline in deposit yields in a given country. At that time, foreign investors and some domestic investors withdraw from the market. In this way, there is a reduction in the demand and sale of the national currency.

The growing importance of imports

You can see in the early example, the cause of the depreciation is not only the reduction in interest rates but, more generally, the decrease in demand for a given currency. We can also deal with it in the case of growing demand for foreign goods.

To buy a given good abroad, consumers must exchange their domestic currency for a foreign one. Thus, with growing imports, the demand for it decreases, and the supply grows, and it weakens.

Price increase

Another reason for the depreciation is the increase in the prices of goods and services in a given country. As these become more expensive, they become less attractive, especially when it comes to international trade. In other words, foreign consumers want to buy less and less of them.

As a result of increasing prices in the country, there is a decrease in demand for a given currency, which, given the constant supply, reduces its value about other currencies, i.e., depreciation.

Effects

How much a currency is worth has a huge impact on the economic situation in a given country. If it weakens, we are dealing, among others, with a decrease in the purchasing power of a currency, and thus with more expensive imports and cheaper exports. As a result of the reduction in the value of the domestic currency, the costs of servicing foreign debt also increase.

More expensive import

One of the most significant results of the depreciation of money is the increase in the prices of imported goods. You can see it well in an example.

Let us assume that you have to pay EUR 10 for a given good abroad. When the EUR / PLN exchange rate = 4, its cost converted to the national currency is PLN 40. If the exchange rate rises to 4.5, i.e., when dealing with a depreciation of the zloty, the same goodwill cost 45 zlotys. This is because the zloty loses value about the euro, and you can buy less with it.

Cheaper export

Currency depreciation also affects exports. As already mentioned, reducing its value makes it cheaper. It is also worth presenting an example.

When the EUR / PLN exchange rate is 4, a commodity worth PLN 50 abroad costs EUR 12.50. When the exchange rate increases and amounts to 4, the same good costs only EUR 11.10. Interestingly, the lower price for the seller is usually not a problem. In the long term, a drop in prices means an increase in competitiveness in the international market and higher sales.

High costs of servicing foreign debt

It should state that the depreciation of money is of great importance for the economy and the costs of servicing foreign debt. When the value of a currency decreases, these become much higher. Many of this has to do with the reduction in the purchasing value of the currency. As you can guess, this is one of the negative effects of depreciation.

Appreciation

Appreciation is the opposite of depreciation. It is spoken of when there is an increase in value. The appreciation of money means an increase in the value of the domestic currency against the foreign currency. However, only when the market regulates them. In other words, this term, like depreciation, is used only in the context of floating exchange rates.

At a constant exchange rate, i.e., when the currency’s value depends on the government’s actions, it is referred to as revaluation.

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