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CBN naira devaluation, what has now changed?

The CBN said two weeks ago that it was planning to review its target band for the naira in the next few days, and depending on where the exchange rate settles, may move its midpoint to between N155 and N156 to the dollar, compared to its current N150.

At the moment, the CBN has a band of 3 per cent above or below N150 per dollar. The move by the CBN has taken many by surprise. Many are asking the question why the need for the exchange rate adjustment going by the tough stance of the CBN Governor Sanusi Lamido Sanusi.

In March this year after the International Monetary Fund (IMF) visited the country and spoke with government, private sector and the banks including the CBN, in its article 1V it said that the naira was over valued. Although a section of the media interpreted as asking for devaluation, the CBN took on the IMF and said there was no basis for asking the country to devalue its currency. The IMF had said that the naira was overvalued and that more exchange rate flexibility would be needed to prevent the Central Bank of Nigeria from running down the foreign currency reserves to fix the rate.

Responding to the statement by the International Monetary Fund that the Nigerian naira is overvalued and increased exchange rate flexibility might be needed in Nigeria, the governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, in an interview with CNBC Africa said: “We do not believe that the naira is overvalued. We do not believe that at a time when the oil price is going up and output is going up, we should be losing the value of our currency.

“We also do not think that it makes sense, if the IMF is concerned about inflation, to ask a country that is import-dependent to devalue its currency. So the advice given by the IMF, frankly, is not based on sound economic logic.” The statement from the IMF had said, “Greater exchange rate stability will prevent one way bets in the foreign exchange market and cushion external shocks. Nigeria’s strong external position and low debt helped mitigate the impact of the global financial crisis. However, a pro-cyclical fiscal stance and an accommodative monetary policy have resulted in high inflation and a loss in international reserves.

“Further monetary tightening may be needed should inflation pressures continue. Moving gradually toward an inflation-targeting regime, once the necessary institutional underpinnings are in place, will help anchor inflation expectations.” At the time also, the House of Representatives, in a reaction, criticised the IMF’s statement and said that the IMF cannot dictate to Nigeria on how to run its economy.

The House had said: “Nations are not obliged to agree with the IMF because every nation has a path to economic development, which it has charted for itself. In the case of Nigeria, we have the Vision 2020- 20 agenda. We know what is right for us and we can pursue our goals without the IMF dishing out to us what it feels is the right approach to good governance and economic development. Nigeria won’t just agree to devalue the naira because the IMF says so.”

The International Monetary Fund (IMF), which completed its Article IV Consultation with the top management of the Central Bank of Nigeria (CBN), in accordance with extant agreements, released a report that berated the apex bank for running down the external reserves to prop up the naira rather than allowing it to depreciate in tandem with existing realities on the ground.

The IMF, then was of the view that the CBN is not in a position to fund the foreign exchange market the way it is doing – dipping into already dwindling reserves – and that a managed depreciation of the naira is much more preferable to an unavoidable free fall.

After all the emotions, pride and arrogance, the CBN is waking up to reality. The question the CBN should answer now is what has changed between the time the IMF team said the naira was overvalued and now, just six months down the economic history line. Hear Sanusi Lamido Sanusi eat his words: “The CBN is considering allowing the naira to depreciate further by setting a new band of between N155 and N156 to a dollar within which the currency can float. We think at this point we might move the naira to between N155 and N156 to a dollar as a midpoint. The CBN will make its stance on the currency clear next week or two.”

This was even as the naira weakened further against the dollar in the foreign exchange market, closing at N159.52 to the dollar. The naira declined against the U.S dollar on both the inter-bank and CBN window as demand for the dollar outstripped supply at both markets. The CBN Governor stated that the apex bank was determined to keep the naira stable at between N155 and N156 per dollar, saying “People will know that in the next 12 months, we will keep the naira within that band. As long as we are not running out of reserves at an outrageous rate, we’ll try to keep that stability.” According to him, “The CBN has been struggling to keep the naira within a band of three per cent above or below N150 per dollar as oil prices declined and demand for imports surged.”

Nigerians expect better performance of the economy not a deteriorating situation. Is the CBN governor now admitting that in the last six months, things have turned for the worse? Or that he was just playing to the gallery as usual? What has changed? If the naira in the opinion of the apex bank was not overvalued then and the advice from the IMF did not make economic logic or sense, is the crude oil production down?

Are prices at the international oil market lower than what they were then? The National Assembly that backed him up in his outburst, where are they now that he has proposed to devalue the naira in line with what he was told was best for the economy six months ago? Will it not have been better if the decision was taken then than now?

To effectively control inflationary pressures, the IMF had suggested then that the CBN should further increase its Monetary Policy Rate (MPR) – the benchmark interest rate at which banks borrow short-term funds from the apex bank. It may be recalled that the CBN raised the MPR in January this year, amid fears of a creeping inflation, by 25 basis points from 6.25 per cent to 6.50 per cent. It further raised it in October to 12 per cent. Other liquidity tightening measures embarked on by the apex bank included raising the cash reserve requirement and liquidity ratio for banks.

These were the steps the IMF advised the CBN to take to get the work done. Nigerians must learn to distinguish between an economist who is out to do what he knows will help the economy in the long run from an emotional activist. Is it the government quest for higher volume of naira that now informs the new found wisdom?

 


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