Prepare yourself for the worse inflation Nigerians. The Central Bank Governor, Mr Godwin Emefiele, promised (see his press statement on 5th June 2014) to implement a monetary policy regime that will lead to: Price stability, Macroeconomic stability, reduction in interest rates, reduction in the Unemployment rate, possible expansion of fiscal policy (i.e government spending more or reduce tax) and overall stability of exchange rates (NAIRA NOR GO FALL) etc. In relation to the exchange rate, he said the following: “Exchange Rate Policy: Our key goal here would be to maintain exchange rate stability. In view of the high import-dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the Naira would literarily translate to considerable inflationary pressure with attendant effect on macroeconomic stability. Therefore, under my leadership, the Bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency. We will sustain the managed float regime in the management of the exchange rate, as this will allow the Bank to intervene when necessary to offset pressures on the exchange rate. To support this strategy, we will strive to build-up and maintain a healthy external reserves position and ensure external balance”. On the 24th November 2014, the same man led a monetary policy stance that is depreciating (He deliberately devalued) our dearly beloved Naira. What are the advantages and disadvantages of local currency depreciation? “All other things (Electricity, good roads, the right human capital, etc) kept equal”, in a manufacturing economy like: Japan, China, Brazil, Russia, etc. the following will be the advantages of Devaluation of a local currency: 1. Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a boost for domestic demand. 2. Higher levels of exports should lead to an improvement in the current account balance. 3. Higher exports and aggregate demand can lead to higher rates of economic growth leading to more job creation, more demand for goods and services etc. (through the various transmission mechanisms and multiplier effects). In a consumer nation like ours (Nigeria) Devaluation of our local currency will lead to the following (disadvantages): 1. It is likely to cause inflation because: • Imports (Petrol, shoes, clothes, food items etc.) become more expensive due to the weaker purchasing power of the currency. • Decrease in Aggregate demand for goods and services as the purchasing power of money declines domestically. • Firms /importers (of both finished and intermediate goods) have less purchasing incentive, leading to scarcity in important consumer good items and possibly galloping inflationary pressures. 3. A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reduces the value of their holdings. In conclusion, I will suggest our Monetary Policy Committee (MPC) and other policy makers call the CBN Governor to order. Notwithstanding the rapid decline in the value of Brent crude oil and the knock on effect this will have on our currency and balance of trade, he should go back and read the speech he made 5th June 2014, 2 days after he took over office as the CBN boss. Mr Osemwenkhae I. Endurance A concerned citizen of Nigeria
Posted on: Thu, 04 Dec 2014 15:13:47 +0000
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