Naira Devaluation: Of what benefit to the economy?

Reactions have continued to trail last week's devaluation of the nation’s currency-Naira-particularly its impact on an import dependent economy, with Nigerians watching with keen interest as to how this will bring respite to the currency, writes ALEXANDER CHIEJINA

Shortly after the International Monetary Fund (IMF) visited Nigeria and spoke with the government, private sector, banks including the Central Bank of Nigeria (CBN) in March this year, the Fund revealed that the nation’s currency- the Naira was overvalued.

The view by the IMF came on the heels of a report it released berating the Apex Bank for running down the external reserves to prop up the Naira rather than allowing it to depreciate in tandem with existing realities on the ground.

The Fund stated that the CBN was not in a position to fund the foreign exchange market the way it is doing- dipping into already dwindling reserves -and that a managed depreciation of the Naira is much more preferable to an unavoidable free fall.

The pronouncement by the IMF; a Fund set up to foster international monetary cooperation, secure financial stability, facilitate international trade, promote sustainable economic growth, and reduce poverty around the globe, attracted divergent views from economic and financial experts, policy makers, legislators and concerned Nigerians as regards the grounds on which the Fund is asking the country to devalue its currency.

At the time, the House of Representatives’ criticised the IMF’s statement, saying that it cannot dictate to Nigeria on how to run its economy.

According to the House; “Nations are not obliged to agree with the IMF because every nation has a path to economic development which it has charted for itself. In the case of Nigeria, we have the Vision 2020- 20 agenda. We know what is right for us and we can pursue our goals without the IMF dishing out to us what it feels is the right approach to good governance and economic development. Nigeria won’t just agree to devalue the naira because the IMF says so.”

Even as the debate continued, a trend in the foreign exchange market began to evolve; the Naira weakened further against the Dollar in the foreign exchange market, closing between N153 to N159 to the dollar. Furthermore, the Naira declined against the U.S dollar both at the inter-bank and CBN window as demand for the dollar outstripped supply at both markets.

While the Apex Bank continued struggling to keep the Naira within a band of three percent above or below N150 per dollar and demand for imports surged, palpable fears rented the air as regards what becomes of the economy from not plunging to a deteriorating situation even as the Apex bank rolled out measures to help check inflation expectations.

With Nigerians still expectant of a better performance of the economy, the battle to save the soul of the Naira has attracted debate from economic and finance analysts degrading the Naira which has been pegged at N116, N126, N146, N158 to $1 in the wake of global economic meltdown of 2009 which blew its ill wind across the already unstable Nigerian economy.

CBN’s view

In a bid to safeguard the freefall of the Naira, the nation’s bank watchdog -the CBN- bowed to pressure at the foreign exchange market and prolonged weakness of the currency by depreciating the Naira with the dollar exchanging at the CBN’s official window Wholesale Dutch Auction System (WDAS) at N150-160 as against the previous N145-155.

The Apex Bank however left its benchmark interest rate (Monetary Policy Rate (MPR)-rate at which the bank watchdog lends to commercial banks),unchanged at 12 percent and its 200 basis point corridor around the benchmark rate meaning that its recommended deposit rate and its lending rate is 14 per cent.

Making this known during last week’s Monetary Policy Committee (MPC) meeting in Abuja, Sanusi Lamido Sanusi, Governor, CBN, revealed that “the committee decided to adjust the mid-point of target official exchange rate from N150.00/US$1.00 to N155.00/US$1.00 and maintain the band of +/-3.0 percent. This means that the Naira should float roughly within a range of N150.00/US$1.00–N160.00/US$1.00, unless extraordinary shocks necessitate a change in stance.”

According to Sanusi “I don’t think there is need for further depreciation at the moment; I think the rates have stabilised around mid-150. Our principle concerns are external. It’s really what happens to Europe and concerns that decisions that should be taken are not taken because of concerns for the elections. I suppose any Central Bank Governor anywhere in the world is looking at Europe to see what decisions government is going to take on sovereign debt and the capitalisation of the banks. So if Europe gets into serious difficulty and if commodity prices are solved, we would probably deal with the issue of a threat to our reserve position and exchange rate but until then based on current configuration, we think we are fine… in the present circumstance, we are fine with N155.”

The CBN governor noted the “continuing demand pressures in the foreign exchange market and the slow rate of reserve accretion indicated that liquidity conditions may still need further tightening.”

