18th August, 2015
Naira devaluation: Why CBN must not bow to pressure
Following the decision by the Central Bank of Nigeria, CBN, to devalue the value of naira earlier in the year, the country’s currency exchange rate has been fluctuating between 200-245 against the dollar on the parallel market. The CBN decision though unpopular and highly criticised, is a direct response to the prevailing economic realities caused by the continued drop in price of crude oil in the international market.
To help cushion the effect of the policy, the CBN introduced other measures aimed at curbing access to foreign exchange at the interbank market. This includes the restriction of access to foreign exchange for importers of some goods and luxury items. Since these measures were put in place, the country’s economy has been struggling to maintain a balance.
While the effects of the CBN policy appears to be normalizing, certain forces from outside the country are however mounting pressure on the Central Bank to further devalue the naira. Chief among them is the internationally-acclaimed ratings agency, Standard & Poor’s, S&P, which insists that the CBN will have to at some point again devalue the naira possibly by more than 15 per cent.
According to S&P’s Director of Sovereign Ratings, Ravi Bhatia, the recent measures by the CBN including stopping the sale of forex to importers of 41 items at the official forex markets could only delay the inevitable. Bhatia asserted that another devaluation is inevitable and that Nigeria has no option but to devalue. One of the many threats of the rating agency is that Nigeria may lose its place in the benchmark GBI-EM local currency debt index if it refuses to further devalue its currency.
For a long time, Nigeria’s economy has continued to depend on pressures from foreign interest. We believe that the time to put an end to that is now. A further devaluation of the naira as being suggested by S&P should and must never be considered by the CBN for many obvious reasons.
A further naira devaluation will lead to a chain of reactions, many of which may not have the appropriate results, because the Nigerian economy mainly depends on oil. The devalued naira will drive export of local products, which do not exist in the required volume for now, but will create an additional burden on the populace, the reason being that the cost of consumables across the board, will escalate.
As the direct consequence of the rise in the base lending rate the cost of loanable funds would have risen. In such case the development will be counterproductive, and against the thrust of the government’s touted plan to create jobs.
There is the expectation that the government’s revenue, in terms of naira, will move up, because of the wide exchange rate disparity between the dollar and the local currency. But the point must be made that this expectation may not be realisable due to two variables – the continued falling oil prices and lower crude production aggregate.
In the developed nations when currencies are devalued, it is to encourage exports, because the prices of local products serve as an incentive and a toast for foreign buyers. In the process, they earn foreign exchange, increase production and create additional jobs. Unfortunately, that is not the case with Nigeria.