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As crude oil price continues to nosedive and with limited war chest to shield naira, the Central Bank of Nigeria (CBN) has officially devalued naira by 8 percent and raised interest rates by 100 basis points.
Godwin Emefiele, the CBN governor and the delegated chair of Nigeria’s Reserve apex bank announced the development in Abuja after the emergence meeting with the members of the Monetary Policy Committee. With this devaluation naira will be pegged at the exchange rate of N168 compared to the previous rate of N155 to one U.S. dollar, which will hinged on the target band of naira between 160-176 to the US dollar, compared with the previously 150-160 naira to the US dollar.
The interest rate was raised by 100 points from previously 12 percent to 13 percent in order to checkmate anticipated emerging inflation and to restrict capital flight from the financial market. The recent arrangement will possibly tame, if not slow the bleeding of the foreign reserve used in the defending of naira. Nigeria with a limited resources and a foreign reserve that stood at previously $39.5 billion could not afford to defend naira indefinitely from the aggressive currency speculators as price of oil continues to slide. Nigeria just have to say no to fabricating a bulwark to protect weaken naira due to its inability to replenish its reserve as oil price continues to nosedive.
It is an expensive venture and not sustainable to vend off naira from the volatile oil price and currency speculators with the country’s relatively light-weight foreign reserve. The country’s dependency on oil for its majority of foreign exchange reserve has buttressed the weakness of Nigeria’s standing on its macroeconomics stability. The country’s GDP show an emerging diversity but it cannot be said of her accumulation of foreign reserve which relies mostly on the export of crude oil.
The hard reality is that the country’s foreign exchange is chiefly derived from oil revenues. And oil accounts for almost 80 percent of the foreign revenue and this must change if a stable value of naira is to be maintained and sustained. The herculean task for the policy makers and the government is to find ways to supplement crude oil export with arrays of meaningful exports of goods and services to offshoot the slavishly dependence on oil.
The new interest rate at 13 percent cannot be the panacea to the problems of macroeconomics stability especially the problem of inflation. At the interim the country’s inflation rate is below 10 percent but at the consumer level the inflationary trends appears more ambiguous and detrimental in basic business transaction where naira could hardly buys anything of substance that can be affordable to average Nigerian.
Again the upward arrangement of higher interest rate may discourage borrowing at the monetary base, thus making it more difficult for small and medium business communities to borrow and invest in their businesses.
With the declining price of oil the subsequent tightening of belt will emerged. But one thing Nigeria cannot afford to do is to abandon her investments on country’s decaying infrastructures especially the provision of electric energy, roads and drinking water. The most important job of a given government is the protection of life and property. Stable and peaceful societies are the foundation for a prosperous society that has the propensity to attract and sustain investments. By doing well and administering the right vision the problems of macroeconomics can be corrected with logical monetary and fiscal policies.
Naira the fickle currency of Nigeria is quite sensitive to the depressing oil price in the international market. Nigeria receives 75-80 percent of her foreign exchange from the export of crude oil. So once there are any negative changes or disruptions in the price of oil, it does adversely affect Naira and thereby reduces the quantity of foreign exchange accumulated by Nigeria.
The nosedive of oil price has the propensity to weaken naira and will induce the Central Bank of Nigeria (CBN) to prop it up with its limited war chest at its disposal. The weaken naira may trigger inflationary trends that may compel the CBN to increase the interest rate. At the interim, interest rate stood at 12 percent and further increase may make it more cumbersome for small and medium business community to borrow from financial institutions.
With increasing oil production by United States and the creping oil glut in the market. And together with the decreasing importation of crude oil by America, Nigeria and its naira are beginning to feel the pain where it counts especially on its budget and value of its currency.
The naira could not withstand the price nose-diving of oil and has become to depreciate in face to face confrontation with the dominant US dollar. But Nigeria is without exception, other major oil producing countries including Russia, Norway. Canada, Ghana and others are seeing their currencies hit by the overflowing oil production in the market.
“The naira’s drop placed Nigeria among the oil-rich nations hardest hit by a production glut that has prompted a 28% drop in Brent crude prices from their 2014 high hit in June. The ruble also has caused headaches for the Russian central bank, while the Norwegian krone and Canadian dollar also have dropped. Oil and natural gas account for 96% of export revenue in Nigeria and about 80% of government revenue, according to the International Monetary Fund,” as reported by Wall Street Journal showed that oil glut is becoming a threat to oil producing currencies especially those that dependent mostly on oil export for its foreign exchange.
Nigeria’s apex bank, Central Bank of Nigeria (CBN) is now in a mood of fighting to defend and fend off the stumbling and weakening naira from aggressive and hostile speculators. But how long can CBN be in the fight before she concedes and throws in her towel. To be realistic, the battle to prop up and circumvent naira is quite expensive and Nigeria’s war chest is relatively minuscule. Nigeria foreign reserve stood at $39.5 billion compared to Russia's $454 billion, therefore Nigeria’s arm for struggle is not long enough to take on dollar for a quantifiable duration.