Sanusi maintained that the decision to retain the interest rate at 12 per cent was borne out of the fact that lending rates were already high and having impact on the real sector, coupled with the realisation that global headwinds might make further tightening counter-productive and pro-cyclical should oil price fall significantly.

“Given the cost of borrowing in current tight monetary conditions, the committee projects that in the face of revenue shocks, likely reaction of the authorities will be a reduction in non-essential spending rather than an increase in public debt. In view of the realities, the committee had resolved that a combination of small fiscal adjustments and moderate depreciation in the exchange rate of the naira should compensate for maintaining current interest rate stance,” Sanusi stated.

On the fiscal policy, he said: “The Ministry of Finance continued to stress its commitment to a tighter fiscal stance and has already indicated a reduction in the benchmark price of oil from US$75.0 per barrel to US$70.0 per barrel.

Sanusi went further to hint that the restrictive monetary conditions would likely persist for some time to come, so as to be able to offset the liquidity associated with the continued loose fiscal policy of government, repurchase of AMCON bonds, quell excessive demand for imported fuel and goods, reduce the inflationary impact from the likely removal of fuel subsidies for which President Goodluck Jonathan has resolved to anchor the presentation of 2012 budget on as government believes this would free up some money for implementation of the new appropriation bill.

Views by experts, Nigerians

Since the pronouncement by the Apex Governor on controlled Naira devaluation, Nigerians have continued to comment on the official devaluation of the naira by the CBN and its implications for the nation’s economy and the citizens.

Speaking on the issue, Committee for Democracy and Right of the People, (CDRP), a human rights group, has described as worrisome the decision of the CBN to devalue the Naira, saying this would increase the suffering of the people as well as lead to the collapse of the economy.

The group, who spoke through its National Coordinator, Amitolu Shittu said “There is no basis for the devaluation of currency as the ongoing crisis in Nigeria is enough to battle with than to increase the suffering of the people. The devaluation of currency at the moment is ungodly as the rate of criminality in Nigeria is due to the bad economic policies of the government. The devaluation of currency would increase the rate of bombings, robberies, kidnappings as well as stealing of public funds."

The action, according to Shittu, had the potential of disrupting the public peace as such, he enjoined President Goodluck Jonathan to rethink the decision.

Going down memory lane, the human rights activist recalled that: "In the 50’s Nigerian rulers including Obafemi Awolowo in the old western region, Ahmadu Bello in the old northern region and Nnamdi Azikiwe in the old eastern region had embarked on agricultural revolution which were profitable ventures as at then and which they operated without borrowing money from the bank", adding: "This shows that with the right leaders the country can grow instead of devaluing the Naira."

Wale Abe, Executive Secretary/CEO of the Financial Markets Dealers Association, said that the decision of the Apex Bank was a welcome development. According to him, it was the right thing to do because that is simply a way of reacting to the dictates of the market even as the interbank market has been hovering around N156 to the dollar.

“Devaluation of the naira to N155/$1 is a way of bridging the gap between these rates. It is actually a way of forcing out the speculators whose activities have been contributing to the mounting pressure on the local currency. We cannot say the CBN has failed in its attempt to defend the naira, because the bank has successfully managed and defended the naira for the past eleven months,” Abe revealed even as he added that there is equally nothing to fear about inflation.

Lending his view, David Adonri, Managing Director/CEO of Lamberth Trust and Securities Limited, stated that if the devaluation was material (that is to say if it is devalued by wide margin), it will have a negative impact on the equities market because a lot of investors will shift their assets to hard currency. But if it is not material, it will have no impact.

“Generally when you devalue your currency, the intention is to reduce import and facilitate export. But unfortunately, the Nigerian economy does not have the productive edge to facilitate export. So, it means that it will decrease import, which cannot be decreased and so the effect will be inflationary. It will lead to inflation in the economy. But because the devaluation is not material, the inflation that it will result will be minimal,” Adonri said.

According to him, those who have invested in fixed income instrument, they will also suffer some instability because if inflation goes up, it will neutralize what they earn as interest.

Adonri argued that devaluation affects both equities and fixed income market negatively. But if it is interest rate adjustment, it will impact positively on the fixed income but negatively on the equities market. But exchange rate devaluation negatively affects the financial market.

