Key things to do now to avoid crisis arising from a possible devaluation of the Naira

The Corona virus (COVID 19) has brought about turbulence in the global financial markets, resulting in the astronomical fall in the price of crude oil (from circa $60 to circa $30 ), fall in the prices of stocks in various stock exchanges ( the Nigerian bourse lost N425bn today) ,various income generating events have been cancelled or postponed including sporting activities and so on.

However, there could be more adverse effects waiting to happen especially for us here in Nigeria and that is a devaluation of the naira .

Devaluation is a reduction in the official value of a currency in relation to other currencies.

Devaluation reduces the cost of a country’s exports, rendering them more competitive in the global market and increases the cost of imports. Nigeria being an import dependent economy will be adversely affected by a currency devaluation due to the expected increase in the cost of imports.

A devaluation can occur because our external reserves have fallen from $45bn in 2019 to about $36bn presently. When a devaluation occurs, the cost of goods and services tend to increase.

Key things to do now to avoid crisis arising from a possible devaluation of the Naira

1.   Pay off foreign currency denominated Loans

Companies and individuals need to pay off any foreign currency (e.g. dollars or pounds) loans they have or convert them to naira as a devaluation or recession will lead to an increase in the value of such loans. Consider someone with a $1m dollar loan at present rate of about N360:$1 A devaluation to N450 :$1 for instance will increase the loan automatically from N360m to N450m.

2.   Invest in foreign currency.

There are companies in Nigeria offering investments in foreign currency. This can help you hedge against any fall in the value of the currency.

3.   Stockpile imported goods.

If you have capital, then there is an arbitrage opportunity for you as you can stockpile imported goods that have high demand and sell them later for a profit.

4.   Hold assets in foreign currency.

Apart from cash, one can also invest in foreign currency denominated assets such as landed property.

5.   Engage in the production of local substitutes for imported goods.

During a devaluation such goods become scarce due to the high exchange rate, if you can produce them locally, you will smile to the bank.

6.Sell you shares and buy them back later

 If there is a consistent drop in the price of shares in your portfolio it may be wise to sell the shares now and then buy them back when the price has hit rock-bottom.