"Nigeria has done the best she can do for now to up hold the naira’s value and the country’s “ central bank stepped in Friday to buy the currency after the U.S. dollar shot up to more than 172 naira, traders said, marking an all-time low for the Nigerian currency. The move lower is being driven by concerns that tumbling oil prices would hit Africa’s biggest economy hard. Nigeria is Africa’s top oil producer. Late Friday in New York, the naira recovered to 166.180 against the dollar, compared with 170.215 naira late Thursday", as was revealed by Wall Street Journal.
Although, Nigeria has done a good job in the diversification of her gross national product. It has shown after the country’s rebasing of her economy that the previously unacknowledged sectors of the economy were vibrantly emerging especially the entertainment industry popularly known as Nollywood that has its own share of gdp at 1.4 percent. Nigerian Gross Domestic Product (GDP) that was rebased “by the National Bureau of Statistic has underscored the decline in the contribution of the oil and gas industry to the GDP in recent times. Before the rebasing, the share of crude oil and natural gas to the nominal GDP was 40.86 percent in 2011, 37.01 percent in 2012 and 32.43 percent in 2013. According to the rebased figures, the share has declined to 17.52 percent, 15.89 percent and 14.40 percent for 2011, 2012 and 2013 respectively", as delineated by Business Day.
But the hard reality is that country’s foreign exchange is chiefly derived from oil revenues. And oil accounts for almost 80 percent of the foreign revenue and this must change if a stable value of naira is to be maintained and sustained. Agriculture and Nollywood must be brought to bear for a greater share of country’s foreign exchange to be stabilized. It is not going to be an easy task to make those two sectors of the economy - Agriculture and Entertainment in competition with oil as regards to generating more foreign revenues. To make it possible, Nigeria must employed what I denote as ‘isolation-derived foreign exchange’, whereby Nigeria will concentrate in massive production and enhancement of a particular crop that can bring more foreign exchange than others.
Nollywood has not been given the attention it desperately deserves, because Nigeria is making ease money from the export of oil. Take for instance United States of America makes its second highest revenue from exporting its Hollywood to the rest of the world. Nigerian government can aid Nollywood to market its movies and music abroad by protecting the intellectual property and copyright. Nollywood can garner a sizable foreign exchange when its distribution channels and services are properly delivered and protected by intellectual property laws.
Naira can be protected and enhanced when sources of foreign revenues are diversified beyond oil. With Nigeria's limited resources it becomes a futile task to vend off speculators especially at this time the price of oil is floundering. The country’s war chest in not sufficient and sustainable to rebuild naira, thus becoming a herculean task to keep its value stable when oil is the only major source of foreign exchange. Naira’s sensitivity to the gyrating price, supply and demand of oil will continue until Nigeria diversifies her foreign exchange, a machination that will permanently put naira in a safe and fortified bunker.
Naira the currency of Nigeria that has been known for a while for its stability has experienced a level of weakest that injected a little panic at Forex market and Central Bank of Nigeria. The quick depreciation of naira must be a headache to the Nigerian financial policy makers at Central Bank of Nigeria (CBN) that wasted no time in reassuring the market that Nigeria has an adequate war chest to defend naira from aggressive speculators.
At the last session of Forex market naira was traded at around 164.50 and lately at 161.85 against US dollar. For the record naira has maintained stability at a level hovering around 155-160 against US dollar. Therefore the concern is real and currency warriors at Central Bank of Nigeria are already to fight back and defend naira.
Charlie Robertson, a London based expert and analyst at Renaissance Capital wrote that “Much of the existing investor base – both Nigerian and foreign, and the main companies we saw at our Africa conference in Lagos this week–are concerned about currency weakness–with many expecting a 5-10% depreciation this year, to roughly 167-175/$.”
Yes, Charlie Robertson is probably right, but the anticipating 5-10 percent depreciation may be too much. Somewhere at about 2-3 percent depreciation is reasonable but that is not going to occur and happen because Central Bank of Nigeria will not give into it nor is Nigeria willing to allow naira to slip into such a weakened currency.
One thing going for Central Bank of Nigeria is the moderately accumulated foreign reserve which stood at $42 billion. The deputy governor of central Bank of Nigeria Sarah Alade was emboldened in reminding the speculators and currency traders that Nigeria has the means and courage to intervene on behalf of naira.
Such a statement coming from deputy governor of central Bank of Nigeria Sarah Alade may psychologically impact the market positively and scare away speculators that will realize that Nigeria is ready to intervene if the need be so.
Naira may be attracting currency speculators for many reasons including for good and bad reasons. On a lighter side Nigeria’s naira has the world looking at it more positively because Nigeria has been recognized as a strong emerging market. In addition, the country’s financial house and fundamentals are relatively stable including its macroeconomics. The downside maybe that currency speculators probably feel some signs of weakness and they move in. But Nigeria with $42 billion in foreign reserve can adequately fend them off and defend naira.
