The Naira And Its Misfortune

President Goodluck Jonathan

Last week’s devaluation of the Naira by the Central Bank of Nigeria (CBN) over falling Brent crude oil prices indicates that tough times are ahead for the common man and the economy unless urgent steps are taken to address the crises.

President Goodluck Jonathan formally unveiled the redesigned commemorative N100 banknote on November 12.  Paradoxically, the banknote, meant to mark Nigeria’s 100 years as a single united nation, can only buy a small loaf of bread, insufficient to kill hunger pangs in a child.

Thirteen days after the launch, like others, the new banknote, which will be issued to the public later this month, lost eight per cent of its value against the dollar. That was after the Central Bank-led Monetary Policy Committee (MPC) devalued the naira.

The local currency has been devalued by 35 per cent in the  last 13 years.  The CBN in 2001 cut its value by 27 per cent, followed by the current eight per cent slash.

In a country stricken by 8.1 per cent inflation, one of the world’s worst; and declining foreign exchange reserves, now at $37 billion from about $42 billion a year ago, the last devaluation was the straw that broke the camel’s back.

Last Friday on Nigeria’s burgeoning black markets, it was valued at about N186 to a dollar. At the official market, the naira fell 2.1 per cent to N178.65 per dollar.

Many pundits said the naira’s fair value was N200 to a dollar. That confirmed the widely held view that it had indeed fallen from Olympic heights both at the interbank market (official rates) and at the black market.

Same day, the Brent crude oil dipped 3.7 per cent to $69.94 per barrel – its lowest ever since 2010, according to auction results. Nigeria’s oil receipts have between September and November 2014, decreased by 21.05 per cent from $5.7 billion to $4.5 billion due to the falling oil prices.

What the MPC did

The committee had at the MPC meeting of November 25, moved the midpoint of the official window of the foreign exchange market from N155/dollar to N168/dollar.

It also widened the band around the midpoint by 200 basis points from plus or minus three per cent to plus or minus five per cent.

The committee also increased the Monetary Policy Rate (MPR), the base lending rate, by 100 basis points from 12 to 13 per cent while the Cash Reserve Ratio (CRR) on private sector deposits also rose by 500 basis points from 15 per cent to 20 per cent. It also retained public sector CRR at its current level of 75 per cent. The CRR is a portion of banks’ deposits kept with the CBN.

Market forces react

Less than 24 hours after the CBN Governor, Godwin Emefiele, announced the devaluation, the price of household goods, including bread, wheat, fish and rice, among others, shot up by 40 per cent or more. The services industry was also affected. At the Marina Park in central Lagos, operators raised vehicle parking fee from N300 to N500.

At a supermarket on Broad Street Lagos, Deborah Nwankwo, a mother of four, bought two cartons of soft drinks, two dozens of tin milk, a dozen imported small yoghurts, a crate of egg, some garlic and two cartons of biscuits. Her bill, she said, was N15, 000. Before now, she would have paid about N9, 000. “The first thing that comes to mind, and one keeps noticing, is how expensive everything is and it could get worse,” she said.

The former Executive Director, Keystone Bank Plc, Richard Obire, said the common man does not understand devaluation, but knows when his purchasing power has reduced. He explained that when a currency is devalued, consumers’ ability to demand and buy products would be drastically reduced. “It also means that people’s ability to spend on discretionary products will decline, as they focus on essential goods like food and shelter,” he said.

Obire said such a policy usually leads to salary delays in private and public sectors, as cash crunch set in, adding that the common man would be adversely affected. “Vital liquidity in pocket of people is crucial. The common man is already feeling pangs of hunger and with the devaluation, a bad situation can only get worse,” he said.

He said middle class earnings will also be affected. “The middle class send their children abroad for schooling. They are also the ones that feed the common man. They will now spend more money sending their children to school, and may have little left for the common man. The common man has very little flexibility for maneuvering at this time. He is at the receiving end,” he said.

The banker said implementation of 2015 budget would also likely suffer as revenues drop. “Imported inflation is also another issue for the Nigerian government. The refined petrol subsidy will go up because of the devaluation. I foresee oil price hike after the election, and that will lead to serious nationwide unrest,” he predicted.

Renowned economist Henry Boyo described the eight per cent devaluation of the naira as “a big mistake”. He said the policy shift remained a wrong concept that would persist because the CBN has learnt nothing from history. He said the devaluation would even move to 20 per cent as the black market continues to outstrip the official rate.

Boyo noted that the prices of goods and services would keep going up, as importers add the increase to the cost of goods and services. He equally sees the price of fuel going up, despite declining oil price.

