Nigeria May Devalue Naira Against Dollar high RiseNigeria’s central bank abandoned weekly foreign-exchange auctions, a key part of managing the local currency, effectively devaluing the naira for the second time in three months.
Supporting the naira through dollar sales at the auctions was draining foreign-exchange reserves without benefiting the economy, the Abuja-based Central Bank of Nigeria said in a statement on its website on Wednesday, after the gap between market and auction rates for the currency widened to a record on Feb.
CBN Governor Godwin Emefiele announced the devaluation of the naira. Reverberating effects to economy are expected because of gamut of pronouncements like increasing Monetary Policy Rate (MPR) to 13 per cent, the adjustment of the Cash Reserve Ratio (CRR) for Private Sector Deposits and others.
The 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 raise 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 be unrealisable of two variables – the falling oil prices and lower crude production aggregate.
In the developed nation’s 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 position with Nigeria.
“This is an effective devaluation of the official Nigerian naira exchange rate,” Razia Khan, the London-based head of Africa research at Standard Chartered Plc, said in an e-mailed note. “This is positive news, and should create more transparency in the Nigerian market.”
The naira gained 0.3 percent to 199 per dollar by 6:06 p.m. in Lagos, rallying for a third day out of four after falling to a record low on Feb. 12.
The central bank, which devalued the naira in November, has attempted to stem the currency’s decline by introducing measures to dry up foreign-exchange trading. The naira has slumped 19 percent in the past six months amid a slide in the price of oil, which accounts for 90 percent of Nigeria’s export earnings and 70 percent of government revenue.
“With reserves declining every day and seen to affect the nation’s ratings, the central bank took the right decision,” Sewa Wusu, head of research at Sterling Capital Markets Ltd., said by phone from Lagos, the commercial capital, on Wednesday. The move amounts to “a tactical devaluation of the local unit, without having to make the announcement,” he said.
Legitimate Demand
Demand for foreign currency must go through the interbank market, Ibrahim Mu’azu, a spokesman for the central bank, said in the statement. The central bank will continue to intervene to meet legitimate demand, he said.
Weekly foreign-currency auctions “continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public,” Mu’azu said. “It has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves.”
The regulator has depleted reserves to their lowest in more than three years to defend the currency. The central bank’s official target band for the currency is 159.6 to 176.4 per dollar, though it sold $401 million at 198.5 per dollar in an unscheduled auction last week to help stem the naira’s rout.
‘Truer Rate’
“It’s become clear in recent weeks that the run-down in foreign exchange reserves is untenable,” David Cowan, an Africa economist at Citigroup Inc., said by phone from London. “It’s good for the Nigerian foreign exchange market. A movement away from a multiple to a single exchange rate regime is better for the market and makes for a truer exchange rate.”
The Monetary Policy Committee is due to meet next on March 23 and 24, less than a week before the country holds a presidential election that was postponed from Feb. 14.
Nigeria’s foreign exchange reserves stood at $32.7 billion as of Feb. 16, down 22 percent on a year ago. Nigerian stocks have dropped 23 percent this year in dollar terms, the most among 93 primary equity indexes after Ukraine.
Is there any escape-route? Certainly, but the question remains if Nigerians have been sufficiently sensitised to brace for this situation.
FRENCH VERSION
Soutenant le naira par la vente de dollars aux enchères était épuisant lesréserves de devises étrangères sans bénéficier de l’économie, la Banquecentrale Abuja du Nigéria déclaré dans un communiqué sur son site Internet mercredi, après que l’écart entre les taux de marché et de lavente aux enchères pour la monnaie s’est creusé à un record sur février.
Gouverneur de la CBN Godwin Emefiele a annoncé la dévaluation dela naira. Effets de réverbération d’économie sont attendus en raison de la gamme des déclarations comme augmentant le taux de politiquemonétaire (MPR) de 13 pour cent, l’ajustement du Ratio réserve Cash(CRR) pour les dépôts du secteur privé et d’autres.
La dépréciation de la naira conduira à une chaîne de réactions, dontbeaucoup peuvent ne pas avoir les résultats appropriés, car l’économienigériane dépend principalement de l’huile.
Naira dévalué conduira l’exportation de produits locaux, qui n’existentpas dans le volume requis pour l’instant, mais créera un fardeausupplémentaire sur la populace, la raison étant que le coût desconsommables, tous les niveaux, s’intensifiera.
Comme la conséquence directe de l’augmentation du taux base auraitaugmenté le coût des fonds prêtables. Dans ce cas, le développementsera contre-productif et contre la poussée du plan vanté par legouvernement pour créer des emplois.
Il y a l’espoir que les recettes du gouvernement, en termes de nairaseront déplace vers le haut, en raison de la disparité large taux dechange entre le dollar et la monnaie locale. Mais le point doit être faitque cette attente peut être irréalisable de deux variables – la chute desprix du pétrole et la baisse de la production brute totale.
Dans le pays développé lorsque les monnaies sont dévaluées, c’estd’encourager les exportations, car les prix des produits locaux serventune incitation et un toast pour les acheteurs étrangers. Dans leprocessus, ils obtenir des devises, augmentent la production et créentdes emplois supplémentaires. Malheureusement, ce n’est pas la positionavec le Nigeria.
« C’est une dévaluation efficace de taux de change naira nigérianofficiel, », a déclaré Razia Khan, chef de recherche d’Afrique auStandard Chartered Plc, basée à Londres dans une note par courrier électronique. « C’est une nouvelle positive et devrait créer plus detransparence sur le marché nigérian ».