The last thing Nigeria would do at the moment is to devalue naira because Central Bank of Nigeria may hold the view that it is too expensive to defend naira. But devaluation of naira will send a wrong message to our trading partners and may even trigger a currency war. Judging from the reaction and reassuring statement coming from Central Bank of Nigeria that is far fetch.
“Nigeria’s Foreign Reserve at $47 Billion. A Strong foreign reserve is good economics.” - AFRIPOL
Beyond its cosmetics largess and intimidating attribute, strong foreign reserve plays a fundamental role in the stabilization of a nation’s currency. In case of Nigeria, the country’s currency which is naira must be stabilized for a healthy and thriving economy to be sustainable. Naira’s stabilization can be functionally achieved when a reasonable accumulation of foreign reserve is met and sustain.
At the interim, Nigeria foreign reserve stood at $47 billion; with naira increasingly stability and rising oil price, the erstwhile depleting external reserve fund have been replenished. In September 2008 the foreign reserve was $62 billion and it was propelled solely by high price of oil. But now the stabilization of naira is coming into a play, thus aiding in propping up the reserve by bolstering strong confidence in the investors, thereby attracting portfolio investments.
The role of naira stability must be treasured for contributing to the appreciation of the foreign reserve. Sound macro-economic stability, essentially the stable naira has open door to inflow of investments especially in the capital market.
Many Nigerians including many high ranking politicians are lately questioning the reason for the accumulation of relatively large foreign reserve by Nigerian government, which was engineered by the country’s financial policy makers. Therefore it makes ample sense that the role of foreign reserve must be readily made available to all Nigerians who are eager to understand how it works. The policy makers at executive branch and at country’s apex bank have not done a good job in communicating to stakeholders – the masses of Nigerians who are surviving with less than $2 a day while country is maintaining a large foreign reserve.
Naira must be protected from fierce and perilous world of currency trading especially from hostile speculators that are bent on making their ‘kill’ without being considerate on the detrimental side effects of their actions.
A strong foreign reserve becomes a bulwark to speculators who will be intimidated by large foreign reserve of a nation. Strong foreign reserve becomes a powerful tool for adjustment of the exchange rate when it deems necessary with regards to the international trade and payments.
Foreign exchange reserve can be used to stimulate export and depressed importation. An export orientated nation with arrays of products to export does not want a very high valued or overvalued currency that may make their products expensive for foreign buyers. In this case, the country will tap into her reserve and buy foreign notes that will lessen the value of her currency.
But to discourage importation, the strong reserve comes into handy too, by buying up local notes that will make imported goods expensive and increased the value of the local currency.
An ample foreign reserve gives a sense of power and security for a nation to be able to manipulate is exchange rate and value at its will and when she deems it necessary.
At the macroeconomics level, a strong foreign reserve is quite significant. When it comes to quantity of international trade and commerce; the regulation of inflation and employment with desirable outcomes could become realizable with strong foreign reserve in the hands of good managers.
United States of America has been complaining that China is manipulating her currency for her own maximum benefit. American politicians and policy makers are concerned about China’s relatively weaken currency that made it possible for China’s products to be cheaper to buy, simultaneously making it more expensive for local Chinese consumers to buy foreign products.
China per say is not doing anything illegal but they are rather tapping into their incredible mind-blowing foreign reserve that may be up to three trillion dollars. With such an enormous and large foreign reserve, one can correctly say that China is manipulating its currency but she is not breaking any laws. China is playing the game to beneficent of her economy. The big problem in this case may be the potential invitation of trade and currency war, such a scenario will not be a welcomed development for the global trade because everybody will be a loser.
As the governor of Central Bank of Nigeria acknowledged, "We need to go into a period of strong and serious fiscal restraints and consolidation. We must continue to build up external reserves and protect the economy from external shocks and focus on the strength and resilience of the banking system. We are building buffers for the economy in the event of external shocks."
That is a well taken point because Nigeria is still a chiefly one commodity based economy. Nigeria’s majority of foreign reserve comes from oil export and a sudden drop in the price of oil will greatly affect the economy and reduce the reserve. It is therefore logical and necessary for building up of reserve to continue, for nobody knows how long the price of oil will stay up. Nigeria without diversity of the economy is still hanging by the thread whenever the price of oil nosedives.
Nigeria’s quest to become a major industrial economy by 2020 or 2030 requires a sound macroeconomics. Therefore the importance of an enabling foreign reserve cannot be overemphasized. A strong economy is an economy that has the financial and economic tools needed to set its agenda, bring it to fruition and to be sustainable on a global scale despite competition. Therefore in today’s Nigeria and in the future, a strong foreign reserve is inevitable.
We all wake up one bright morning; the next thing we heard was that Sanusi’s Central bank of Nigeria (CBN) will introduce a 5,000 naira banknote in the circulation in nearest future. The most perplexing question that begs for an answer is when and why CBN arrive to this decision to print such a large denomination without adequate consultation and research analysis. Although CBN is an autonomous institution, it still own certain explanation to Nigerians on the strategic importance and impacts of its decision and on how the country can benefit from it.
