Continuing free fall in crude oil prices in the international market, resulting in changing oil price benchmark figures in the 2015-17 Medium Term Expenditure Framework and Fiscal Strategy Plan eventually led to the probably inevitable decision of the federal Government on November 16, 2014 to tighten the noose on the economy by curtailing expenditure and expanding the tax net minimise balance of payment deficits.
Finance Minister Dr. Ngozi Okonjo-Iweala who made Federal Government’s position known however, assured Nigerians that economic immunities have been put in place to cushion some bad effects of the measure on the masses as against the past experiences witnessed from decisions of this kind.
Just a week after these decisions were announced and citizens contemplate the possible effects these will have on their lives, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) announced the devaluation of the local currency from N155 to N168/ American dollar. That is to say, the naira has been devalued by 8.38 per cent with respect to dollar.
According to CBN Governor, Godwin Emefiele, this move was aimed at curbing negative speculations on the nation’s currency, particularly by the banks, which have reportedly been putting so much pressure on the naira. He insisted that excess liquidity level in the banking system made the decision fundamental and timely to ensure a healthy economy. The CBN also raised the benchmark interest rate to 13 percent from 12 percent, the first change since October 2011, and the Cash Reserve Requirement (CRR) on private sector deposits to 20 percent from 15 percent.
Some analysts hold believes that the decision of the apex bank should not have been surprising, arguing that value of naira is dependant of crude oil price at international market. Crude oil is the major source of revenue for the country and its price has crashed compare to how it used to sell at world market even in recent times.
An economic analyst, Prof. Pat Utomi in an interview with newsmen in Lagos submitted that “the value of a currency is a function of what you produce. If you are depending on one commodity value for earning income, once that commodity value crashes, your currency is overvalued, therefore, there is need for devaluation”. He however, contended that the major problem with our economy is partly as result of late actions by the major policy makers who always give impressions of being prepared, not prepared.
The situation at Nigerian Stock Exchange was not funny as declination in price some weeks after naira devaluation was witnessed, some analysts argued that the market had already reacted to the decline in oil prices and pre-empted the devaluation of the naira. Some even hold belief that the market was set to rise as foreign investors were not only expected to halt outflow, they would invest more because of the increasing value of the dollar and the low price of the stocks.
Managing Director, Highcap Securities Limited, Mr. David Adonri explained that uncertainty being recorded in the market could be linked to the continued decline in oil prices and value of the naira.
He hinted “before the devaluation of the naira, the market had already reacted significantly to falling oil prices and it was expected that remedial tools including devaluation would be applied. That was a very proactive action by the market. As such when devaluation was announced, the market was calm.”
The situation in the banking sector did not call for celebration as banks were expected to have a relatively challenging year given all the regulatory headwinds they have had to contend with.
A top official in the banking industry who preferred anonymity said “we believe that investors are of the view that the sector is likely to benefit from the recent decline in crude oil prices. However, the recent devaluation of the naira could put a dent in that theory as the local downstream sector is largely dependent on imports”.
It would be recalled that before devaluation, naira has been silently struggling for survival against the dollar and other major international currencies despite CBN’s effort to save it from losing too much of its value by defending it with the dollars in the foreign reserve, which initially stood at $44.6bn but declined to $36.8bn by November last year.
Also, major failure in corporate governance at banks, inadequate disclosure and transparency about financial position of banks, lack of investor and consumer sophistication and lack of entrepreneur friendly bank interest have frustrated business environment in
With devaluation, high interbank rate will constrain credit growth and could create bad loan problems for lenders. Higher interest rates signalled by the CBN’s increase in the benchmark interest rate from 12 percent to 13 percent is expected further balloon the already skyrocketing interest rates for the real sector.
This may likely discourage small and medium enterprises (SMEs). In addition to unstable power supply that our local industries have been experiencing, higher cost of production may hit their business doors in this era.
The story from poor masses’ angle is cry over inflation and weakness in their purchasing power. Articulate Nigerians legitimately feel concerned about the twin reactions of the CBN and Ministry of Finance to the prevailing scenario.
Just a handful are swayed by the call from Okonjo-Iweala that ‘’if Nigerians really come together, we can take the necessary measures to make those difficult decisions and steps to cut the governance so that the measures the government proposes in that direction are supported.
If we take some of these measures now, it will help us in the future and stabilize our macroeconomic framework”. Nigerians say, the benefit of the era of economic boom was privatized by a microscopic group of people who are majorly in power therefore, government should not come up with any policy that will lead to very puny economic atmosphere, saying that poor masses are mostly at receiving end.
Dr Okonjo-Iweala warned that Nigerians should learn from negative outcomes of salary and wages increment of public servants without corresponding prudent cost of governance in the past. She said “people today are shouting about the high cost of governance, yet when the demand for wage increase was going on, I did not see that much of a debate to caution the government to hold back. I was at the World Bank at that time and I actually wrote a speech protesting about this”.
While she recognised that increment of wage by the past administrations aggravated cost of governance in Nigeria presently, the Trade Union Congress (TUC) on December 14, 2014 alerted government that it will demand a wage increase for workers in the New Year, following the devaluation of the naira. National president of the congress, Alhaji Bobboi Kaigama disclosed the plan at the end of TUC’s national Executive Council meeting in Lagos.
He said wage hike had become necessary because the current devaluation had started impacting negatively on Nigerian workers.
He insisted that “the issue of wage is a dynamic thing. In stabilised economies, wages are directly proportional to the inflation trend of a country”. It is expected that following the devaluation of the naira and its resultant rise in inflation, salaries of workers should automatically be increased too”, he added.
Economic stakeholders are unanimous that Nigeria needed fiscal transformation that will drastically reduce inefficient recurrent spending, and so free up resources for capital projects and social programs. The government needs to increase allocation to capital projects, and this will require reordering of national budget and priorities.
Direction of agricultural policies in recent times have shown that the right policies do create jobs and boost incomes. The same reforms should be made across sectors to treat the sick economy. Efficient tax revenue system should be ensured while the government honours her promises to provide immunity for the masses as the economy undergoes recalibration.
