New Telegraph

Experts: Devaluation of naira’ll weaken economy, increase inflation, poverty

…improved exports, a must for a strong naira

…fixed wage earners to suffer more, as prices soar

 

 

 

As reactions continue to trail the recent comment credited to the Vice President of Nigeria, Professor Yemi Osinbajo on the value the naira, some economists have said that though the regulated forex policy of the Central Bank of Nigeria may not be the best for the long term growth of the economy, certain encumbrances have made the policy an option for the country’s survival from its present economic predicament.

 

Speaking to the Sunday Telegraph, Nigeria’s first professor of capital market, Uche Uwaleke, agreed that by the International Monetary Fund (IMF) standards, the difference in the official rate and the parallel market rate should be between N435/$ to N440/$. So, the over valuation is less than five per cent. But the naira is exchanged at an official rate of N414.3/$1 as against the N575/$1 in the parallel market.

“The parallel market premium is the gap between the official exchange rate and what obtains in the parallel market. At N414/$ in the official market on Thursday as against N575/$ in the parallel market, the premium is at N161, yielding a huge profit margin to traders, who do roundtripping,” said Dr. Abiola Babajide, Economics teacher at the Covenant University, Ota, Ogun State.

 

He stated that the naira has suffered several devaluations in the recent past; saying devaluing the currency to what was called appropriate value neither solved the fundamental problem of helping to diversify the export base nor curbed unbridled imports. Doing so yet again will not change any-thing. Rather, it’s a recipe for high poverty and unemployment levels.

 

“It will make imports more expensive. And we don’t have alternatives to most of the imported products today,” he added. Financial expert, Dr Sam Nzekwe said: “Devaluing currency means the naira has a lower value not appropriate. That is basic economics.

 

The problem is that Nigeria imports almost everything. Despite the ban on forex allocation to some items, the country still imports them, if you like say indirectly through neighbouring countries. Devaluation will immediately trigger price increases.

 

The corporate cost of business will be higher with the devaluation of the naira. This is because an item now comes with a higher cost.

 

Therefore, the amount of money businesses will be spending will be higher. Appropriate value is the value at which market equilibrium can be maintained in view of your present circumstances and that is what the Central Bank is doing.”

 

“It will also increase the poverty rate because if you are earning a particular amount and that amount has lesser value or purchasing power, it means you are likely poorer.

 

The devaluation will lead to the inability to live a decent life, which is poverty. Basically, it will affect everybody,” he stressed. According to Professor Akpan Hogan Ekpo, since Nigeria is an import-based economy, the devaluation will likely have a devastating effect on the economy.

Ekpo, who is a professor of Economics and Public Policy at the University of Uyo, Akwa Ibom State, said the government might devalue the naira again in the next one year, adding, “What the government has been doing is managing the currency, which means using our foreign reserves to manage the currency.”

 

He, however, added that CBN likely devalued the naira as a necessary move to narrow the gap between the official and the black-market exchange rates. He described devaluation as a sign of economic weakness, saying the government should focus on providing an enabling environment for businesses and investment rather than constantly devaluing the naira.

 

Ekpo said: “It will weaken the purchasing power of people who are fixed income earners, in the sense that the company is not going to increase your salary because the CBN has devalued the naira. So, you are still earning the same salary, whereas the costs of goods and services have gone up.

 

Implications of devaluation

 

Expressing the view that devaluation is a sentimental policy option, he stated: ‘‘The CBN can follow these sentiments and move the naira to say N575/$1. It is quite easy.

 

But what are its macroeconomic consequences? Here are a few: ‘‘Government debt service is already over 70 per cent of revenue. Devaluation will make it to over 100 per cent easily; ‘‘Inflation, though high at 17 per cent, has been trending down in the last five months.

 

 

A devaluation to N575/$1 will push inflation to over 25 per cent; and fixed income earners, which includes all government workers, will see their real wages (take home pay minus inflation) evaporate into thin air.

 

The same pay they got last month, which they were already struggling to use to make ends meet, will simply buy less than half of what it bought them last month.

 

This could ignite justifiable calls for salary increases and could cause social unrest, in a country where tension is already high.” Ekpo said: ‘‘Loans that were indexed on FX will be immediately re-priced (higher interest rates) and terms will be made much tougher.

 

This could lead to widespread defaults, higher NPLs and financial system instability; Imports will become much more expensive, translating into higher production costs. Producers will pass the higher costs on to consumers, who will pay more for the same goods.

 

Producers who cannot pass on the cost will shut down their operations over time; Nigerians who buy FX from the CBN for school fees, medical bills, BTA, PTA, etc will pay much more in naira; and since imports value will rise astronomically and exports won’t (our main export is oil which we cannot control its price or quantity), the country’s current account balance will go into deficit and make our balance sheet much worse!’’

 

Osinbajo harps on value of naira reflecting market realities

 

Osinbajo had urged the Central Bank of Nigeria (CBN) to allow the naira to reflect the realities of the market in view of the falling exchange rate in the market. Osinbajo spoke at the recent opening of a two-day Mid-term Ministerial Performance Review retreat at the Presidential Villa, Abuja. Osinbajo said the exchange rate is artificially low, and this is deterring investors from bringing foreign exchange into the country.

As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my own respective view, is the only way to improve supply.

 

We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view,” he stated.

 

According to the Vice President, the dollar scarcity crisis can only be fixed when the market is made to reflect the real status of the economy.

 

He said the demand strategy of the CBN has kept the rate artificially low. He said: “Oil price at one point fell even below production costs; about $10 a barrel and then finally settled at about $45 a barrel during the second quarter of 2020. The official rate of the naira was devalued from N305 to the dollar, then to N380 to the dollar.

 

This was by the third quarter of 2020. Meanwhile, Osinbajo, in a statement by the Senior Special Assistant to the President on Media, Laolu Akande, explained that he did not call for devaluation of the naira, contrary to some media reports, explaining that his position was for a foreign exchange management regime that is market determined.

 

The Office of the Vice President reinforced his position, saying under the current foreign exchange regime, privileged individuals and firms are taking advantage of the wide parallel market premium to rip off the country’s foreign reserves.

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