He said Nigeria has learnt nothing from what happened to the Ghanaian and Zimbabwean currencies. “I see the naira being devalued by 20 per cent as time progresses. I have repeatedly said that mopping up the naira to achieve exchange rate stability is wrong. The CBN substitution of the naira allocations for dollar should be stopped. Allocations should be divided based on dollar certificates. The exchange rate for the naira will continue to fall,” he said.

Managing Director, Afrinvest West Africa Plc Ike Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.

“Nigeria’s crude oil – bonny light, which traded at $110.2 per barrel in January this year, reaching $114.6 per barrel by June, is now trading at about $78 per barrel.

“With the discovery of the shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the United States (U.S.) to reduce oil imports constitutes a downside risk on crude receipts of OPEC members. Consequently, the CBN must   establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases,” he explained in a report – Naira Trending Towards 2015.

Chioke said Nigeria’s dependence on crude oil (currently 70 per cent of total foreign exchange earnings) makes economic growth susceptible to oil price shocks. According to him, a decline in crude oil price would lead to a corresponding decline in oil receipts; “which will forestall the accumulation of external reserves, creating a negative signaling effect that leads to capital flight, thus depreciating the naira.”

“The current over reliance on oil receipts – oil receipts account for about 96.8 per cent of the country’s total exports – by the government poses a huge threat to the stability of the economy,” he noted.

Other policy-makers speak

Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.

The official devaluation of the naira, she said, allows the Retail Dutch Auction System (RDAS) to move within the range that straddles the interbank foreign exchange rate. “While the market reaction to the RDAS move in the near-term will be important, we think that these measures deal as comprehensively as possible with the challenges facing Nigeria.

“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.

Head, Equities Market at FBN Capital Olubunmi Ashaolu said the CBN has by the policy, set clear cut objective on its monetary policy direction. He said the stock exchange positive reaction was an indication that local and foreign investors now understand where the naira is heading. “As long as there is clarity and good investment climate, the equities market will benefit,” he said.

He advised government to improve infrastructure, noting that such action would make Nigeria’s investment climate more attractive for foreign investors.

Managing Director, Financial Derivatives Company (FDC) Limited Bismarck Rewane said the MPC’s decision has reinforced the CBN’s independence and autonomy.

He said the currency adjustment has a direct impact on the cost of imports and may undermine the MPC’s efforts at ensuring price stability in a hugely import-dependent economy. The devaluation, he added, would slow down external reserves depletion. “Since the naira is closer to equilibrium, the need to intervene will be less,” he added.

To the President of National Association of Small Scale Industrialists, Chukwu Wachukwu, there are consequences wherever currencies are devalued. He said the naira devaluation would make government to jettison sole reliance on oil and pay attention to other sectors of the economy. “We can’t just continue to depend on oil, we need to diversify,” he advised.

Good times for exporters

However, for exporters, devaluation of the naira means increased cash flow and higher profit margins.

The Managing Director, Sunyprofit International Limited, Sunday Anjorin, who exports Nigeria timer to China and Vietnam, captured the excitement that came with the decision.

“For years, we have been waiting on the CBN to do the needful. When it finally came last Tuesday, we had no option but to celebrate. This policy will create more millionaire-exporters than ever before. I was so impressed with the news that I called my associates together to wine and dine with me,” he said.

Anjorin said although exporters’ cash flow will rise, “the celebration may be cut short given that their cost of production will equally increase, because cost of raw materials will be exorbitant, making nonsense of the higher profit margins.” Still, he said timber operators would take advantage of the policy shift and increase their profit margins.

Also to benefit are multinational oil companies and their expatriate workers whose salaries are in dollars. People who receive foreign exchange through Western Union and MoneyGram are also to benefit from the devaluation.

CBN takes action

Emefiele said the CBN under his leadership remains committed to safeguarding the value of the naira. For instance, the lender had last month, banned the sale of foreign exchange by banks to importers without the requisite shipping documents.

It also directed that only imports, which are backed with evidence of shipment and other relevant documents, will qualify for purchase of foreign exchange. Only such transactions will be eligible for foreign exchange purchase via the RDAS or the interbank window, it said.

The apex bank said that henceforth, all importations involving electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions would be funded from the interbank foreign exchange market only.

The policy, the CBN said, was to maintain the existing stability in foreign exchange market and strengthen the various policy measures, already initiated, including the regulation of the Bureau De Change (BDCs) that cut dollar supply to operators from $50,000 to $15,000 weekly. These measures, Emefiele admitted, would help conserve the foreign exchange and support the naira.

Okonjo-Iweala on solutions

In the last six months, managers of the economy have known little or no rest. The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, has been busy explaining what government is doing to wriggle out of the crises. She talked about plugging revenue leakages, increasing the drive for revenue as well as developing the non-oil sectors.

