The recent devaluation of naira by the Central Bank of Nigeria (CBN) will have both positive and negative effects on the economy according to Dr. Obida Wafure University of Abuja, says
The Central Bank on November 25, devalued the naira’s peg to a record high from about 155 to the dollar to 168, widened the trading band significantly from plus or minus 3% to plus or minus 5percent.
The bank also increased the benchmark interest rate to combat speculation against the currency which has been battered in recent months by the relentless slide in the price of oil to 13 percent from 12 percent, with nine out of the 11 members voting for the move.
“Although we had forecast some tightening, the central bank has exceeded expectations,” said Razia Khan, head of African macro research at Standard Chartered Bank in London.
“[It] has shown absolute commitment to dealing with current challenges [and] we think that these measures deal as comprehensively as possible with the challenges facing Nigeria,” she added.
Charlie Robertson, global chief economist and head of macro strategy at Renaissance Capital echoed this saying this “shows the CBN is serious about defending the new currency level.”
In a statement, Godwin Emefiele, the governor of the central bank, described the country’s fiscal revenue outlook as “not too impressive.”
“Against this background, the committee is of the view that the current challenge requires bold policy moves on both the demand and supply sides of the foreign exchange market,” he said.
Attempting to stanch the slide, the Central Bank of Nigeria earlier this month sought to temper dollar demand by barring importers of goods, including electronics, generators and telecommunications equipment, from procuring dollars at its foreign-exchange auctions.
It also limited the amount that money lenders can deposit in the bank’s so-called Standing Deposit Facility to 7.5 billion naira, or about $44 million. At the time, traders said that the regulation should boost naira liquidity among banks.
The International Monetary Fund says oil and natural gas account for 96 percent of Nigeria’s export revenue and about 80 percent of government revenue.
“Although we had forecast some tightening, the central bank has exceeded expectations,” said Razia Khan, head of African macro research at Standard Chartered Bank in London.
“[It] has shown absolute commitment to dealing with current challenges [and] we think that these measures deal as comprehensively as possible with the challenges facing Nigeria,” she added.
Charlie Robertson, global chief economist and head of macro strategy at Renaissance Capital echoed this.
This “shows the CBN is serious about defending the new currency level,” he said.
In a statement, Godwin Emefiele, the governor of the central bank, described the country’s fiscal revenue outlook as “not too impressive.”
“Against this background, the committee is of the view that the current challenge requires bold policy moves on both the demand and supply sides of the foreign exchange market,” he said.
Before the CBN move, the naira has fallen more than 10 percent against the dollar since January, placing Nigeria among those oil-rich nations hardest hit by a production glut that has led to a near 28 percent drop in Brent crude prices in the past four months.
Attempting to halt the slide, the Central Bank of Nigeria earlier last month sought to temper dollar demand by barring importers of goods, including electronics, generators and telecommunications equipment, from procuring dollars at its foreign-exchange auctions.
It also limited the amount that money lenders can deposit in the bank’s so-called Standing Deposit Facility to N7.5 billion, or about $44 million. At the time, traders said that the regulation should boost naira liquidity among banks.
Responding to the move, head of African research at Standard Chartered Razia Khan, wrote Woh! Big surprises from the Central Bank of Nigeria… With these moves the CBN has shown absolute commitment to dealing with current challenges. They have not shied away from the tightening needed to sustain current forex reserves.
Wafure of the Economics Department of the university said just as the devaluation will encourage local industries, it will and also bring about closure of many that depend mainly on imported raw materials, the economics teacher said.
“Once a currency is devalued, there are negative and positive effects to the economy, especially at the value chain of every nation state, but the negative effect supersedes the positive effects.
“The negative effect is that it will increase the rate of importation and so many industries will be shut down as they will not afford to import some raw materials.
“It will also lead to unemployment and lower the production capacity and thereby bring about inflation as the Growth Domestic Production (GDP) growth rate will fall.
“Our GDP growth rate is measured by the activities in the economy, so by the time inflation is going on, the economic activity of the country will fall.”