Sanusi’s CBN have for a while been worried about the increasing inflationary trend in the economy. To that effect the country’s reserve bank has gone about it by raising the interest rate to more 12 percent to combat rising inflation. Now in a split of second they chose to rubbish their good work with this incoherent policy decision. By printing a large denomination of naira notes, the value of the naira will nosedive while inflation will gain momentum and that can be disastrous to the economy. Sometimes, our policy makers especially those of them that are making important financial decisions act like those that do not grasp the fundamentals of monetary and macro economic theories. One cannot quench a burning fire by throwing kerosene into it. How can you tame inflation by application of tools that will make it worse than before? I am totally disappointed with Central Bank of Nigeria.
Does Nigeria desire to make naira become worthless akin to Zimbabwe currency that is miserably worthless? Is Nigeria policymakers ever ‘chill out’ and think critically on how their decisions may destroy the house they are trying to build. These impulsive financial and monetary decisions were what wrecked the economy of Zimbabwe. Nigeria is tilting to the path of Zimbabwe economic gulag where hyperinflation and incoherent economic decision will doom the nation’s economy.
one hundred trillion Zimbabwean dollar bill sits atop a pile of other old Zimbabwean notes of various denominations.Photo: TSVANGIRAYI MUKWAZHI / Associated Press
It may be incredulous to believe but it was in a record that Zimbabwe printed the largest banknote denomination of 1oo trillion dollar bill. Zimbabwe with its fool’s decision demolished their agricultural based economy with massive inflation. And restored to printing large banknotes to control inflation which made worst of the situation.
Nigeria has everything going for it in terms of steady influx of foreign exchange it derived from the continuous sale of oil. Even with that phenomena naira is still soft and malleable when compared to other similar economies of Nigeria’s standard. Most of country‘s problems from their quick and unsound decisions that comes from their political and policy makers come from the country’s supposedly best and brightest who should have known better.
Nigeria has produced capable men and women that can affirmatively transform their countries. Yet Nigeria is obsessed from getting counsel from international bodies that are not working on the interest of the country. No one is implying or accusing any international body of making Nigeria to print large bank notes, but one thing for sure, self doubt and self negation made Nigeria to sort advice from outsiders whom they believed that are more intellectually superior to them.
There are perilous cultural and economic ramifications that may likely come from the printing and introduction of 5,000 naira note into the circulation. First and foremost it will be an inducement for Nigeria to progressively print larger banknotes, today it is 5,000 and next time it will be 10,000 naira note until naira become worthless.
The cultural implication is quite enormous; already Nigeria has a problem with corruption, money laundering and bribery. The large banknotes will be a powerful facilitator for bribery and corruption and that is not the intended purpose of CBN. It will not make it easier for the fight against corruption to see the light of the day.
Finally, the so-called cashless society that CBN is gearing up to implement may not materialise by printing more currency with large denominations. It is illogical to be printing such a large note, while simultaneously setting up a cashless system, for that is an apex of irrationality.
Emeka Chiakwelu, Analyst and Principal Policy Strategist at Afripol Organization.
Addressing journalists in Abuja, Chairman, Senate Committee on Banking, Insurance and other Financial Institutions, Senator Bassey Edet Otu, said that it had become imperative for Senate to put a halt to the new CBN arrangement because a project of this kind required parliamentary approval, adding that the upper legislative chamber was never briefed prior to the announcement of the soon-to-be introduced note.
"As a committee, we should do our work. This morning there is a burning issue that is going on in our country and there is need for us, as a committee, to comment on this topical issue. I am the chairman of the Senate Committee on Banking, Currency and other financial institutions.
"We have also read in the papers just like you about the currency restructuring that the CBN embarked on. I believe that a project of this nature requires parliamentary approval because there are numerous and fiscal implications on the entire economy," Senator Otu said.
The CBN governor had on Thursday, last week, announced the introduction of a new currency series where the existing denominations of N50, N100, N200, N500 and N1,000 will be redesigned and a new note of N5,000 introduced.
According to Sanusi, the front face of the new highest denomination will be adorned with the pictures of three women activists - late Margaret Ekpo, Funmilayo Kuti and Hajiya Gambo Sawaba, while the back side would have the National Assembly structure.
Speaking further, Senator Otu warned the CBN to be very careful in taking some decisions that would worsen the nation's economy and send wrong signal that Nigeria's currency was valueless. He stressed that the country did not deserve this policy since the nation was not in a major crisis.
According to him, "this type of action is only taken where there is a major crisis and the CBN must be very careful in order not to send a wrong signal or message to households, domestic sector and even the external ones that the Nigerian currency is valueless, which I believe it is definitely not, and that for every unit of value they need to carry a large quantity of cash.
