Devaluation of the naira

CBN Governor Godwin Emefiele said that the Monetary Policy Committee (MPC) resolved at its 98th meeting penultimate Tuesday to lower the target band of the exchange rate to N165-N178 to the dollar from N155-N168. It raised its benchmark Monetary Policy Rate (MPR) by 100 basis points to 13 percent, the first change since October 2011, […]

CBN Governor Godwin Emefiele said that the Monetary Policy Committee (MPC) resolved at its 98th meeting penultimate Tuesday to lower the target band of the exchange rate to N165-N178 to the dollar from N155-N168. It raised its benchmark Monetary Policy Rate (MPR) by 100 basis points to 13 percent, the first change since October 2011, and banks’ Cash Reserve Ratio (CRR) to 20 percent from 15 percent.
Emefiele explained that the economic challenges facing the country required bold policy and administrative measures in the management of the nation’s reserves, which have declined by a steep 25 percent to $36.7 billion from the 2008 high of $68 billion during the administration of late President Umaru Musa Yar’Adua.
He said that the apex bank took the measures to align the market towards its long term equilibrium path, adding that the situation demanded that the regulator confronted the issue of shrinking reserves head-on in order to strengthen the naira. Emefiele added that if CBN failed to take the right policy actions now, the market would force it to take more drastic actions in the near future when the reserves would have fallen even lower.
While the CBN cannot influence global oil prices, the measures are intended to send a signal to stakeholders that it would do what it can to preserve macroeconomic stability. But it seems they were adopted without evaluating, or ignoring, their overall impact on Nigeria’s import-dependent economy.
For instance, the net impact of a weaker naira would be sustenance of an inflationary spiral as cost of goods, including petroleum products, and services would soar, such that the 8 percent inflation rate achieved in October could rise above 10 percent by yearend.
Devaluation will also affect the real sector; it will constrain production and worsen the country’s high unemployment rate, as well as adversely affect low income earners whose purchasing power has sharply eroded over the past few years.
While banks and currency speculators appear to be the primary targets, the challenge of protecting small and medium enterprises has not been sufficiently addressed. The hike in MPR could prove a disincentive to borrowing by manufacturers as prevailing high interest rates would jump and the bearish trend in the equities market would continue, given the CRR squeeze on banks.
It is worrisome that the MPC acknowledged that the depletion of the reserves “does not seem to have any bearing on the genuine foreign exchange needs of the country.” Rather than lamenting the situation, the regulator should consider taking a more proactive step by identifying areas that spur demand for foreign exchange rather resorting straight away to devaluation, which has not been very helpful in the past.
The negative speculation around the naira means that the currency, which is trading outside the CBN band, could weaken further in comparison to the dollar sooner, because there is no certainty when or if oil prices will rebound. The prognosis therefore is that of a potential economic crisis, despite assurances by government officials to the contrary.    
CBN chief asserted that devaluation is fallout of tumbling oil prices, but there is no evidence to suggest that the naira strengthened when oil prices surpassed $120 per barrel. Indeed, it has lost 45 percent in the last six years when oil prices were strongest and Nigeria’s reserves robust.
One of the major burdens on the naira is the imbalance in Nigeria’s international trade, which was put at a ratio of 91 percent import to 8 percent export in 2013. That problem is worsened by the fact that the price of the main contributor to the feeble export ratio – oil – has collapsed.
In spite of the dwindling reserves, however, Nigerians spend over $1 billion annually to send their children to schools abroad. Add to this the huge sums spent on medical bills and frivolous trips by government officials paid for from public coffers and the problem becomes clearer.