Nigerian Naira (NGN): Definition, History, Forex Example

What Is the Nigerian Naira (NGN)?

NGN is the currency code for the Nigerian naira, the official currency for the Federal Republic of Nigeria. The Nigerian naira is made up of 100 kobos. As of December 2020, 1 U.S. dollar is equal to around 380 NGN.

Understanding the Nigerian Naira

The Nigerian naira replaced the country's use of the British pound in 1973. Pound to naira conversion was set at a rate of two naira for every pound. By 2008, inflation had dramatically devalued the currency. The government made plans to once redenominate the currency at a 100 old nairas to 1 new naira but suspended those plans.

The U.S. dollar is the most popular foreign exchange currency pair involving the NGN. The currency has been pegged to the U.S. dollar at various levels over the years. As of December 2020, the USD/NGN exchange rate hovers near 380. That means it takes 380 NGN to buy one USD.

The Central Bank of Nigeria manages and distributes the Nigerian naira. One of the bank's primary roles to control the inventory of NGN in circulation, as well as to ensure the country's financial security and attempt to keep prices stable.

Nigerian Naira Banknotes and Coins

Naira coins and notes are minted by the Nigerian Security Printing and Minting Company, with some currency also produced by overseas printing companies.

Coins include the 50 kobos, 1 naira, and 2 nairas pieces circulated since 2007. Banknotes include the 5, 10, 20, 50, 100, 200, 500, 1000 nairas notes; 50 kobo and 1 naira notes are no longer in use. In 2014, the central bank released a commemorative note celebrating the nation's independence. This commemorative note has a quick-response code (QRC) that when scanned takes the user to a website about Nigeria's history.

The Nigerian Economy

Nigeria is located on the West Africa coast and derives its name from the Niger river. The region was home to many ancient and prosperous societies before falling under British colonial rule in the 1800s. In 1960, the territory became the independent Federation of Nigeria. Shortly after, the country spiraled into a civil war which lasted until the 1970s. France, Egypt, Britain, and the Soviets meddled in the country during the years of war. Until 1999, the leadership of Nigeria alternated between elected officials and military dictatorships.

Military rule, political corruption, and mismanagement damaged the economy and ran up massive foreign debt. Nigeria defaulted on its debt as oil prices fell in the 1980s. Renegotiation of its Paris Club debt occurred in 2005, and in 2006 Nigeria cleared its debt. 

Widespread and rampant inflation has been a significant problem for the Nigerian economy. The inflation rate in Nigeria soared more than 70% in 1995. Since then, inflation has averaged around 12 percent. Improvements in controlling inflation have been attributed, at least in part, to fewer increases to the cost of critical staples such as utilities and food. Between 2016 and 2019, interest rates have moved between 11% and 14%.

According to World Bank data, Nigeria is a lower-middle-income emerging market which is still struggling with the impact of inflation. The country experienced 11.4% annual inflation and gross domestic product (GDP) growth of 2.2% in 2019. 

Example of NGN On Forex Markets

Assume the exchange rate for the USD/NGN is 361. This means it costs 361 naira to buy one U.S. dollar. Currency dealers and banks will not offer this rate when looking to exchange one currency for the other in cash (digitally or physically), since they will incorporate their exchange fee into the rate. Therefore, someone converting NGN cash to USD cash may pay 379 NGN for one USD, about 5% more.

This 5% markup, is the bank or dealer's profit on the transaction. Fees to exchange physical currencies typically range from 0.5% on larger amounts of currency to up to 5% or more, depending on the currency being exchanged and the amount of currency.

On the flip side, someone who wants to convert U.S. dollars into NGN won't get 361 of them either. They may get 5% less (based on what the bank or dealer charges), which means that for each U.S. dollar they will receive roughly 343 NGN.

If the exchange rate goes from 361 up to 400, that means the naira has decreased in value, because it costs more naira to buy one USD. If the rate were to be lowered to 320, that would mean the naira has increased in value against the USD, because it now costs less naira to buy a USD.

The naira tends to fluctuate more against other currencies since the Central Bank of Nigeria monitors the USD the most and attempts to the peg the currency to it. The NGN is not pegged to other currencies, so the rate could vary daily. Assume the AUD/NGN rate is 245.30. That means it costs 245.30 NGN to buy one Australian dollar.

To see what the exchange rate is in terms of NGN/AUD, divide one by the AUD/NGN rate, or 1 ÷ 245.30 = 0.004. That means it costs less than half a cent AUD to buy one NGN.