"The CBN in 2008 and 2009 came up with a proposal to re-denominate the currency, that was even to take off the zeroes. This was just 2008 and 2009 and here we are in 2012 we are seeing a kind of policy somersault even though we understand the dynamics of the sector very well. I believe that we have to be well briefed on this.
"Also in 2005, the CBN undertook a major currency restructuring which ran into billions of Naira.
"Till date, a proper value has not been done to know its costs to the Nigerian tax payers and the extent of the benefits and in that 2005 coinage, I think it did not work at all because both the goldsmiths and the blacksmiths converted the coins to moulding bangles, earrings, etc.
"So, we believe that the coinage works very well where there is infrastructure to take it like a half, probably like a parking where you go and put it, etc. We have not developed that real basic infrastructure and those coins, most of them, are nowhere really to be found.
"The CBN will have to prove that the policy is not a clear contradiction or at variance with cashless society, which they are even yet to justify and whether this is the popular economic way to go. We are asking and we are sending a letter to them to stop all further actions on this until the senate of the Federal Republic is properly briefed."
Asked if the CBN informed the Senate prior to the decision, Senator Otu said: "Well, we have not been properly briefed yet, so I would not know. We do not know the reason for it, even though at the moment we do know that inflation is a problem, but I don't think that they have used all the mechanisms to tackle it and it is not really out of hands.
"There has not been any meeting with the CBN yet. This is a major policy issue and there is no way this kind of thing can go on without us knowing everything about the details in order to know how it will affect the people of Nigeria."
On what section of the constitution the Senate was relying on, he said: "We are not really going to rely on laws per se, what we are trying to do here is what is best for the Nigerian people. The Senate is not really against the independence of the CBN, but what we want in place is proper check and that there should be checks and balances in all these things that we do.
"So, I believe that at some point we will be able to sit down together and look at the merits and demerits, but till date we do not know anything about it and we do not know what the people stand to gain and until that is properly put through, we say everything about it must stop."
Source : Vanguard
The appreciation of naira is due to relative mass inflow of dollars into the exchange market. Due to dollar sales by oil companies and Central Bank of Nigeria the Nair's buoyancy is likely to continue expect fiscal expenditure and monetary interruptions. The conditional naira's appreciation is tactical move that lacks elongated strategic planning. Naira value should rest on a sound economic outlook and economic output not on temporary fix as inflow of dollar suggested.
When the Federal government of Nigeria's over blotted budget kicks in and the price of oil comes down, it will affect the rising value of naira. The partial removal of subsidies may be aiding the value of naira as a source to replenish reserve but the possibility of disturbance have not been put to rest as the government continues to negotiate with the restive labour.
The scope and sources of inflow of foreign exchange into the market must be expanded and that is possible when the economy have arrays of products to export in order to generate ample foreign exchange. The limited source of dollar from oil export cannot do the trick and the economy with its structural imbalance cannot sustain the appreciating naira. Therefore naira has not arrived home safe nor is it possible to refer to naira as a strong currency.
Bloomberg reported that "The currency of Africa’s biggest oil producer appreciated 0.2 percent to 157.9 per dollar as of 10:27 a.m. in Lagos, the commercial capital, rising 0.6 percent this week. A close at this level would be the highest since Nov. 8, according to data compiled by Bloomberg."
This latest appreciation may not be an indication that the good days for naira is back again. The gaining by naira is not anchored on strong fundamentals of Nigeria's economy but rather on the momentum engineered by sales of dollar by the oil companies and the country's Federal Reserve Bank, Central Bank of Nigeria (CBN).
Apart from the recent gaining made by naira, the strengthening is probably temporal and conditional. It is conditional because the inflow of dollars may not be sustainable but when the inflow of dollar and its source flow decelerated, naira will return to its original standing. Naira is relatively a weak currency when it stand toe-to-toe to dollar especially when the oil companies and Central Bank of Nigeria supply of dollar ebbs and diminuted
"Nigeria has sold $600 million at two foreign-currency auctions this week, the largest amount sold in five days by the central bank since October. The bank offers dollars at twice- weekly auctions to maintain exchange rate stability. The oil industry is the next major source of dollar supply to lenders after the central bank," according to report coming from Bloomberg.
Speaking on enhancing the value of naira, Emeka Chiakwelu, Principal Policy Strategist at Afripol emphasized that sustaining naira's appreciation must follow an unambiguous standard of operation and pathway methodology that will make a real difference on the value of naira. Chiakwelu restated that, "The country's reserve stood at US$ 32.64 billion in December and the inability to replenish the dwindling reserve in spite of high price of oil was due to the constant defense of the weaken naira."
And he further stated : “To enhance the value of naira the country's war chest must be strengthened in order to withstand the threat coming from speculators. The CBN has eventually restored to the devaluation of naira up to N160 to $1. But the bulwark is not the panacea because it is focusing on the symptoms of the problem not on the root cause. The country does not produce arrays of agricultural and finished products to export in order to raise a quantifiable foreign exchange that can make naira stronger and that can discourage currency speculators."
