The recent depreciation of the Naira against some world currencies may be a deliberate policy by the government to ensure internal and external balance for the economy, but there is palpable fear among Nigerians as to how far the policy can go in stabilising the economy in the face of the current economic meltdown.
A depreciation in the value of the Naira simply means that more quantities of the local currency is required to exchange for a unit of other international currencies such as the Dollar, the Pound sterling, the Euro.
However, between December 2008 when the policy was introduced and early January, 2009, when CBN opened for business after Christmas and new year holiday, the nation’s currency has been depreciating at alarming rate. At official rate of N116 per Dollar early December, the Naira depreciated to N138 per Dollar at the close of business in the same month while in the black market it was booming as between N150 and N155 chased one Dollar.
The simple interpretation of this is that the Naira is depreciating faster than expected and Nigerians are groaning.
CBN governor, Professor Chukwuma Soludo while addressing the Senate to justify the devaluation policy said devaluation of the nation’s currency was as a result of the reaction of the currency to certain realities in the foreign exchange market.
He said government was making some unintended gains from the crash of the Naira, with some cash inflow of about N520 billion.
Soludo, however, allayed the fear of Nigerians that the economy was in crisis, saying government was already taking measures to stabilise the currency.
According to him, the CBN had mopped up the liquidity in the nation as a way of paving way for a stable Naira, adding that as of the close of work on Monday, the Naira had started appreciating.
Since first week of January 2009, Naira had depreciated by 12.9 per cent at the segment of the foreign exchange market while it depreciated by 12.4 per cent and 18.6 per cent at the official and Bureau de Change (BDC) segments respectively.
The official exchange rate rose to N131.27 per cent in December, from N116.81 per Dollar in January. The inter-bank foreign exchange rate also rose to 133.03 per Dollar from N117.76 per Dollar in January while BDC exchange rate rose from N118 per Dollar to N140 at the close of business in December.
So far, the Naira has lost N7.75 in the official rate since Monday when CBN resumed foreign exchange sales this year. On Monday alone, the market lost N4.35 as the exchange rate rose from N131.27 to N135.62.
The apex bank, through its Monetary Policy Committee (MPC), promised to be intervening in the money market activities on daily basis to save the Naira from further depreciation. This, has not been.
Banks on their part, in order to meet large volume of forex demand from their customers have resorted to patronising black market and this has helped in the soaring depreciation. For instance, CBN only sold one third of the Dollar demanded by the bank and BDC operators bided for during the first foreign exchange trading at the market. Dealers had bided for about $500 million but the apex bank sold $155 million to banks.
Many financial analysts and economists have continued to argue that economic agents in the country should allow the Naira to depreciate to a certain level to enable the country contain the ongoing global financial meltdown.
They said that a weaker Naira would assist the nation to mitigate the effects of fall in the prices of crude in the world market and the reduction in the foreign reserves, stressing that a weaker Naira would give government greater spending power in Naira terms for every Dollar earned and to manage its widening deficit.
However, many Nigerians disagreed with. According to Frank Ogiamien, Chief Operating Officer, Platform Securities, even though the intention of government was to discourage imports, this was yet to be felt in the country as Nigerians were beginning to feel the impact.
He said as a result of the devaluation, shares on the floor of the Nigerian Stock Exchange were depreciating day by day as more Naira was required to be exchanged for few foreign currencies. Ogiamien said investors would continue to sell their stocks in the market in order to meet immediate needs adding that unless government reversed the policy, it might lead to hyper inflation.
Also, national chairman, Conference of Nigeria Political Parties (CNPP), Dr Olapade Agoro averred that the true reason behind this instant devaluation was that Nigeria’s economy was weak and ailing, adding that Nigeria was now a leper colony economy where nothing good worked.
Agoro said it would be totally wrong for the strength of the nation’s economy to continue to be judged on the strength of its false-based foreign reserves of $58 billion, and “one stands to be corrected by the best of an economist on this fact that our foreign exchange reserve rose on accidental and incidental booty” that is subject to external variables.
General secretary of the National Union of Chemical, Footwear, Rubber, Leather and Non-Metallic Products Employees (NUCFRLANMPE), Matthew Momoh, said in the last five years, 75 companies in the sector had closed down, adding that the number of employees in the sector, who registered as union members had reduced by 80,000 in the last 10 years.
Momoh, who said that the union had submitted a memorandum to the presidency on how to resolve some of the problems confronting the manufacturing sector, explained that the problem was caused by policy summersault by the government and inability of the government to put in place normal checks at the nation’s border.
He stated that several studies had indicated that cost of production in the country was at least between 30 and 40 per cent higher than the cost of production in other countries due to these problems.
Momoh argued that the problems if not resolved would lead to the collapse of the manufacturing sector, as it has presently affected the competitive ability of manufacturers in the country.
He advised government to put in place tariff structure that would increase duty paid on imported finished products and reduce to the barest minimum, if not zero level duty paid on imported raw materials, as a way of protecting local industries.
Sales manager, Mikano International Limited, Mr. Pierre Bechara lamented that the Naira devaluation has greatly affected the importation of raw materials to produce power generating sets. According to him, everything has gone up. “Being a very big company, we are able to survive now because of our international reputation,” he said.
At the last Monetary Policy Committee (MPC) meeting in Abuja, Soludo insisted that the depreciation was done in order to maintain an internal and external balance for the economy.
“This was carefully thought through and deliberately implemented in order to ensure that we maintain an internal and external balance for the economy. The economics of exchange rate is such that in a world where you face any fracture on your balance of payment, especially through the external sector and since we experience much of it in the later part of this year, declining oil prices which account for 95 per cent of our foreign exchange, we have two options: you either allow the prices to adjust by way of exchange rate or quantities would adjust,” he said.
The CBN governor explained that the exchange rate responded to several factors, adding that Nigeria currently operated a flexible exchange rate regime as most economies of the world.
“There is quite a number of factors that could lead to the demand in foreign exchange, including the liquidity condition in the economy induced by money supply, government spending, the net capital flows, the level of their foreign reserves and the rates at which it grows, domestic productivities and that will actually increase your exports and imports. As at 2007, Algeria had about $110 billion; as at September this year, it had $130 billion but its exchange rate has also depreciated and you take them all from the emerging market, most of them—whether it is Malaysia, Thailand or Brazil, India Russia, Indonesia, Philippines, South Africa, all down the line with even higher levels of diversified export structure—most of these countries are not having any financial crisis.
“But it is simply that the global trading regime has altered and, therefore, the variables that you allow to adjust are the exchange rate and Nigeria happens to be one of those countries,” Soludo explained.
He added that Nigeria was not having a financial crisis, but that the global financial crisis was impacting negatively on the country.
“As far as I’m concerned, Nigeria is not having a financial crisis but the global financial crisis impacts on the Nigeria economy through the declining oil price and, therefore, the declining squeeze of the reserves.
He explained why the CBN decided to ration the foreign exchange to the Bureau De Change.
“If you check the numbers as well, you look at the volume. We work with the volume rather than the number. Today, if 5,000 BDCs decide to operate, we have to think in terms of quantity and how do we determine that? We have to make a decision about accreditation. At what level do you want to accumulate or de-cumulate your reserves? When you take that decision, that is what determines what quantity is available for you to sell at any point in time.
“We have met the demand in the market and that is why the demand pressure has now come significantly from over $1 billion to $72 million as of today. We have met that demand and I think the market is now stabilizing,” he said.