Meanwhile, Razia Khan, Head of Macroeconomics and Regional Head of Research, Africa, Global Research of Standard Chartered Bank, said there is no implicit devaluation.

Khan noted that the announcement merely confirms a situation that should allow the NGN to trade close to previous levels, closing any differential between the WDAS and interbank FX rate. 

“This will be important for price stability considerations going forward, lessening the need for further tightening.  The announcement merely plays catch up with where the market already finds itself. We expect the CBN to reinforce its price stability credentials, intervening in the interbank market to restore confidence where necessary, and supporting this with ongoing tight monetary policy – mainly through Open Market Operations (OMOs).  The move on the FX rate is positive in that it closes any gap with the interbank market, demonstrates the responsiveness of policymakers to market pressures, and hopefully also allows for the gradual re-accumulation of FX reserves, while keeping the price level relatively stable.  Given the external risks facing the Nigerian economy, this is a sound course of action,” she said.

 

Economic implications

There is no gain saying that Nigeria is an import dependent economy hence, there are fears that if the Naira continues with its free fall, importers will have to adjust the prices of their products upwards to reflect the amount being paid for these goods.

Despite the Apex bank policy measures, some schools of thought believe that the current devaluation of the Naira will have significant impact on the masses. This is borne out of the fact that if the battle to save the soul of the Naira continues, investors intending to come into the country may think twice before investing giving the current rate of volatility of the Naira.

A financial analyst, who was visibly annoyed with the current volatility of the Naira urged the Apex regulatory authority not to do anything that could tarnish the good image he has built for himself.

According to him “devaluation may worsen the nation's currency since the country is an import-dependent economy”. The analyst however cautioned the CBN not to tinker with any policy likely to worsen the economic situation in the country.

Citing his experience as regards the strength of the Naira against other foreign currency, he said, “I thought I had much money on me, as I held N8, 000 in my pocket, until I tried to convert it into the US dollars; it came to less than $49. Who would believe Nigeria could be so poor only a few years back? If they devalue the naira now, the masses will be further impoverished” he added.

Taking a cursory look at the countries that had devalued their currency, the analyst posited that such moves are usually as last resort aimed at correcting  past economic mistakes.

The Nigerian situation is such that the abrupt decline in crude oil prices has significantly limited the amount of foreign currency the country receives from the sale of petroleum. Since majority of the goods utilized in Nigeria are imported, the demand for foreign currency appears to be exceeding the rate at which the country foreign reserve is being replenished.

So far, the CBN has tried several measures to halt the freefall, it has refused to support the currency using the nation’s foreign reserves. No doubt, a currency is the reflection of the country in which it is legal tender. It stores all the data about that country and their appraisal. Therefore, a currency is a unique measure of past and future with significant implications on the present.

It is believed that the dearth in infrastructure (energy, water, transportation, etc) has contributed to the high demand for foreign currency which is used to purchase goods that are not manufactured domestically depleting our foreign exchange reserves due to the massive capital outflows by the private sector.

Saving the troubled ‘Naira’

Across the globe, international economic and financial conditions have continued to deteriorate with possible threats of financial shocks from Europe, making it increasingly difficult to correct the serious imbalances that have developed in the international economy since the peak of the global economic and financial crises.

With major industrial economies presently economically weak and still expected to remain in recession with high unemployment rates and large unsustainable fiscal imbalances for an extended period, going by the recent forecasts of most international institutions, there was the need to review Nigeria’s domestic economic conditions and challenges facing the economy against the background of developments in the international economic and financial environment in order to reassess the options monetary policy for the remaining part of the year and first quarter of 2012 became imminent.

The CBN’ Monetary Policy Committee, (MPC) however observed a mild resurgence of inflationary pressures at the end of the third quarter and beginning of the fourth quarter of the year, after series of monetary policy tightening measures has been put in place in the country.

As the inflation outlook appeared mixed and complicated by the fact that the full effects of the recent aggressive monetary tightening measures were yet to be felt, latest output growth projections remained robust, even though lower than earlier projected.

Importantly, it was observed that the average exchange rate appreciated at all three segments of the market during the period. At the wDAS market, the exchange rate opened at N158.48/US$ (including 1 percent commission) on October 11, 2011 and closed at N156.05/US$ on November 18, 2011, representing an appreciation of N2.43k or 1.53 percent within the period. 