The problem with Sanusi's Central Bank of Nigeria (CBN) is not coming in tune with the big picture but rather embracing piecemeal methods to fix naira. There must be a long term and comprehensive planning that will bring together the executive, legislature and CBN together. The appreciating naira in three weeks sounds good but to bring about a strong naira that is sustainable needs more work. The fiscal and monetary policies should be in tune with one another and more importantly a strong currency is a reflection of a country's economic wellbeing.
The midpoint of the naira target band was lowered to 155 per dollar from 150, Governor Lamido Sanusi told reporters in the capital, Abuja, yesterday. The benchmark interest rate was left at a record 12 percent.
The Central Bank of Nigeria had raised its key rate at every meeting this year until yesterday, boosting it by 2.75 percentage points on Oct. 10 as inflation pressures mounted. Slower economic growth in Africa’s most populous nation and concern that oil prices may decline as the global recovery wanes gives Sanusi room to keep borrowing costs on hold.
“Monetary tightening was ahead of the curve and had been somewhat front loaded,” Adedayo Idowu, an analyst at Vetiva Capital Management Ltd. in Lagos, said in an e-mail. The bank is “exercising deliberate caution in providing a soft landing for the domestic economy should global risks materialize.”
Nigeria’s economic growth slowed to 7.4 percent in the third quarter from 7.7 percent in the previous three months as oil output eased, the statistics office said on Nov. 15. The price of oil plunged 13 percent in New York in the first nine months of the year.
‘Too Much’ Tightening
“We need to be very careful about how much tightening is too much and how much tightening is too fast,” Sanusi said.
Interest rates have been increased this year as inflation climbed above the central bank’s 10 percent target. Consumer prices rose 10.5 percent in October, up from 10.3 percent in the previous month, according to the statistics office.
Price pressures may increase next year as Nigeria prepares to remove a subsidy on fuel that costs the government $7.5 billion a year. The central bank will act to contain any “second-round” impact on inflation from the price shock, Sanusi said.
“It is clear from the Central Bank of Nigeria statement that monetary policy will remain tight in the interim,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mail. This is the case “especially if fuel price subsidies are lifted and a secondary effect is evident.”
The central bank, which manages the exchange rate by selling foreign currency at twice-weekly auctions, has been struggling to keep the naira at its official target of 3 points above or below 150 per dollar. The rate at yesterday’s auction weakened to 155.21 naira per dollar. The naira fell 0.3 percent to 159.325 per dollar on the interbank market as of 9:16 a.m. in Lagos today.
“The market is already there, we haven’t moved away from where the market is,” Sanusi said. “The investor wants to know how the naira is likely to move within the investment horizon, and what we’re trying to do is to provide the right anchor for expectations.”
The International Monetary Fund (IMF) is an organization founded with a prime objective of stabilizing international monetary exchange rates and facilitating development through the application and enforcement of liberalizing economic policies to its 187 member countries which includes Nigeria.
This time around IMF has definitely proven to us that its recent prescription for Nigeria to devalue her currency naira is not based on sound and logical economic proposition. Not that any time in the past that IMF monetary recommendations on and for developing economies have been logical. In the 1980s when many developing nations especially in Africa were cash scrapped and were in deep recession they turned to IMF as a lender of last resort. The period marked the nadir point of haplessness in Africa due to IMF‘s structural adjustment program known as conditional ties given to these countries before they could be eligible for the loans they were asking from the institution.
Nigeria this time is not asking for any intervention from IMF. The economy of Nigeria is growing progressively at above 7 percent and naira is relatively strong and stable. The weak point that can be perceived from the economy is the growing deficit trade especially from China, rising inflationary pressure and continuous depletion of the crude account by excessively withdrawal. Even with that Nigeria has a substantial foreign reserve which falls to U.S $33.12 Billion in January. But thanks to rising oil price the reserve will commence to replenish and grow.
The volume of the foreign reserve is not bad by any standard especially with regards to the country‘s GDP which was growing at 7.4 percent in first quarter 2011. The point is that Nigeria has adequate war chest to defend naira and ward-off aggressive currency speculators. Therefore IMF suggestion that currency is overrated has no basis for Nigeria can defend her currency standing in the global currency market. Moreover the local high demand of dollar has become a check on the value of naira.
Dominique Strauss-Kahn, Managing Director International Monetary Fund (IMF)
Afripol organization experts discussed the issue of IMF and naira’s devaluation. Afripol concluded that there is absence of monetary logicality for devaluation of naira.
Gideon Nylan, an expert on political economy of developing nations at Afripol, concluded, "The Nigerian middle class has yet to recover from the IMF devaluation of 1986. Suddenly teachers, lawyers, doctors, and civil servants saw their life savings disappeared. In order to support their families and create a better living for themselves, they left the country for greener pastures in other countries."
