Naira Devaluation: Good Policy With Grave Implications

July 20, 2020
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As the monetary authorities advance in the unification of the exchange rates by devaluation of the Naira, experts warn of its implications on the economy,MARK ITSIBOR writes

The date was July 10, about three days after the Naira was devalued from N360/$1 to N380.5/$1 at the official window by the Central Bank of Nigeria (CBN) and Barrister Sani Kanabe had gone to the Computer village, a popular electronics market in Lagos to purchase a used black and white 3-in-one printing machine. “I was surprised when the shop owner said he cannot sell it below N48,000 despite much plea for a reduction in the price,” he said. Before the devaluation of the Naira on the heels of the control opening of the markets due to Coronavirus induced lockdown in most parts of the country, the scanning and photocopy machine was sold for N35,000.

The official devaluation of the Naira by N20 obviously has spiral effect on prices of general goods, especially imported products like vehicles, computers, furniture, home appliances, drugs and other medical equipment. Survey by LEADERSHIP on prevailing market prices between July 7 2020 when the local currency was devalued and now showed that the prices have increased.

For instance, an America used Toyota Corola car 2012 (direct tokumbo) that was selling for between N1.9 million and N2 million before the devaluation, is now sold for between N2.2 million and N2.4 million. Also, a London used medium sized laptop computer that was selling for N40,000 is now sold for between N60,000 and N65,000. Some dealers on the products who spoke with our correspondent say they have to raise the price to have the Naira equivalent of the amount needed to purchase the items in Dollars.

The devaluation of the Naira from 360/$1 to N380.5/$1 at the official market is part of efforts of the Central Bank of Nigeria (CBN) to unify the exchange rates in the Importers and Exporters (I&E) window. But is the justification for the reduction in the market value of the Naira worth its negative impact on the nation’s economy?

Some industry experts who spoke to our correspondent on the development expressed mixed reactions on the matter, saying while it has potentials for increasing naira inflows into the federation account, leaving the fate of the Naira entirely to market forces has grave implications for a mono product economy – crude oil, as the principal source of foreign exchange. Obviously, the move has advantages as well as negative ripple effect on the nation’s economy.

On the downside, with oil revenue accounting for over 90 per cent of foreign exchange, the unification of exchange rates means that the dollar-denominated components of government spending will now be done at a higher exchange rate. So, it puts pressure on the local currency as more naira will be needed to make government purchases. Despite pronouncements and warnings to diversify the Nigerian economy by focusing on other growth enhancing segments of the economy, including agriculture, mining, telecommunications among others, the authorities are yet to turn the hand of the clock and turn the nation to a production based one, rather than its current status as a consumption based economy.

The general agreement is that the revaluation of the Naira will increase the rate of importation and so many industries will be shut down as they may not be able to import some raw materials.

Professor of Finance and Capital market, Uche Uwaleke said the currency devaluation makes the 2020 budget unrealistic and unachievable having been based on exchange rate of N360 per dollar and by extension the recently-approved Medium Term Expenditure Framework.

Besides that, the essential items that have enjoyed access to forex at the official subsidised rate such as petroleum products imports will have no choice but use the single market for forex. The fear is that the devaluation could lead to a further increase in the pump price of petroleum products. The federal government recently announced an increase in the price of the commodity to N143.5 per litre of petrol.

“The immediate implication is increased cost of importing petroleum products which will lead to a hike in the pump price of fuel especially now that the downstream sector is being deregulated,” says the Professor Uwaleke.
Based on official data, Nigeria’s balance of payment stood at a whopping $4 billion as at the third quarter of 2019 up from $48.7 million dollars in the preceding quarter and $4.5 billion in the third quarter of 2018. One of the concerns of some people is that it will undermined Nigeria’s effort at flattening the curve on importation of finished goods, considering the current high cost of production in the country.

In view of the import-dependent nature of the Nigerian economy, industry experts believe the upward adjustment of the exchange rate “will feed into higher inflation rates at least in the short run necessitating tight monetary policy by the CBN and high interest rate environment.”

Nigeria is currently grappling with double digit inflation. The headline inflation rose from 12.40 per cent in May to 12.56 in June 2020.

Based on the recent development, the Monetary Policy Committee (MPC) is expected to tighten Monetary Policy Rate (MPR) to be above its current rate of 13.5 per cent. If the interest rate is raised, it would help rein in inflation expectations, further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.
Investment analyst, Stephen Kanabe who agreed with the position of Uwaleke, expressed fear that tightening may also result in deposit money banks re-pricing their assets and loans, thus raising the cost of borrowing and therefore heightening the already weak investment climate. It however strengthens the stability in the foreign exchange market.

The Monetary Policy Committee had restated its commitment to maintaining stability in prices, without which meaningful economic recovery cannot be achieved.

Economic analyst, Seye Adetunmbi noted that the action of the CBN became inevitable due to the reality of the pressure on the national reserve towards meeting the federal balance of trade obligations.

Adetunmbi said the fact that Nigeria allowed most of its factories and manufacturing centres to die off, induced by failed power sector brought the country to its knees. “Nigeria is no longer the net exporter of refined petroleum products as it used to be in the 1980s,” a situation he said now exacts pressure on the Naira.

However, no matter how bad the devaluation may seem, the popular agreement is that the devaluation also comes with positive potentials for the economy. On the upside, Uwaleke and Kanabe said it translates to increased naira inflows into the federation account implying that the three tiers of government will have more money to distribute.

Also, it eliminates opportunities for currency round-tripping and sharp practices associated with having multiple Exchange rates thereby promoting transparency in the country’s forex market.

By the same token, Uwaleke who is also a former commissioner of finance, Imo State said it will enable price discovery as the real value of the naira becomes established through demand and supply forces as not a few think that the naira is overvalued.

The action of the apex bank will engender clarity in the country’s forex market with the potential to attract foreign investors.
Mr Kanabe added that the associated fall in the value of the naira in the near term could encourage non-oil exports and discourage imports thereby facilitating the government’s import substitution policy and improving the balance of payments.

Moreover, the measure will be in line with the expectations of international financial institutions especially the IMF and the World Bank encouraging them to further support Nigeria’s economic recovery efforts.

The economic experts said it is important to ensure that while leveraging the upsides of exchange rates’ unification, policy makers in Nigeria should ensure that the downside risks are mitigated. The advice is that the authorities should develop multiple sources of foreign Exchange outside oil, especially via Agriculture and Solid minerals, while vigorously promoting the use of domestic products and services by supporting their availability at competitive prices.
Because it has consequential bearing on the rate of direct investment for Nigeria, many have said a managed exchange rate is still better for the economy.

This they say may be largely due to frequent change of industrial polices, instability in foreign exchange rates and interest rates, rising inflation, and long drawn crisis – ridden programme of transition of democratic governance – all combining to render the country’s investment climate hostile to inflow of foreign investment capital.

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