The minister, who spoke at the International Institute for Finance (IIF) African Financial Summit 2014 held in Lagos, argued that with the right policies, Nigeria and other nations in the continent would be able to sustain growth despite the economic headwinds.

She admitted that events unfolding over the last six months have cast a shadow on global economic recovery in the aftermath of the 2008/2009 financial crises.

She said: “Many countries on the continent depend on commodity exports as the main source of revenue. In Nigeria, our crude oil exports alone accounted for about 83 per cent of the value of our total exports in 2013, according to our National Bureau of Statistics.

“It is now imperative to drive up domestic resource mobilisation, especially taxes. In several African countries, including Nigeria, tax revenue to Gross Domestic Product (GDP) is below 15 per cent – the conventional International Monetary Fund threshold for satisfactory tax performance. There are many leakages and gaps to be plugged, and more effective tax administration could contribute to improving revenues.”

Continuing, she added that aside drop in oil prices, the price of gold, which peaked at about $1383 per ounce in March, this year, is now trading at around $1160 per ounce. Iron ore, which traded at around $130 per dry metric tonne at the beginning of the year, is now trading at around $76 per dry metric tonne, which is a loss of more than 40 per cent of its value this year.

Also, prices of some agricultural commodities are on a downward spiral, with the price of cocoa falling by about 10 per cent from $3,252 per tonne at the end of September, to about $2,900 per tonne now.

Dr. Okonjo-Iweala said: “We need to look into areas that for reasons that are not very clear, we have neglected and we need to change direction. We need to identify such sectors and create an enabling environment to attract private investments, while also channeling government’s spending into them”.

The minister listed and explained some of the more promising job creating sectors needed to lift Nigeria out of its present predicament.

The sectors, according to her and other financial experts, are:

Agriculture

The World Bank estimates that agriculture has three times potential to reduce poverty than any other sector. Already, government is carrying out a quiet revolution to increase food self-sufficiency, reduce imports, transform produce and create viable value chains for a number of important products.

Housing

This sector is seen in developed countries as an important sector for stimulating economic growth and job creation. Housing has brought the global economy out of every recession in the past. It is therefore not surprising that this sector is prominent in many of developed markets.

Sports

The sports industry, experts said, also holds huge potential for Nigeria because of its youthful population. New research by AT Kearney finds that the Africa market for sports events in 2014, including revenues from tickets, media rights, and sponsorships, will be worth close to $80 billion. When sporting goods, apparel, equipment, and health and fitness spending are added, the sports industry generates as much as $700 billion yearly or at least one per cent of global GDP.

The Nigeria market for Premiership football merchandise alone is worth tens of millions of dollars. Yet investment in organised sports, as a business, is very small. Therefore, experts urged more investment in the area.

Creative industry

This industry, if properly managed, holds the key to unlocking fast growth and job creation in the country.  In Nigeria, the Nollywood alone accounts for about 1.5 per cent of GDP and employs 200,000 people directly and nearly one million indirectly.

Ghana, others take

policy measures

Nigeria is not an outlier in the change in monetary policy stance. Ghana and Zambia also recently tightened further their benchmark interest rates to 21 per cent per annum and 12.5 per cent per annum respectively. On the other hand, Kenya and South Africa maintained the status quo on their policy stance.

With respect to the currencies, the Ghanaian cedi remains the worst performing currency in Sub-Saharan Africa, with a value loss of 26.27 per cent year-to-date, while the Zambian kwacha has lost 11.86 per cent year-to-date.

Historical view of the naira

From 1980 to 2000, the naira depreciated by N101.50 to N102.10 to dollar, when compared with N0.6 to dollar it traded as at 1981. Not even the   Structural Adjustment Programme (SAP) introduced in 1985 could have predicted this sharp slide.

The currency first hit double digits, moving from N9.9 to a dollar in 1991 to N17.2 to a dollar the following year. That constituted a significant 73.7 per cent change. Thereafter, a gradual slide ensued, attaining triple digits in 2000.

Although it was considerably stable between 2000 and 2003 (below N120 to a dollar), the recent adverse global capital flows and drop in oil price, among other factors, have culminated in the current all time low.

Moreover, decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds or borrow from other central banks.

That explains why the CBN has found it increasingly difficult to defend the naira. The solution, according to Dr. Okonjo-Iweala, lies in diversification of the economy.

For now, the continued decline in oil receipts poses a threat to government revenues, limiting the fire power to regulate the naira. Should this continue unabated, the naira’s misfortunes will worsen and the N100 banknote will no longer buy a small loaf of bread for a minor, let alone kill hunger.

SOURCE: http://thenationonlineng.net/new/the-naira-and-its-misfortune