Just few weeks after the Central Bank of Nigeria (CBN) raised alarm that Nigeria’s economy was sliding into a recession, and may hit full recessionary period in 2016, if measures were not put in place to boost the rate of growth, the former governor of CBN, Sanusi Lamido Sanusi, has called for further devaluation of the Naira.
While Sanusi stressed that further devaluation of the local currency becomes necessary to absorb shock in the system, as the economy is currently in a slow down, the current CBN’s governor, Mr. Godwin Emefiele, said earlier that another devaluation of the Naira will bring a telling effect on the economy and severe hardship for the citizens.
He explained that the CBN initially devalued the naira by using monetary policy to address the seeming economic crisis in the country, as a result of falling oil prices. He added that the local currency was devalued in an attempt to manage exchange rate, in order to ensure stability in the system.
In the same vein, the World Bank has raised alarm over the state of Nigeria’s economy, saying pragmatic steps must be taken to shore up the economy, in order to prevent it from going into a recession.
Expert’s opinion:
In a chat with Sunday Vanguard in Lagos, the Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, said, “My view is that the CBN’s approach to management of the forex market has created more problems for Nigeria’s economy than it has solved. The reason being that, it has not resulted in transparency issues in forex allocation; stopping of round tripping because of the huge disparity in rates; liquidity problem, as it is very difficult to access foreign exchange, even for items that are valid for forex. There is absence of a level playing field and there is uncertainty in the system, as the forex market has become very unpredictable.”
He explained, “Our country’s risk rating has also taken a hit. It has had a profound negative effect on many businesses in the country.The CBN had fixed an exchange rate, which the apex bank itself lacks the capacity to support in terms of supply. Its policies also represent a major obstruction to inflow of autonomous foreign exchange. It is a very unusual model. The CBN got itself needlessly entangled in a complex web of trade policy issues, which have caused varying degrees of dislocations for investors in the economy across the broad spectrum of large, medium and small enterprises.”
“My submission is that the CBN should return to status quo and focus on creation of a foreign exchange market that is efficient, transparent, predictable and market driven, to enhance economic growth and development. The apex bank should thereafter work in concert with other economic ministries like Finance, Trade and Investment, Planning Commission and the Nigeria Customs Service (NCS) to articulate fiscal policy measures to fix sectoral, productivity and competitiveness issues in the economy”.
Naira devaluation and investments outflow:
Moreso, the economy has experienced huge investments outflow following declining oil prices and devaluation of the naira. Already, investors have pulled investments estimated at a monetary value of N4.9trillion from the economy, even as more foreign investors withdrew N846.53 billion investments from the Nigerian Stock Exchange (NSE), due to what they described as uncertainty in Nigeria’s economy.
Naira devaluation and exchange rate:
When Sunday Vanguard visited some Bureau de Change (BDC) outfits within Lagos metropolis, it was observed that the naira currently exchanges for between 215 and 220 at the black market, while the inter-banks rate is about N197 to 1$. The CBN carried out the first stage of Naira devaluation in the last quarter of 2014 fiscal year, as oil prices fell at the international market and the government announced austerity measures to tax people enjoying luxury goods in the country. The CBN then devalued the Naira from N155 official exchange rate to N168 per dollar, increased lending rate from 12 to 13 per cent and the Cash Reserve Requirement (CRR) for private sector deposit from 15per cent to 20 per cent.
The economic implication of the Naira devaluation was instant depreciation of the Naira, as exchange rate increased from N155 to about N230 per dollar at the black market, and people began to pile up dollars in their houses. Also, entrepreneurs, especially manufacturers dealing with imported raw materials experienced high cost of getting materials for production, following the depreciation of the Naira.
It could be recalled that in the last quarter of 2014, the International Monetary Fund (IMF) had predicted slow growth rate for Nigeria in 2015. The IMF prediction was based on events that surrounded the economic front, from the drop in oil prices to declining foreign reserve and insecurity in some parts of the country, preventing inflow of Foreign Direct Investments (FDIs) into Nigeria.
Statistical overview of declining oil prices from 2014 last quarter to 2015:
The crude oil prices declined from over $120 per barrel in the last quarter of 2014 to $100 pb; from $100 to $85pb; from $85$pb to $80; from $80pb to $73pb and from $73 to $54pb. Another resultant effect of falling oil prices on the economy was a slash in 2015 budget by N235 billion, from N482 trillion to N466 trillion, as against N4, 724.69 in 2014. The Finance Ministry also approved $5 per barrel reduction in 2015 budget benchmark from $78 to $73 per barrel in line with the economic realities. At present, there is so much uncertainty in Nigeria’s economy.
The way forward:
For economic experts, the way forward is to diversify the economy into non-oil sectors to develop the real sector, saying that the shock the economy is experiencing now is the aftermath of the drop in crude oil prices, which started in the last quarter of 2014. Government has also been advised to ensure proper coordination of fiscal and monetary policies to move the economy forward, even as government should begin to address fiscal imbalance in the system.
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