Economic Implications of Naira Devaluation The federal government recently announced some austerity measures as a consequence of the drastic fall of oil prices in the international market. From $100, the price of one barrel of oil fell to $65 last week. Announcement of the austerity measures came alongside the decision by the Central Bank of Nigeria’s Monetary Policy Committee (MPC) on the future path of monetary policy, in an environment of increased risks and uncertainties. Central Bank of Nigeria announced an increase in the Monetary policy rate (MPR) from 12 per cent to 13 per cent and increase in the cash reserve Requirement (CRR) from 15 percent to 20 per cent. For private sctor funds the CBN retained CRR for the public sector funds at 75 per cent. Finally, CBN moved the exchange rate of the Naira from N155 to N168 per dollar. The implications of these measures are that there is increase in interest rate, inflations and finally devaluation of the Naira. Of major significance is the devaluation of the naira. At his confirmation hearing before the Senate on March 26, 2014, Mr. Godwin Emefiele, the CBN governor, had categorically promised not to devalue the naira because, according to him, it would cause untold hardship for many Nigerians. He said such an action would increase the rate of unemployment in the country and cause inflation. He based his argument on the fact that Nigeria is mainly an import-dependent economy. In his inaugural address on June 5, two days after assuming office, Emefiele had said that as part of his agenda, the exchange rate policy’s key goal would be to maintain stability. In view of the high import- dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the naira would literarily translate to considerable inflationary pressure, with concomitant effect on macroeconomic stability. He, therefore, promised that under his leadership, the bank would continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency by sustaining the managed float regime in the management of the exchange rate, as this would allow it intervene when necessary to offset pressures on the exchange rate. He said in order to support this strategy, the CBN would strive to build up and maintain a healthy external reserves position and ensure external balance. “There is no doubt that reducing the interest rate and maintaining the exchange rate are very daunting twin goals. However, the CBN would work assiduously with all stakeholders to device countervailing measures that would ensure that these goals are mutually achieved,” he had promised. Six months into his tenure, Emefiele has reneged on those promises. As has been admitted even by the CBN, devaluation of the currency inevitably causes inflation, both in the domestic market and in relation to imported goods, since imports are more expensive, causing cost push inflation. Foreign goods will cost more. In other words, devaluation is a decline in the country’s standard of living. Traditionally, it is a tool used by a desperate government with a poor economic policy. It has been the argument in well-informed quarters that both the austerity package announced by Dr. (Mrs.) Ngozi Okonjo-Iweala, finance minister and coordinating minister for the economy, as well as the devaluation of the naira by CBN, are panic measures that are most likely to be counter- productive, at the end of the day. This is because the Nigerian economy has not fallen into a state of recession, neither is the global economy in a state warranting such extreme measures. The arguments are based on the fact that the pattern of budgetary expenditures over the years has been a source of slow real growth in the economy. Much depends on why naira is being devalued. If it is due to a loss of competitiveness, then devaluation can help to restore competitiveness and economic growth. In this case, the Nigerian industrial competitiveness in comparison with the industrialised countries is almost zero. Competitiveness is usually only restored by a decline in real wages. But in the Nigerian case, there would be no justification for reduction in real wages. The minimum wage at present is N18, 000 per month. If the devaluation aims to meet a certain exchange rate target, it may be inappropriate for the economy because, it will inexorably lead to a decline in the standard of living of the people. The effects of inflation further depend on other factors such as spare capacity in the economy. Nigeria has no spare capacity in any known product, except through imported goods A depreciation of the naira will inevitably see its market value fall against other currencies. The economic effects of a lower pound take time to manifest – economists say that there are time lags between a change in the exchange rate and changes in, for example, inflation and the balance of payments. The last major depreciation of the naira was between the mid and late 80s. The economy has not fully recovered from the negative impacts of that exercise. The effects of the latest devaluation will be borne by poor Nigerians. This is why BusinessWorld advises that the austerity measures must not only have human face, but must also be made to spread across all strata of the society, especially the rich.
Posted on: Tue, 23 Dec 2014 23:09:42 +0000
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