Following the lifting of the exchange rate peg by the Central Bank of Nigeria (CBN), the naira has been experiencing volatility against the dollar at the Investors' & Exporters' (I&E) FX Window. On June 14, 2023, the CBN consolidated all foreign exchange markets into the I&E window, resulting in the naira depreciating to 770.38 per dollar from 663.04/$ on Friday at the I&E window, which is the official FX market.
What is the difference between currency devaluation and depreciation?
Currency devaluation, as defined by the International Monetary Fund (IMF), is a deliberate downward adjustment in the official exchange rate, leading to a reduction in the currency's value. On the other hand, currency depreciation or appreciation occurs when market forces cause changes in the currency's value. A decrease in currency value is referred to as depreciation, according to the IMF. In non-formal settings, the terms devaluation and depreciation are often used interchangeably, although they have slight differences. When the FX market is free, it is called depreciation, whereas when it is controlled, it is referred to as devaluation, explains Kalu Aja, a personal finance consultant.
How does currency devaluation/depreciation occur?
In a floating exchange rate system, changes in the value of a currency occur due to market forces, resulting in currency depreciation or appreciation, states the IMF. Since 1973, most industrialized countries have adopted floating exchange rates, where the value of currencies fluctuates based on the supply and demand in international markets. Appreciation refers to an increase in currency value, while depreciation indicates a decrease. However, some countries or groups still utilize fixed exchange rates to pursue specific economic objectives, such as price stability. In a fixed exchange rate system, only the government or monetary authority can modify the official value of the currency, usually in response to unique market pressures. Nigeria, in this case, has adopted a floating exchange rate system, allowing supply and demand to determine prices, notes Aja.
It is important to note that the removal of the peg affects the naira's value, and without it, the naira can fluctuate between N1000/$ or N300/$, adds Aja.