Thursday, November 24, 2011

Will the value of our currency, Naira hold?

Nigerians were asking whether the devaluation of our currency by CBN will support production or not. But, we are back with a new information in that respect. 

Previously, the Central Bank of Nigeria (CBN) held its Monetary Policy meeting (MPC), the first after the emergency meeting it had last month. Just like last month when the CBN surprised everyone by increasing its monetary policy rate by a staggering 2.5 percent to 12 percent, the apex bank set a new band of N155 +/- 3 to a US dollar, effectively announcing a depreciation of about 3 percent.

This appears a culmination of the fight by the CBN to keep the rate at about N150 to the dollar, despite increases in the demand for the dollar in the last few months and decreases in Nigeria’s reserves. It has become very obvious that the Bank is working from three dimensions. First, the CBN has increased interest rate and the expectation is that this presents Nigeria as a competitive portfolio investment attraction. As this pulls in the foreign currencies, it should help hold the Naira.
So far, there is no evidence that the recent increase in interest rate has significantly increased portfolio flows in Nigeria. Some analysts believe this is because there is still focus on the crisis in Europe, and once there is a measure of certainty, Nigeria, with such a huge interest rate, will attract investors.
Second, the CBN believes it can continue to improve on the Wholesale Dutch Auction System (WDAS) and minimise speculation demand. In this respect, it has sought to separate genuine demand for foreign exchange and those that engage in speculation and currency trading.
Third, which has also become very critical, is that the CBN hopes it will receive cooperation from the fiscal side to minimise the fiscal deficits and improve on the efficiency of government spending. It is these three factors that it hopes will hold and thus help maintain the Naira value at its current band rate. 

However, the most fortunate is that, despite the fall in oil prices, we have not seen the levels and rates of fall that we saw in 2008.

The critical possibility that the CBN can continue to lead and determine the Naira rate changes, rather than react to changes determined at the parallel exchange rate depends on the rate of fall in oil prices. In this context, we believe the most critical of data to examine on a continuous basis is how the global demand for oil is shaping up, especially if the crisis of confidence continues in Europe. Indeed, the CBN recognises its helplessness when it comes to changes in oil prices.

On the basis of the current and changing economic environment, we believe three things should happen or should be made to happen as quickly as there is a signal of worsening economic conditions, especially downward risks to oil prices being realised. 

First, the government’s current US 70 oil price benchmark should be made flexible, and ensure that a new one  is triggered if oil price falls consistently, for, say a month. 

Second, the CBN should also put in place greater flexibility around the band of exchange rate. This will effectively expand the possibility of the depreciation of the Naira without having to set a new band.

Finally, as important as the measures that both the CBN and the government have taken on the economy in the last few months are, it is their work on the supply side of the economy that will help strengthen both the growth process and the Naira exchange rate in the medium and long term, and that should be the focus, while ensuring that short term dynamics do not affect such planned trajectory. Difficult task, we know.

No comments:

Post a Comment