The 248th meeting of the 12-member Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, began yesterday in Abuja with interest rate and liquidity ratio top on the agenda. But it will be difficult for the meeting and indeed, the CBN to effectively handle
these twin issues without agreeing on what should be the appropriate exchange rate for the local currency, the Naira.
But again, this depends on the MPC agreeing to either retain the existing monetary policy or devaluing the currency, an issue that has received divided opinions across the country. Although experts have clamoured for the devaluation of the Naira in the light of the nation’s
depleting foreign exchange reserves, there were insinuations that the Monetary Policy Committee may not do so during this first bi-monthly meeting for this year, and may delay it till March.
It was further learnt that President Muhammadu Buhari’s stance of not devaluing the Naira would influence the voting pattern of the MPC when issues that border on the exchange rate policy are considered.
Following CBN’s refusal to sell dollar to Bureau de Change Operators, the Naira took a nose-dive at the parallel market. While it traded at N197 to one US Dollar at the official market window, it sold at N287.5/N300 to the dollar at the parallel market. This comes against the recorded N244 to a dollar last December.
The exchange rates for the Euro and Pounds are far higher. Foreign exchange (Forex) traders have attributed this depreciation to lack of sufficient dollar quantities at the market. These are happening despite efforts by the Central Bank of Nigeria, CBN Governor Godwin Emefiele and his team to save the Naira. Key players in the banking and financial sector of the economy as well as manufacturers, have all expressed their discontent with the present situation.
Analysts have deliberated on the logical basis behind the current value of the Naira amidst the incessant fall in oil prices and the CBN’s currency controls. However, while the general conclusion is that none of this is working, the CBN would beg to differ. CBN Governor has
continued to defend his currency controls as he remains resolute that the Naira is “appropriately priced” with a prospect of rebounding positively soon.
For countries whose exchange rates are linked to either dollar or a basket of major currencies, breaking those ties would raise the odds of inflation accelerating too fast. It would also take away a steadying influence on their economies.
“Countries operating with a currency peg, particularly oil exporters, are suffering from losing export earnings, weakening their ability to defend the peg at a time when emerging-market currencies are under pressure from a stronger dollar,” the chief economist at London-based
frontier- markets specialist, Exotix Limited, Stuart Culver house said, adding that the situation magnifies the problems they’re having.
Oil and natural gas account for at least 85 percent of the exports of Saudi Arabia, Nigeria and Venezuela, while Russian energy sales account for more than half the government’s revenue, according to the United State Energy Information Administration.
Though it didn’t have a formal peg, Russia, the world’s largest energy exporter, recently in a move to save her currency from further depreciation, ended a policy of maintaining the rubble in a fixed band versus a basket of dollars and euros.
While a decision by the CBN to reject cash deposits in dollars resulted in the rise of Nigeria’s currency against the US dollar in the first week of August 2014, this was rather short-lived. The Central Bank of Nigeria (CBN) also increased the list of restricted items excluded for funding from the official foreign exchange (forex) market.
However, despite banning 41 items from the official forex market, demand is still not being met. There has been continuous pressure on the currency as the fall in oil prices and the imbalance between increasing demand for foreign currency and the foreign exchange available continue to intensify.
Over the past one year, the Naira lost about 15 % against the dollar with an official devaluation in November. It was devalued from N150-N160 to the U.S. dollar to N180-N197 as it battled to preserve macro-economic stability, while raising serious concerns. The MPC
meeting must equally suggest ways to reinvigorate the economy so that we can have an indigenous growth.
What the government needs to do is to drop monetary policy rates and the cash reserve ratio so that liquidity will flow into the economy.
Banks should increase lending to local production to stimulate economic growth and job creation. In the same vein, the MPC should not allow the Naira to continue its free fall, considering the negative implications on our economy. One way of doing this is to determine the appropriate exchange rate for this very important currency.