At the inter-bank segment, the selling rate opened at N158.90/US$ and closed at N158.62/US$, representing an appreciation of N 0.28k or 0.17 per cent. In the same vein, at the BDC segment, the selling rate opened at N165.00/US$ and closed at N160.00/US$, representing an appreciation of N5.00k or 3.03 per cent for the period.  All these occurred even as the external reserves position closed at US$34.38 billion of international reserves as at November 17, 2011.

While the MPC felt that external developments have in general responded favorably to monetary policy stance adopted in the its last deliberations in October, there was the need for the Apex Bank to be vigilant with respect to developments in the foreign exchange market and maintain its stance in favour of stable exchange rates. This in turn sent clear signals that will help anchor the expectations of investors, manufacturers, and policy makers in the short-to-medium term.

However, in a bid to save the soul of the troubled ‘Naira’, the committee came up with the following policy measures: to retain the MPR at 12.0 percent and the symmetric band at +/-200 basis points; to retain the Cash Reserve Ratio (CRR- minimum reserves each commercial bank must hold) at 8.0 percent; to adjust the mid-point of target official exchange rate from N150.00/US$1.00 to N155.00/US$1.00 and maintain the band of +/-3.0 per cent; and to encourage the CBN to continue to seek convergence between wDAS and interbank rates to reduce arbitrage opportunities, avoid speculative attacks, and the emergence of a multiple-exchange rate environment.

Expressing her thoughts on the decision, Alade Sarah, Deputy Governor,(Economic Policy), CBN, revealed that most major industrial economies were experiencing high inflation and high unemployment rates making recovery harder to achieve. While noting that the Euro zone countries were grappling with the sovereign debt crisis which has resulted in the change of government in two countries (Greece and Italy), Alade maintained that most analysts are uncertain that the risk of sovereign default will be addressed expeditiously and this loss of confidence is reflecting in market transactions.

According to Alde “Although Nigeria’s exports have performed well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand. This suggests that risks to the growth projection for the next few months are on the downside and further tightening could dry up domestic economic activities.

“While there are still pockets of downside risks in the domestic banking sector, the resolution action taken by the Central Bank is helping to restore confidence in the banking sector. The return in confidence needs to be enhanced by giving the banks some space to consolidate their position and cater to the needs of their customers. Another policy hike could further tighten liquidity conditions in the market with adverse impact on economic activities.  Furthermore, the deceleration in global growth and increased volatility in commodity prices all call for prudent monetary policy stance to maneuver the fragile economic environment,” she concluded.

Lending his view Tunde Lemo, Deputy Governor, (Operations) CBN disclosed that the recent monetary tightening stance of the MPC meeting has assisted a great deal in reducing the demand pressures in the foreign exchange market, resulting in modest accretion to the Gross External reserve which stood at USD 34.38billion on November 17, 2011.

While maintaining the fact that developments in the domestic economy suggest that the inflationary pressures may persist till the end of the year as headline and food inflation rose marginally in October., the deputy governor opined that slight reduction in core inflation may not be sustained in the run up to the year- end due to the impact of increase in consumption pattern at this time of the year.

In his words “These pressures are however not strong enough for serious concern, especially as the political negotiations necessary for the removal of fuel subsidy may not be concluded in the near-term. The global economic recovery remains fragile. While the threat of double dip recession has decreased in USA, unemployment still remains high.

“Europe continues to grapple with sovereign debt crisis, mounting market tension and risk of banking crises, while expected growth in China may slow down considerably as the housing market is already showing sign of a possible crash. These external developments may have negative impact on global demand for crude oil and therefore result in significant shortfall in government revenue and money supply. I am therefore of the opinion that MPC needs to watch these domestic and foreign developments in the next few months as further tightening may be pro cyclical in the event of a major slowdown in global and domestic economies”

As heightened concerns over economic and financial developments in the developed and emerging markets continues, there is palpable fear that fiscal imbalances, bank solvency risks, higher inflation and unemployment etc. portend a world in which a new recession cannot be ruled out.

Even as measures taken by the MPC last month October are said to be working and uncertainties in the external environment advise a pause avoid further tightening being pro-cyclical, Nigerians hope these latest policy measures by the Apex Bank won’t in any way devalue the troubled ‘Naira’ bearing in mind that country has become the new bride for emerging market investors such as China, India, etc.