By Babajide Komolafe
Today is a critical moment for the Naira. Its fate, at least for the next two months, will be decided by eleven economic experts who meet regularly to review and take decisions on policies that influence money supply in the Nigerian economy. For the past three years or so, members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) have consistently decided to defend the naira.
Though the main objective is to ensure stable prices of goods and services, by curtailing the rate of increase in these prices (known as inflation rate), they reasoned that since most of the things we consume in Nigeria are imported, it is critical that the amount of naira we spend to obtain a dollar (naira exchange rate) should be stable. The belief is that if the naira exchange rate is allowed to increase, the price at which we buy these imported goods will increase and thereby increase the inflation rate.
But the amount of dollars available to the country, for transactions with other parts of the world (external reserves) has been declining steadily. From a peak of $48 billion last year….it dropped to $38.2 billion as at last week. If this trend continues, we may not have enough dollars to import and meet other foreign obligations. When a commodity is scarce or would soon become scarce, its price will definitely go up, and people will begin to horde the commodity either against future use, or to sell when the price goes up and hence make huge profit.
That is already happening with respect to the dollar. Individuals and organisations are buying the dollars today for their future needs. Foreign exchange traders are also buying to sell when the price (the naira exchange rate) will be higher than what it is today.
But the CBN has kept the price at which it sells the dollar (naira exchange rate) or official exchange rate stable at N155.74 per dollar for some time now, though the rate at the open market on the street is N170 per dollar, and the rate at which banks sell dollars among themselves (interbank rate) is N164.. dollar.
The decline in the nation’s external reserves is unprecedented.
Since it recovered from the huge decline promoted by the global financial crises in 2008, the reserves have not gone below $38 billion. And without a sharp increase in the price of crude oil, which generates …per cent of the nation foreign exchange revenue, or increase in volume of crude oil produced by the country (especially courtesy of drastic reduction in crude oil theft), inflow into the reserves will not be enough to offset outflow, hence the reserves will continue to fall.
Thus as the MPC meets today, its members would have to decide whether to continue to defend the naira, and maintain the current exchange rate or they will decided not to defend the naira by adjusting the official exchange rate upward in deference to the law of demand and supply.
There is little or no consensus among economic operators on what should be the decision of the MPC members. Most people in the banking industry especially foreign exchange dealers, recommend that the MPC should allow the naira to depreciate (lose some value by raising the exchange rate). They argue that the focus now should be to protect the nation’s external reserves and not to protect the naira.
“No Naira should be devalued,” said a senior bank treasurer, who spoke on condition of anonymity. He believes that the MPC would raise the official rate to N165 per dollar from N155. A senior economic analyst with one of the banks, who does not want his name mentioned, also routed for depreciating the naira. He told Vanguard, “There is a balanced outlook between the current efforts to support the naira and keep depleting the reserves or to preserve the reserves and move the midpoint to N160 per dollar plus/minus three per cent.
The latter will allow naira exchange rate in the interbank to oscillate to N164. 8 per dollar. Interestingly, there is a resistance above N165 by the CBN, and also a resistance below N164 by the operators. Whichever is the case, the latter option will suit all parties. Although this could be seen as indirect devaluation, but it might not, if we consider that the 2014 Budget benchmark is N160.” According to Opeyemi Agbaje, Chief Executive Officer of RTC Consulting Limited, sensible policy will be some depreciation.
There are however some experts who believe the MPC should maintain the policy of defending the naira. These include Victor Ogiemwonyin, Chief Executive of Partnership Investment Company, and Samuel Durojaiye, President Finance Houses Association of Nigeria (FHAN).
“We cannot afford to devalue the Naira now, the negative fallout has too many unpredictable outcomes. I believe CBN will keep supporting the currency because it will cost us less than wholesale devaluation that will have no end. Though, our foreign reserves are below $37b now”.