Implications of further devaluation of Nigeria’s currency on economy
By Oludare Mayowa
As news filtered into the system that the Central Bank of Nigeria (CBN) has ordered the convergence of the exchange rates between its official window and the Investors’ and Exporters’ (I&E) FX Window on Friday, the parallel market responded in equal measure as the rate on the retail window fell further.
The naira rate on the parallel market fell to N463 to the dollar, a decline from the N360 the market opened in the week.
With the official devaluation, which was yet to be confirmed by the CBN, the exchange rate on the I&E window was, however, steadied at N386 to the dollar at the close of the market on Friday.
On Friday, the CBN was said to have devalued the naira on its window by as much as 5.3 percent to N380 to the dollar against the N360 to the dollar the regulatory bank adjusted the rate in March.
This step was said to be in compliance with the agreement reached by the country with the International Monetary Fund (IMF) before it granted Nigeria the $3.4 billion financial assistance under the Rapid Financing Instrument (RFI) to support the authorities’ efforts in addressing the severe economic impact of the COVID-19 shock and the sharp fall in oil prices.
The local currency has been consistently under pressure since the outbreak of the Coronavirus pandemic caused disruptions in the global supply chain and the sharp drop in crude oil prices which exerted downward pressure on Nigeria’s foreign exchange income and reserves.
However, the recent move by the CBN to officially devalue the local currency would further exacerbate the cost of living and erode the disposable income of average Nigerians going forward.
The implications of the devaluation are multidimensional in the sense that while it will increase government earning from oil and other commodity exports in naira term, on the other hand, it will translate to higher cost of imported goods and services with consequent impact on the inflationary trend.
Nigeria depends largely on importations of goods, service and raw materials and machinery for its manufacturing sector, which means manufacturers will have to look for more naira to purchase raw materials and machinery need to continue in operations.
“Consumers are in for tough time and this will have dire consequences on poverty level in the country,” a senior banker told this reporter.
He also analyses the implications of the devaluation on employment as well as other sectors of the economy, saying many manufacturing firms could lay off workers in the face of increasing costs of staying afloat and probably consumer’s resistance to increases in prices.
The banker also envisages a massive review of government’s procurement process and many contracts already signed for supply and other would have to be review to accommodate the possible fall out of the devaluations of the local currency.
The recent increase in fuel pump prices by the government to make room for the recovery in global oil prices and by implications increase costs of importing refined products will further compound the woes of the ordinary Nigerians who have to contend with challenges of daily living and a weak currency.
Analysts said while the convergence of rates on the domestic foreign exchange market is good for the economy as it will eliminate rent-seeking and arbitraging by the privileged few, its timing and the overall implications on cost of living and economic growth could be an enormous burden to bear at this time.
The CBN had since 2016 resisted the pressure from both the World Bank and the International Monetary Fund (IMF) to abolish the multiple exchange rate windows in the country while depending on the improvement in export earnings from favorable crude prices to build up its foreign exchange reserves.
However, with the impact of the pandemic comes restrictions measures by governments all over the world to curb the spread of the disease with consequence disruption in human and business activities and the sharp drop in demand for crude oil.
Nigeria is among top oil-producing countries that had suffered the most from the initial sharp drop in global crude oil prices, causing dollar shortage on the domestic foreign exchange market.
As at the last country, the backlog of demand from portfolio investors wanting to repatriate their funds out of the country was around $2 billion, but the CBN has been asking them to wait until forex flow improves.
The question many people are currently asking is that; would the devaluation of the naira lead to Nigerians rethinking their consumption patterns and trigger efforts to build local capacity?
Why ordinarily, the challenges of paying more for imported goods should be a catalyst for developing local capacity by manufacturers to source their raw materials and encourage research and development of local content.
From experiences, Nigeria has not been able to rise up to the occasion in the past when dollar shortages led to disruptions in local production and high cost of imports.
Both the government and the private sector had momentarily struggled with the challenges and later shrug it off and move on as if nothing has really changed.
Also, the challenges of poor power supply, increase insecurity across the country, cost of funds and lack of government support as some of the drawbacks to any effort to develop local capacity and resort to backward integration.
The devaluation is therefore seen in some quarters as a set back toward efforts to stir the country away from economic recession as being projected by both the IMF, World Bank and the country’s ministry of finance and budget.
Even with the devaluation, Nigeria will have to still struggle to meet cumulative demand for dollars from both local and portfolio investors whose funds are trap in the country as a result of the shortage of dollars caused by the decline in the foreign exchange buffer.
But it appears the CBN was left with little choice if it really wants to conserve the country’s forex reserves which have dropped to $36.16 by July 2, from around $45 billion at some point.
From whatever sides you want to examine the latest devaluation move by the CBN, it appears Nigerians may have to brace up for hard time ahead.#GFD