The naira devaluation debate has been on in the last one year. Recently, President Muhammadu Buhari stoked the fire when he insisted that devaluation for an import-driven economy like Nigeria’s will be suicidal. His position has not stopped those, especially international investors, who believe that devaluation is the only way out for Nigeria. COLLINS NWEZE writes on the intricacies of devaluation.
The number of those for or against naira devaluation keeps rising.
Though the naira goes for N304 to a dollar in the parallel market and N197 at the official market, a difference of N107, those seeking further devaluation of the currency against the wish of President Muhammadu Buhari and the Central Bank of Nigeria (CBN) Governor Godwin Emefiele are not relenting.
For the second time in almost one year, Buhari said the government would not devalue the naira because it will not benefit the citizens.
The President, who spoke in Kenya, said export-driven economies could devalue their currencies and not an import-dependent economy like Nigeria. Devaluation, he said, would result in further inflation and hardship for the poor and the middle class in Nigeria. He said he had no intention of bringing further hardship on the poor who, he believes, have suffered enough.
In France last September, he said: “I do not think it is healthy for us to get the naira devalued. The Central Bank is providing ample foreign exchange (forex) to essential services and industries.”
Likewise, Emefiele is insisting on exchange rate stability. To him, the CBN is committed to safeguarding the value of the naira and it has instituted policies to achieve the objective.
He said the devaluation advocates forget that naira owes its stability or otherwise to some factors, chief of which is the price of crude oil in the international market.
Nigeria has been hit hard by the fall of crude prices globally, prompting CBN to impose strict forex rules to save its reserves and avoid what would be the third devaluation in a year.
Last June, CBN restricted forex access for the import of 41 items ranging from rice and toothpicks to steel products and glass. The restrictions did not go down well with investors, that have called for a relaxation.
Bureau de Change operators have condemned the clamour for further depreciation of the naira by international organisations. Rising from their maiden BDC Owners Forum in Lagos, they pledged to support the CBN to ensure the continued stability of the naira. The decision followed deliberations on recent developments in the BDC subsector and the forex market.
Despite the government’s pledge, the apostles of devaluation insist that naira must devalued because of fall of oil price, which poses challenges to the economy.
The stand of devaluation advocates
For the Head, Africa Strategy at Standard Chartered Bank, Samir Gadio, though a further devaluation of the naira may not happen soon, an adjustment is imminent.“
Despite the Central Bank of Nigeria’s resolve, markets observers believe that it will eventually succumb to pressures and devalue the currency (again),” he said.
Also, Bond Fund Manager, Standard Life Investments, Kieran Curtis, said a further devaluation would restore the economy to competitiveness and promote more capital inflows.
“It will take a combination of weaker currency and higher inter-est rates to get us back to Nigeria,” he said, arguing that when Nigeria is compared to other oil exporters, it hasn’t had enough of a currency adjustment.
The naira was devalued in November 2014 during the Monetary Policy Committee (MPC) meeting. The midpoint of the official window of the foreign exchange market was moved from N155/dollar to N168/dollar. The Committee also widened the band around the midpoint by 200 basis points from plus or minus three per cent to plus or minus five per cent.
Despite these moves, many analysts believe that further devaluation of the naira is imminent and that it will boost the inflow of foreign capital and enhance economic growth. For instance, the International Monetary Fund (IMF) had predicted that the Gross Domestic Product (GDP) growth for last year would be about 4.8 per cent from 6.3 per cent last year.
Still, Nigeria has some indicators in its favour. Though to the detriment of local firms, its foreign exchange reserve position remains healthy.
Analysts have predicted that foreign investors will likely remain wary of Nigeria until there is stability and enduring policies and a further naira devaluation leading to a dollar surge in the interbank market.
Gadio added: “Even though international investors want a piece of Nigeria, they will stay away, because, right now, they expect to make a 10 per cent loss on the foreign exchange side since devaluation is likely to happen.”
Morgan Stanley analyst, Martin Rats, said the global oil and gas industry reaction is like what happened in the slump of 1986, almost 30 years ago, when Saudi Arabia triggered an oil price slide by making a bid for market share.
Then, like now, “as the oil groups cut spending, the wider workforce shrank and costs in the supply chain tumbled. The majors shored up cash flow and, in time, investors reacquired faith in their dividends,” he said.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said a strong positive correlation exists between the exchange rate and crude oil price.
Nigeria’s crude oil – Bonny Light, which traded at $110.2 per barrel in January, last year, hitting $114.6 per barrel by June same year, is now trading below $35 per barrel. “With the discovery of the shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the US to reduce oil imports constitutes a downside risk on crude receipts of Organisation of Petroleum Exporting Countries’ (OPECs’) members. Consequently, the CBN must establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases,” he explained in a report titled: Naira trending towards 2015.
Chioke said Nigeria’s dependence on crude oil (70 per cent of total foreign exchange earnings) makes economic growth susceptible to price shocks.
Executive Director, Treasury and International Banking, United Bank for Africa (UBA) Plc, Femi Olaloku, said dwindling oil prices around the globe poses serious challenges to a developing economy like Nigeria’s, hence, the need for the government to also consider various diversification options. For him, further devaluation of the naira is imminent, as such would make the importation of goods into the country more expensive, encourage local manufacturing and inflow of foreign capital.
MPC speaks
The Monetary Policy Committee (MPC) held its first meeting of the year between January 25 and 26. It reviewed the economic and financial market conditions in 2015 as well as the outlook for the year.
The meeting was held against the backdrop of a challenging global economic situation — underscored by the heightened geopolitical tensions, China’s growth concerns and persistently declining oil prices — resulted in a volatile price opening across all financial markets at the begining of the year.
Equally, it led to dimmed global growth prospect with the International Monetary Fund trimming its 2016 global growth forecasts by 200 basis points to 3.4 per cent.
The drop in oil prices also led to reduced foreign exchange earnings as well as lower revenues for Nigeria’s government.
This has compounded the Balance of Payment (BoP) position of the country as well as the assumptions under which the 2016 budget was drawn up and anchored.
The oil price fall, which ensued after sanctions on Iran were lifted indicated the need for more domestic policy adjustments to restore confidence and stabilise macroeconomic condition. This informed expectation that the last MPC meeting would be centred on the current forex challenges as all the other monetary policy tools seem to have been implemented to full effect.
The Committee, however, decided not to alter any of the policy variables suggesting more policy harmonisation with fiscal authority and the bank’s desire to fine-tune its foreign exchange management framework to buoy liquidity in the market.
This could mean the apex bank is considering a more flexible exchange rate mechanism but it remains yet to be seen how that would be implemented without giving up on the Naira/Dollar peg as statements emanating from the Presidency last week further suggest that the authorities are not favourably disposed to an official weaker currency.
On the MPC’s decision, Currency Analyst at Ecobank Nigeria, Olakunle Ezun, said the committee’s decision to hold policy steady was based on several competing domestic and external factors. These factors, he said, include the weakening of the economy driven by sustained low oil prices; the need to moderate domestic interest rates so as to encourage indigenous businesses to borrow; stabilisation of the financial system in the aftermath of the Treasury Single Account (TSA) withdrawals and J. P. Morgan delisting of Nigeria; and the effect arising from the normalisation of monetary policy in the US.
Ezun explained that without a larger bulwark of forex reserves to rely on, the CBN is under pressure from the sustained low oil price to devalue the naira. It is possible that the CBN can hold the rate at N197 to dollar, but for how long?
