Cannot understand Naira devaluation? Check out the pros and cons

 – Writing for The Nation Online, Collins Nweze examines the debate on devaluing the Naira.

 – Supporters say the national currency needs to be devalued to meet economic reality.

 – Opponents say however that devaluation would be suicidal.

The debate about devaluing the Naira continues to rage on.

Though the Naira goes for N315.5 to the dollar on the parallel market, and N197 at the official rate, those seeking further devaluation of the currency against the wish of President Muhammadu Buhari and Central Bank of Nigeria (CBN) governor Godwin Emefiele are not relenting.

For the second time in a year, Buhari said the government would not devalue the Naira because it it would not benefit the public.

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.

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“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,” he said.

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 devaluation supporters forget that the Naira owes its stability to several 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.

Bureau de Change operators have condemned the clamour for further depreciation of the naira by international organisations.

After 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, devaluation supports insist that Naira must devalued because of the fall of oil prices, which poses challenges for the economy.

Bond Fund Manager at Standard Life Investments, Kieran Curtis, said a further devaluation would restore the economy to competitiveness and promote more capital inflow.

“It will take a combination of weaker currency and higher interest rates to get us back to Nigeria,” he said.

Is more Naira devaluation inevitable and imminent?

The naira was devalued in November 2014 after a 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 3% to plus or minus 5%.

Despite these moves, many analysts believe that a further devaluation of the naira is imminent which will boost the inflow of foreign capital and enhance economic growth.

For instance, the International Monetary Fund (IMF) had predicted that Gross Domestic Product (GDP) growth for last year would be about 4.8% from 6.3% last year.

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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 on the interbank market.

Morgan Stanley analyst, Martin Rats, said the global oil and gas industry slump is like what happened in 1986, 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 prices.

“With the discovery of 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,” Chioke said.

“Consequently, the CBN must establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases.”

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, therefore the government needs to consider devaluation.

For him, further devaluation of the naira is imminent, as this would make imports of goods into the country more expensive, therefore encouraging local manufacturing and the inflow of foreign capital.

The MPC speaks out

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 heightened geopolitical tensions, China’s growth concerns and persistently declining oil prices — resulted in a volatile price opening across all financial markets at the beginning of the year.

The drop in oil prices also led to reduced foreign exchange earnings as well as lower revenues for the Nigerian 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.

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The global fall in oil prices after sanctions on Iran were lifted indicated the need for more domestic policy adjustments to restore confidence and stabilise macroeconomic condition.

This led analysts to believe that the MPC meeting would be centered 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 the fiscal authorities 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 policy.

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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 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?

The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of Naij.com.

Details at The Nation Online

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