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Economic experts on likely pains and gains of Naira devaluation

The devaluation of the naira by the Central Bank of Nigeria (CBN) on Tuesday, November 25, 2014 would have negative as well as positive effects on the economy.

Devaluation, “official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency”, has lowered naira and pegged official exchange rate to the US dollar at N168 (it was N155 before the new policy). Interest rate (which determines how much financial institutions can lend out) is now 13 per cent.

With economic experts, policy makers, entrepreneurs and Nigerians jolted by the CBN/Monetary Policy Committee’s timely move to save Africa’s biggest economy from imminent danger, ENCOMIUM Weekly reviews the implication of the devaluation of naira…

 

EXPECT CHEAPER EXPORTS

The devaluation of naira will likely make exports more competitive and appear cheaper to foreigners. This will increase demand for exports and in turn encourage productivity.

 

IMPORTS BECOME EXPENSIVE

A devaluation means imports will become more expensive. This will reduce demand for imported goods. The economy will thus receive a boost, other factors being equal.

 

IMPROVEMENT IN BALANCE OF TRADE & ACCOUNTS

With exports more competitive and imports more expensive, we should expect higher exports and lower imports, which will reduce the current account deficit; that’s Nigeria’s capability to pay for imported goods and services.

Godwin Emefiele
Godwin Emefiele

 

WASTAGES ARE DISCOURAGED

A serious- minded government will cut down cost even as citizens think inward. Suffice to say the times call for prudent management of resources.

 

DEVALUATION TRIGGERS INFLATION

One inevitable effect of the devaluation of naira is inflation.  It would be noted the economy had enjoyed single-digit inflation for a very long time, but the current policy decisions might take the inflation rate from the current 8.1 to about 10.5 per cent.

A Professor of Economics at the Olabisi Onabanjo University, Tella Sheriffden, believes the CBN’s devaluation may not even stop the crash of naira unless the economy is diversified.

 

RISE IN GENERAL COST OF G00DS & SERVICES

Devaluation of naira is also expected to increase the cost of goods of services, especially imported ones. Even locally produced goods that raw materials are sourced abroad would also attract higher prices.

 

HARD TIMES FOR INCOME EARNERS

This is not the best of times for income earners as wages and salaries wouldn’t be enough for workers.
Although economic and financial analysts commended the CBN Governor, Mr. Godwin Emefiele, and the Monetary Policy Committee (MPC) team for having the courage to take such ‘drastic and bold decisions’, they noted that the development would inflict ‘pains’ on Nigerians, at least in the short term.

 

COST OF LIVING WILL HIT THE ROOF

As the naira loses its value, it would also reduce its purchasing power.  This will affect the cost of living.

 

INSTABILITY/CRISIS

If the policy bites harder on the masses, you cannot rule out possibility of social unrest. This, if not well handled, can destabilize the country.

 

PAUCITY OF CREDIT FOR THE REAL SECTOR

Accessing funds may also be more difficult due to increase in interest rate. The Chief Executive Officer, Eczellon Capital, Mr. Diekola Onaolapo, explains: “Although the economy has been facing this challenge for a while, in view of falling oil prices and depleting reserves, the above adjustment will have ripple effects on the real sector (the main engine for economic growth). Increase of MPR to 13 per cent from 12 per cent directly affects interest rates and automatically increases cost of funds for the real sectors.”

 

BANKING SECTOR TO LOSE BILLIONS TO DEVALUATION

It has also been predicted that the banking industry would lose billions of naira as a result of the increase in the private sector Cash Reserve Ratio (CRR).

The planned withdrawal of about N500 billion from the private sector deposits in the banking system to curtail the fall of the naira and to reduce excess liquidity (volume of money in circulation) will also affect the banking sector. Banks that obtained foreign loans will also record losses since they (loans) are dollar- denominated. Nigerian banks have issued Eurobonds running into over $2bn aside other dollar-denominated foreign loans.

 

BORROWERS ARE KINGS, LENDERS SERVANTS

Creditors are not usually winners despite high interest rate in a devaluation/inflationary era. Borrowers seem to have the upper hand as they might pay back less than what they borrowed since the original value must have depreciated. That’s how kings become servants when a currency is devalued and vice versa.

 

FEARS DEVALUATION MIGHT NOT WORK

There are also fears that the policy might not achieve its objective.

“Our fiscal and monetary policies need to be active. Policy inertia is a problem. We need to treat the ailment and not just the symptoms”, the Chief Executive Officer, Economic Associates, Dr Ayo Teriba lamented.

Stressing the need for structural reforms, he said the country’s export was dominated by oil because of lack of production of non-oil items for exports amid the absence of functioning rail transportation.
“We are really in for turbulent times. These are the implications of not diversifying the economy on time.”

 

DEVALUATION WILL FURTHER DEPLETE FOREIGN RESERVE

Another economic analyst, Bismarck Rewane, CEO, Financial Derivatives Company Limited is worried that the country’s reserves, which stood at $53bn in 2008, had slumped to $37.2bn by Monday, November 24, 2014. Rewane predicted that devaluation of naira may not save the situation if oil price continues to fall.

 

LOSS OF REVENUE

Revenue would likely drop if devaluation worsens the economy.  The reverse would be the case if the measures arrest the dwindling fortunes which necessitated the monetary policy intervention.

  • UCHE OLEHI
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