Nigerians who saved in dollars at the start of the year are now swimming in too much Naira.

Nigerians who took a bet against the local currency by converting some of their naira savings into dollars at the start of the year are currently in the money.

As of December 31, 2021, the exchange rate at the parallel market closed at about N565/$1. However, the rapid depreciation of the naira in recent months has seen the exchange rate fall to a whopping N720/$1 in the black market at the time of writing.

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

This includes Nigerians with savings in domiciliary accounts, investment trading apps, cryptocurrency wallets, bonds, or any investments that are denominated in US dollars. Data from the CBN indicates the total amount of dollars deposited into domiciliary accounts of Nigerian banks as of December 2021 is an estimated $20 billion.

That amount was classified as N8.5 trillion by the CBN using its official exchange rate and would have been worth N11.3 trillion on the black market. It is now worth N14.4 trillion in the same market assuming the exchange rate of N720/$1. Similarly, a $10,000 investment in January that was worth N5.65 million is now worth a whopping N7.2 million assuming the latest exchange rate.

Nigerians that saved in dollars

Nairametrics conducted interviews with Nigerians who anticipated and protected their savings from a falling Naira. Due to the sensitivity of the subject, they only agreed to speak under the use of their first names.

Bennita told Nairametrics that she began buying dollars monthly and saving in her domiciliary accounts in response to the price falling to N500/$ in 2021.

• “It was like an eye opener for me when the dollar hit N500,” she said. “So I decided to transfer the majority of my savings to my domiciliary account. I also began to buy dollars every month when I get paid.”

She asserted that her actions were motivated by Nigerias failed monetary policy, as evidenced by skyrocketing inflation and a 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. This meant trouble, so I had to take action to protect myself, she said.

Another saver, Akintope, explained that most of his free cash is in dollars or cryptocurrency.

• “I see no point in saving in Naira because its not a stable currency, I keep the majority of my savings in stable coins or cryptocurrency.”

• He added, “Even though we have just experienced a bear market, there is more hope for crypto than there is for the Naira.”

What the traders are saying

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

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

People are buying dollars to purchase digital assets, Gwadabe added. “The USD buy rate on the crypto floor is moving at the same time with the local rate,”

In response to the Lawmakers summon of the Governor of the Central Bank of Nigeria, Godwin Emefiele, over the “free fall of the naira”, the bank said,

• “The CBN remained committed to resolving the foreign exchange issues confronting the nation and as such has been working to manage both the demand and supply side challenges.”

The bank also stated that demand from manufacturers and individuals paying school and hospital fees abroad was high and that it was looking for ways to earn forex in the wake of falling 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

• Kenyas shilling, the currency of the largest economy in east Africa, fell to its lowest level in 5years to trade at 118.85, representing a 5.97% decline YTD, at the time of writing this article.

• The Ghanaian cedi has also lost 37.18% against the US dollar YTD. As the dollar index (DXY) maintains its bullish momentum, the Cedi seems to be heading in the opposite direction. When writing this article, the USD/GHS was trading at 8.29 Cedi.

• South Africa‘s rand also nosedived as the dollar scaled new highs, driven by the hawkish stance of the U.S. Federal Reserve. South Africa’s rand (ZAR/USD) has declined by -3.92% YTD.

South America

• So far in 2022, the Brazilian real (BRL) has been highly volatile against the US dollar (USD), shifting from being one of the top performers against the greenback earlier in the year to a selloff that has pushed it to the bottom of the emerging market currencies performance. Despite this, the Brazilian real (BRL) is still 7.61% stronger against the US dollar.

• Similarly, the Mexican peso fell to 20.36 per dollar after peaking at 19.56 at the beginning of July. The Chilean peso has also dropped more than 20% in the last month, briefly reaching 1,050 pesos per dollar for the first time, causing concern. The Chilean peso was trading at around 900 pesos per US dollar at the time of writing.

Developed Economies

• The greenback has also gained ground against other developed countries. The Dollar Index (DXY), which measures the value of the US dollar relative to a basket of foreign currencies, has been on a bullish pace.

• At the time of writing, the DXY was up 10.27% year to date. This means the US Dollar has gained 10% against the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF) combined.

Dollarization concerns

Although Nigerians holding the dollar as a hedge against Nairas free fall 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 has lost its utility as a medium of exchange in market transactions. However, the only fully dollarized countries remain Panama and Liberia.

• When a government adopts foreign currency as the primary or sole legal tender, this is referred to as official dollarization.

• On the other hand, unofficial dollarization occurs when individuals hold foreign currency bank deposits or notes to protect themselves from high domestic currency inflation, as is the case in Zimbabwe.