Before now, it had been widely speculated, and even canvassed, that the naira should be devalued, against the dollar and other major foreign currencies. Yesterday’s eventual intervention by the Central Bank of Nigeria (CBN) merely lent credence to what some public commentators felt was long overdue.
What CBN Governor Godwin Emefiele announced in Abuja the devaluation of the naira, the increase of the Monetary Policy Rate (MPR) by 100 basis point from 12 per cent to 13 per cent, the adjustment of the Cash Reserve Ratio (CRR) for Private Sector Deposits and the gamut of the other pronouncements, are bound to have reverberating effects, in both micro and macro dimensions.
The first culprit of the increase in MPR, of course, is the real sector. The cost of loanable funds would have risen, as a direct consequence of the raise in the base lending rate. The development will be counterproductive, and against the thrust of the government’s touted plan to create jobs. There is an indirect correlation between increased interest rate and job creation.
The devaluation of the naira will lead to a chain of reactions, many of which may not have the intended results. For a largely monolithic-economy, one that largely depends on oil, the expectation that a devalued naira will drive export of local products, which do not exist in the required volume for now, will create additional burden on the populace, the reason being that the cost of consumables, across the board, will escalate. When you juxtapose the consequence of an inflation induced policy on an economy, nay the people who do not possess a corresponding purchasing power, by reason of unemployment, the consequences are better imagined than experienced.
No doubt there is the expectation that the government’s revenue, in terms of naira will move up, because of the wide exchange rate disparity between the dollar and the local currency. However, the point must be made that this expectation may be unrealisable of two variables- the falling oil prices and lower crude production aggregate.
Is there any escape-route? Certainly, but the question remains if Nigerians have been sufficiently sensitised to brace for this situation.
In the developed nation’s when currencies are devalued, it is to encourage exports, because the prices of local products serve as an incentive and a toast for foreign buyers. In the process, they earn foreign exchange, increase production and create additional jobs. Unfortunately, that is not the position with Nigeria.
Another issue would be that Nigeria will have greater difficulty in paying its external debts, which are on a growing trajectory. Earning less foreign exchange in the face of growing external debts, is an ill-wind that blows no one good.
Varied reactions have greeted the policy shift. Renowned economist Henry Boyo described the eight per cent devaluation of the naira as “a big mistake”. He said the policy shift remained a wrong concept that will persist because the CBN has learnt nothing from history. He said the devaluation will even move to 20 per cent as the black market continues to outstrip the official rate.
Boyo said the prices of goods and services will gradually go up, as importers add the increase to the cost of goods and services. He equally sees the price of fuel going up, despite declining oil price.
He said Nigeria has learnt nothing from what happened to the Ghanaian and Zimbabwean currencies. “I see the naira being devalued by 20 per cent as time progresses. I have repeatedly said that mopping up the naira to achieve exchange rate stability is wrong. The CBN substitution of the naira allocations for dollar should be stopped. Allocations should be divided based on dollar certificates. The exchange rate for the naira will continue to fall,” he said.
Managing Director, Head, Africa Macro Global Research, Razia Khan expressed surprises over the MPC meeting.
She said: “Wow! Big surprises from the CBN. Although we had forecast some CRR tightening, and an Retail Dutch Auction System (RDAS) devaluation to a more realistic level, the CBN MPC has exceeded expectations”.
For her, the CBN has shown absolute commitment to dealing with current challenges. They have not shied away from the tightening needed to sustain current foreign exchange reserves. The official devaluation of the naira, she said, allows the RDAS to move within the range that straddles the interbank foreign exchange rate.
“While the market reaction to the RDAS move in the near-term will be important, we think that these measures deal as comprehensively as possible with the challenges facing Nigeria. While Nigeria cannot do much to influence the oil price, the combination of measures today (yesterday) sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.
Chief Economist at Renaissance Capital (RenCap), Charles Robertson, said the combination of a devaluation – with a rate hike and a reduction in liquidity via the CRR hike shows the CBN is serious about defending the new currency level. He explained that the CBN took the decision based on emerging economic realities. The fall in oil price has undermined reserves position, and weakened CBN’s ability to defend the naira. FX reserves currently stand at 7 months of import cover.
On the 2015 budget, he said the MPC’s budget oil price of proposal of $73/ barrel may be optimistic adding that the low oil price environment gives Treasury the opportunity to remove fuel subsidy. He said the MPC is positive about the inflation outlook, despite weaker naira and that inflation pressures have moderated in recent months.
The naira is under further pressure in the interbank market owing to strong dollar demand, the recent, sharp fall in Brent oil prices (down 23 per cent since late June), and uncertainty over the effect of normalisation of US monetary policy.
Minister of Finance Mrs Ngozi Okonjo-Iweala last week painted the sorry picture of the economy as a result of the ol price drop.
She told the CNN: “If you have an economy that depends on revenues as oil for 70 per cent of its revenues, you always are never comfortable. You always are waiting, and you always have plans in case oil prices fall.
“So, even though this has put us in an uncomfortable position, the issue is how are we dealing with it? And we are reacting to it swiftly.
“We’ve taken down the benchmark price at which we were going to do our 2015 budget, and even our medium-term framework from $78 to $73, but that’s not all.
“We have a scenario-based approach so that even if oil falls below the $73, we’ll kick in with additional revenue raising and expenditure cuts.
“ And coupled with appropriate monetary policies, I think we can manage a softer landing for the economy.
“I don’t want to prejudge what OPEC will do, but that would be helpful, I think. We want something that is fair to both producers and consumers. And if OPEC takes a balanced approach to both, then that is fine with us.
“We’ve not been waiting, folding our hands, waiting for this to happen. It’s very difficult if 70 percent of your revenues come from oil. And you have to be ready.
So, what we had done was put in a mechanism whereby we could save during times when oil prices were high, and we did manage to save a little bit. We have about $4 billion — slightly more than $4 billion saved that we can fall back on. We could have had more –but that’s what we have at the moment. And then we have revenue-raising measures. Since our economic base has been shown to be much broader than we thought, we have kicked in measures to raise non- oil revenues. When we’ve been working very hard in our Internal Revenue Service to strengthen our tax administration. We’ve had some success. We’ve just raised a half billion more dollars, equivalent, in revenues this year alone. And we are shooting to go up to a billion next year.”
