Just yesterday, the CBN Governor Godwin Emefiele made the following pronouncements: he raised the MPR (Monetary Policy Rate) from 12% to 13%, increased the CRR (Cash Reserve Ratio) for private sector from 15% to 20%, moved mid-point exchange rate from N155/$ to N168/$ and increased the band around mid-point exchange rate from +-3% to +-5%. What exactly does this portend in laymans terms? This is exactly what I seek to breakdown so everyone can understand. 1. INCREASE OF MPR FROM 12% TO 13% MPR is the rate at which CBN lends money to banks. Essentially, everything revolves around the MPR. If it goes down, then the cost of lending by banks to customers goes down and if it goes up, the cost of lending goes up also. Implication for this new increase is that the cost of lending will go up. Current lending rates hover around 23% to 25% and we can expect this to also increase by at least 1% also. In other words, banks will increase their interest rates on loans. Loans will become more expensive. If you have existing loans, be prepared to pay more as the rates will be tinkered with. Another implication is that disposable income will shrink especially if you are servicing loan obligations. For those involved in importation, brace up for challenging times. Case in point: if you imported an item last week when it was N155/$ and you now need to pay your supplier this week, you will need to look for an additional N13/$ so you can completely make your payments at N168/$. Your case is even worse if you borrowed funds from a bank as your cost of repayment has suddenly increased and your margins may not increase at the same rate. Banks would have to avoid funding transactions in foreign currency when receivables will be in local currency. 2. INCREASE IN CRR OF PRIVATE SECTOR DEPOSIT FROM 15% TO 20% Let me paint a scenario for better understanding. If you give a bank N1,000 as deposit in your account, prior until now N150 is meant to be sterilized- kept away with the CBN as liquid cash while only N850 is available for lending. Its a way of mopping up excess liquidity in the system. Now, instead of N150 being kept away, N200 will be kept away and only N800 will be available for lending. With this pronouncement, about N500b will be sterilized before close of business today across all banks in Nigeria. This means this amount will not be available for doing business or lending to other sectors. Another implication is that increased CRR will reduce the amount of money available by banks for investments in money market instruments such as treasury bills and bonds. It will also reduce amount available for lending. Banks wont be able to create as much loans as before and it will have effects on other sectors. Banks will also lose heavily on interest income which would have been earned on those funds. Banks will become more competitive as they struggle over more private deposits which will also mean that interest rates on deposit placements will also go up. 3. MOVE IN NAIRA EXCHANGE RATE FROM N155/$ TO N168/$ This move resulted in the immediate devaluation of Naira by about 8.4%. This means that you need more naira to buy the dollar. Unfortunately, our economy is heavily dollarised. With this devaluation, importers will be challenged while exporters will be happy and benefit. Now, devaluation usually leads to inflation. Inflation is a situation where too much money chases too few goods. One can expect to see prices of imported goods rise due to inflation. Consequently, this will affects the price of other things- from transport, school fees, food, etc. Final word on this- oil and gas sector will be very challenged with this policy. 4. INCREASE OF THE BAND AROUND THE OFFICIAL EXCHANGE RATE FROM +-3% TO +-5 This implies that the rate is permitted to go up as high as 176.4/$ and as low as $159.6. This implies that we can expect the rate to still go up in a few months though Naira will be stable for now. With the upper limit increased to N176.4, our external reserves can have a breather as it will take some time for the CBN to continue to defend the Naira by utilizing the reserves. So we can build our reserves again- provided oil prices dont fall further than the $73 per barrel benchmark of 2015 budget and the current price of $75 per barrel. With our current reserves, we still have enough cover for 7 months import. But if they drop further, then we have a real crisis in our hands. So, with all these explanation, what is to be done and what is expected? Firstly, I would say people should get ready cut down seriously on non-essentials. For the next few months or so, cash will be king. For those who travel for pleasure, explore leisure travels within Nigeria to save foreign currency spendings. You need to keep having disposable income so you can have the ability to buy what is essential. This is the time to save, save, save. Secondly, pay down your loan obligations as quickly as you can. Avoid borrowing if you can. Look for alternate ways of funding your business. The lesser the loan obligations you carry, the better. If you have a lease on a property, quickly pay for a long lease if you can. Once you have signed the lease agreement, the owner can no longer increase the lease amount until expiration. Thirdly, if you work for the public sector, prepare for challenging times ahead. Salaries will remain irregular and at the extreme, there may be job cuts. Some states may become insolvent. The thing is you have to look for ways of creating additional income. Fourthly, look for opportunities in exportation. Whoever has foreign currency is king. Can you export charcoal, packaged Nigerian foods and other items? Fifthly, think about protecting what you have. You have to consider insurance seriously as the cost of replacement will now be higher than the cost of protecting the items. If you have a car, insure it comprehensively. If you have a house, ensure fire and burglary insurance is in place. Dont miss your premiums. Furthermore, get involved in agriculture. If you dont spend too much on food, chances are youll not be affected so much and can even be smiling to the Bank. Is devaluation always a bad thing? I would say no because entrepreneurship thrives most under inflation. People come up with creative ways to stay afloat. Exports appear cheaper to foreigners. This will create demand for exports. Our nation will also be able to reduce our current account deficit. In simple English, when a countrys import bill is higher than the export bill, the difference starts costing the government, they would need to buy foreign exchange to pay for the difference (either tap into foreign exchange reserves or borrow money). Last word....so many people have been lamenting and calling out Emefiele for devaluing the naira. The truth is he didnt have much of a choice. With the pressure on our external reserves going by the increased demand for dollars, the profit-taking of foreign investors in our Stock markets and our money market instruments and with increased liquidity occasioned by political spends ahead of 2015 elections, devaluation was a matter of when and not if. The devaluation might not be the popular thing to do but it is certainly the right thing to do.
Posted on: Thu, 27 Nov 2014 00:11:33 +0000
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