Emeka Chiakwelu, Principal policy Strategist at Afripol commented, "Bretton Woods institution (IMF) asking Nigeria to devalue her currency is akin to throwing kerosene to a burning fire. There is no logic to that, Nigeria’s currency has already been steadily diminished by the rising inflation and further devaluation is contrary to a sound economic judgment."
Chiakwelu noted that, "IMF should be in business of enhancing an economy by giving logical counsel not by depreciating methodology. IMF has the power to increase Nigeria’s special drawing rights (SDRs) and including naira into ‘basket of currencies’. Instead IMF chose to play a role that will be increasing the price of foods and raw materials in Nigeria by devaluation of naira. "
Beware of Trojan horse coming as IMF helping- hand because history has proven that it has severe ramification. What will be the justification for Nigeria to devalue her currency?
The economy is not wholly export base except crude oil and the economy is not diversified with array of manufactured products for export. The logic of devaluation is to induce and increase export by lowering the prices of local manufactured products making them attractive for export. But that is not the case with Nigeria, a mono-product exporting country, crude oil which generates about 90 percent of the country’s foreign exchange. By devaluating naira the price of oil will nosedive and country’s foreign reserve will dwindle, while the incentive to buy Nigerian fiduciary bonds and securities in international market will depreciate.
To be factual Nigerian currency naira has already be weaken by rising inflation. At this point in time the inflationary trend is gradually creeping into the monetary base and with that naira is gradually but steadily losing its ground. Therefore what is logic of further devaluating a currency already weaken by rising inflation and by so doing summon a hardship that will be felt by majority of Nigerians. Most of the products and materials utilized by final consumers and raw materials in Nigeria are mostly imported from abroad. With the devaluation of naira importation and oversea products will become more expensive and out of reach of majority of Nigerians.
Devaluation may discourage importation and foreign products in Nigeria as a result of the subsequent appreciation of foreign currencies for trading notably dollar as naira loses value. But with that Nigeria may not gain or take the advantage because the economy is not diversified and our local production is still at the rudimentary stage. Nigerian industries are still dependent on foreign expertise and raw materials to function at a reasonable capacity and with devaluation of naira the prices of dollar and pound will soar with relative to naira. Subsequently, it will have adverse effect in our growing local industries. The prices of food and agricultural products will be high away beyond the masses in a nation where 70 percent of the population survived with less than two dollars per day.
African experience in 1980s with IMF left a bad taste in their mouths, when the cash strapped African nations turn to IMF for credit. It became a disaster for Africa and the consequences of Africa's entanglement with IMF sow the seed for economic depression in today's Africa. IMF‘s conditional ties for loans were so stringent for these nations to swallow. It was called structural adjustment programs which will supposedly reform the economies.
The pathways to IMF’s structural adjustment initiative were paved with hardship and misery. These nations, poor nations of Africa were compelled to cut their spending drastically without putting into consideration the suffering of the masses especially women and children. On the wise counsel of IMF and its Ivy League experts African nations devalued their currencies on the grounds that it will increase export. They failed to see that most African nations were not producing anything but relied on agricultural crops and donors to finance their budgets. With the devaluation the price of crops decline sharply on the international market and Africa’s yoke enhanced.
The criteria for obtaining loan by devaluation of currency coupled with neo-liberal economic policy based on liberalized trade and open market was once IMF prescription for Nigeria in 1980s. At that point in time Nigeria was being heaped with foreign debt and was falling behind in the service of her foreign debt. Thus it became difficult, if not impossible for the country obtain line of credits unless the swallow the austerity measures given by IMF. The consequences were annihilation of infant industries and untold hardship of average Nigerians. The problem of Nigeria then was more of mismanagement and misplacement of priority.
But that is not the case with the present Nigeria that is not seeking any loan or aid from IMF. Nigeria GDP is bulging with economy projected to grow at more than 7 percent in 2011, although with vulnerabilities of inflation and excessive spending and depletion of foreign reserve. The withdrawal may make sense because the country needs to defend the value and stability of naira from international and aggressive speculators.
Nigerians for one moment can walk a little taller, knowing quite that the caliber of men and women at Central Bank of Nigeria (CBN) led by Governor Sanusi Lamido are willing to stand up when necessary and defend the economic and financial interest of the country.
Nigeria's Strategic Blunder
Nigeria has so far achieved theoretical quantitative macroeconomic fundamentals, but a lot needs to be done particularly on stabilizing her bearish Naira currency. Although Naira is relatively stable, it is weak and soft when you compare it to other major currencies like dollar and euro. Presently Nigeria is having one of the lowest debts to GDP ratio in the world. This is attributed to her recent payment of foreign debt and the reasonably macro-economic stability she achieved through economic reform measures with a huge foreign reserve. Yet the value of Naira continues to be depressed.
