Managing the devaluation of the naira. THE decision of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) to devalue the naira to N168, from N155 to the American dollar, is an emergency measure that could hurt the country in different ways, the short term gains notwithstanding. Coming few days after the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo- Iweala announced austerity measures, the devalua tion of the national currency is bad news for Nigeria. The next few months could be tough, if not painful for Nigerians, if the managers of the nation’s finances do not tread cautiously and design comprehensive measures to keep the economy above waters. The devaluation, which was one of the outcomes of the two-day MPC meeting in Abuja, came against the back drop of uneven growth in the global economy, the fall in oil prices and the vulnerability of the domestic economy. The decision, according to CBN governor, Godwin Emefiele, is mainly directed at curbing negative speculations on the nation’s currency, particularly by the banks which have reportedly been putting so much pressure on the naira. In real terms, the devaluation amounts to 8.38 percent of the Naira. Further explaining the rationale for the decision, Emefiele said the level of excess liquidity in the banking system made the step imperative. To achieve this, the naira had to be devalued by moving the mid- point of the official window of the foreign exchange (forex) market by 100 basis points from 12 percent to 13 percent. In doing so, the CBN hopes to tighten the monetary policy framework by allowing some flexibility in the exchange rate, as well as stem specu lative activities and depletion of foreign reserves which, as at October, had fallen to N37.1 trillion. We are not unaware of the importance of the MPR, which is the anchor rate at which the apex bank lends money to commercial banks to boost liquidity in the system, in furtherance of its responsibility as lender of last resort in the country. With this devaluation, business parameters in the country are likely to be adversely affected. Inflation will increase, while the purchasing power of the people will reduce. It is also likely to fuel unemployment. Even though this devaluation may signal the commitment of the CBN to assert its operational independence to foreign investors, the greater worry is that the much-expected expansion of the economy may be far away, considering the far- reaching negative implications of currency devaluation, such as increased cost of production, with its resultant lower profit margins for companies and higher cost of services and goods, especially imported ones. This will inevitably affect the general wellbeing of the people. In spite of these, the decision on devaluation of the naira seems somewhat justifiable. On its face value, the collapse of global oil prices, from which Nigeria derives the bulk of its revenue, and the reduction in external reserves, which has constrained the ability of the CBN to continually defend the naira and sustain the exchange rate, are hard facts that the apex bank must respond to. Nevertheless, Nigerians had expected the CBN to have designed measures to enhance the resilience and stability of the banking system in situations such as these. As events in both the domestic and international markets have shown, our banking system has not witnessed the much-needed credit expansion to the real sector of Nigeria’s economy. Consequently, it has not engendered the expected level of inclusive growth and employment. There is no doubt that the fall in the price of crude oil and our declining external reserves demand that the apex bank confront the issues head-on and strengthen the value of the domestic currency. But, proper management of the nation’s economy and fiscal discipline at all levels of governance over the years would have prevented the present anxieties and desperate measures on account of the current fall in oil prices. This is more so as oil price had remained far above the budget benchmark for many years, peaking at about 110 dollars per barrel earlier this year, before the current slump. Moreover, the volatility of oil prices was long in evidence, but government seemed to have ignored the signals, and lived in denial. On this score, therefore, the Federal Government should take the larger blame for its lack of foresight in not diversifying the economy and insulating it from the present over-dependence on oil revenue. Ordinarily, the devaluation of the naira would not have been a problem if Nigeria had a lot of goods to export, and little to import. Devaluation benefits exporters, as they can get more naira for the dollars they are paid for their exports. But Nigeria is a nation of importers, which indicates that we will now need more Naira to buy dollars for our imports. It is sad that a combination of factors, among them, cost of production, high interest rate and unstable power supply, have hampered local industries. Now, in a desperate effort to raise additional revenue, the federal government says it will soon introduce surcharges on certain luxury goods. The plan, according to the Finance Minister, is to make the richer members of the society contribute a little more to easing the pain that will result from the current economic challenges. Government plans to raise N480 billion (3 billion dollars) per annum for the next three years through this means. The Finance Minister has said that the interest of “the common man is a priority” in government’s strategy to salvage the economy. Let this be clearly demonstrated through policies and programmes that will cushion the effects of the devaluation of the naira. Altogether, if the present economic challenges succeed in making the government look inwards to develop other revenue channels, enthrone fiscal disci pline in the management of resources and cut the cost of governance, then the devaluation of the Naira and the austerity measures would have been blessings in disguise for the country.
Posted on: Mon, 29 Dec 2014 11:41:06 +0000
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