Nigeria's financial and economic community is quick to point out that the fate of Nigeria's currency Naira - the gyrations, floundering and nose-diving is the ramification of global economic meltdown. This is not entire the case, we can recollect couple of months ago that Nigeria was celebrating because Merrill Lynch, an international investment banker rated Nigeria as one of the top ten nations that were safe for investment. The rating may be incredible - "at least to anyone living in Australia, much of Europe and U.S. -- because it ranks Nigeria (where the per capita GDP happens to be a paltry $2027 a year) as the safest economy in the world, which certainly seems like a stretch given it's the 38th-largest economy in the world and 137th when based on per capita GDP -- not to mention it suffers from social unrest."
So with this highly publicized rating one can extrapolate that the Naira is out of harm's way, from the tumbling of the global economic downturn. The subsequent dramatic falling of Naira cannot be justified for Nigeria's economy is not wholly exposed to floundering of world market.
Nigeria may be perceived to be safe because she has not really submerged in the mainstream of financial and economic globalism. Nigeria has not met the criteria to be fully vigorous and integrated player in the world trade theatre; Nigerian economic indicators and metrics including statistics, benchmarks and indices on the economy is the testament of the country's inactivity on international stage. Again Nigeria does not have a credit based economy and lacks the serious capitalists and capital to be among the chief players in the global trade.
So, why is Naira falling? The currency Naira is falling due to both tactical and strategic blunder.
Nigeria's economy is fragile and weak because Nigeria operates one commodity based economy, which is oil, a major source of her foreign currency.
In the short range, Nigeria is obsessed with easy money of oil trading and out rightly rejects the growing diversifications of her economy she initiated. A great nation like Nigeria has refused to grow her economy with all the natural and human capital at her disposal. Nigeria exports the crude oil to developed nations who refines the oil and Nigeria will in turn buy back the refined oil from the outside and subsidize the gasoline for local consumption. The oil refineries are not performing at an appreciable and optimum level, instead they are abandoned to waste away for Nigeria lacks maintenance culture.
This logic, mindset and modus operandi towards wealth creation forges and set the stage for the scarcity of dollars.
Forces of Demand and Supply
The Naira demand and supply is determined by the market forces because Naira is allowed to float without any fixed exchange rate. The relative weakness of Nigeria's entire economy does not seem favorable to the status quo. The GDP is relatively small compared to industrialized nations and this negates the stability and international purchasing power of Naira. The amount of importation overwhelms the economy and a low return of foreign exchange due to lack of exportation to generate foreign exchange.
The crux of the matter is the demand for dollars are extremely high among Nigerian banks. Nigeria does not generate enough foreign exchange to satiate local consumption. Therefore the demand for dollar drives the value of Naira that is ubiquitous and weak. Nigerian source of dollars and foreign exchange comes only from the export of oil and its overdependence for foreign exchange from oil.
The psychology of the meltdown
The psychological impact of the global economic downturn must be appreciated. With global access to the international news networks including CNN, BBC and others remote corners of the earth become nominal partakers in the global village. Therefore pseudo feeling of the bad news might creep into Nigeria's mindset and usher in a psychology that may trigger the fall of naira in the real world.
What Nigeria must do
As the value of Naira nosedives, Nigeria has another alternative to prop up the Naira by withdrawing her huge war chest - her enormous foreign reserve and liquefy the financial and banking market. This is a delicate tactical action because drawing down of the reserve can lower Nigeria's credit worthiness and financial rating.
Nigeria's financial actors cannot fold their hands and blame this whole sorry episode on the global economic meltdown. Naira as currency is not readily convertible which becomes a barrier in the active participation in global trade especially in currency transaction.
The governor of central bank deserves some credit for his early vision. Professor Soludo has called for pegging of Naira by making it convertible but Nigeria's gatekeepers failed to heed to his recommendation. But it is never too late to act, for there must be a consensus on this matter via enlightenment of the Nigerian public and elites on the merit of readily convertibility of Naira. Convertibility is akin to setting up a wall in the defense of Naira from hostile local and international currency traders that hoard dollars in Nigeria thus creating artificial demand and scarcity of dollar.
Nigeria must make foreign exchange available to its local banks. The banks need the dollar for its customers who are engaging in foreign transactions. At the moment Nigeria need to withdraw some money from her foreign reserve, which will be pump into the market which will definitely reduce the scarcity of dollars. This will in turn enable Naira to regain some of its value and withhold the trashing from dollar. But all this is a temporary measure and not the panacea to a healthy and sustainable currency.
Nigeria has become responsive to the diversification of her economy, not minding she has a long way to go. The country knows what to do, but procrastination and intellectual lethargy have always retarded her progress. Oil cannot continue to be her only high yielding sector; agriculture must be expanded and retooled. Investment must be made in research and development.
A paradigm shift
There must be strategic planning by the responsible parties in Nigeria: The politicians, business community and bureaucrats must stop talking and launch operation economic diversification. The economic reforms must be practical and pragmatic to the marketers and citizens.
Fiscal and monetary policies can be applied to regulate and appreciate naira but it is not doable and workable, for although the fundamentals of the economy may be sound but it lacks the stability and zest to leverage against the dominant dollar.