Barely 48 hours after the Central Bank of Nigeria, CBN, devalued the national currency, the Naira, the International Monetary Fund, IMF, has said that it is the right move in the right direction.
It would be recalled that the CBN Governor, Mr. Godwin Emefiele, while briefing the press on the outcome of the 98th meeting of the Monetary Policy Committee, in Abuja on Tuesday, had said that the combination of low accruals into the nation’s foreign reserves, owing to falling oil prices at the international market; continual depletion of the reserves; and high demand at the foreign exchange market made it difficult for the apex bank to continue to defend the Naira.
The apex bank boss added that the decision to devalue the currency is to improve fiscal health amid a steep fall in the prices of crude oil, the main export commodity of Africa’s largest economy.
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Justifying the decision to devalue the Naira, Emefiele disclosed that the nation’s foreign reserves lost more than $3 billion in one and a half months to efforts to defend the Naira.
Reacting to the devaluation of the Naira on Wednesday, through a press statement, the IMF said: “We are supportive of and welcome these actions, which we view as complementary and moving in the right direction.
“Of course, the global situation remains fluid and the key issue is being ready to manage downside risks and for the authorities to be prepared, based on assessments of credible scenarios, to consider additional measures, as necessary.”
Meanwhile, opposition parties in Nigeria have criticised the federal government over its decision to devalue the Naira, saying raw materials and industrial products will become costlier as Nigeria is heavily dependent on imports.
Nigeria has been badly hit by a sharp fall in revenues with Opec crude falling below $78/barrel, the country’s 2013 budget benchmark.
The country’s finance minister has now cut the 2015 oil benchmark price from $77.5 to $73/barrel in order to ensure better fiscal health.
The CBN has moved the USD/NGN target band to 160-176 from 150-160. The bank also raised the benchmark interest rate to 13% from 12%, in order to curb inflationary pressures stemming from a weaker local currency.
Central bank governor Godwin Emefiele said the current downturn in oil prices is not transitory but appears to be permanent.
The USD/NGN traded at a new record high of 178.25 on Wednesday before easing to 176. However, the dollar has been showing some weakness for the past few days which might help the Naira to some extent. After a set of data release on Wednesday, the USD index has fallen to a five-day low of 87.53.
Explaining the basis of the decisions of the Monetary Policy Committee to devalue the Naira and raise lending rate, the CBN boss said: “A major issue considered by the Committee, however, was the declining level of external reserves, which arose from demand and supply constraints. On the supply side, the falling oil price has considerably reduced the accretion to external reserves thus constraining the ability of the Bank to continually defend the naira and sustain the stability of the naira exchange rate.
“The supply side is further weakened by the commencement of normalisation of monetary policy by the US Federal Reserve following the termination of the third quantitative easing on 29th October, 2014; a development which has accentuated capital outflows. These developments are against the backdrop of considerable loss of fiscal space following our inability to build sufficient reserves during the boom days.
“On the demand side, the pressures in the foreign exchange market were aided mostly by the excess liquidity conditions in the banking system and speculative activities. It has become increasingly worrisome that improvement in liquidity conditions in the banking system, designed to enhance the resilience and stability of the banking system, has not translated to increased credit expansion to the real sector to engender inclusive growth and boost employment. Rather, it has led to an upward pressure in the foreign exchange market and Standing Deposit Facility window of the Bank while banks continually exercise a cautious approach to lending.
“Against this background, the Committee is of the view that the current challenge requires bold policy moves on both the demand and supply sides of the foreign exchange market. Consequently, bold policy and administrative measures in the management of the nation’s stock of foreign exchange reserves have become inevitable in order to align the market towards its long-run equilibrium path.
“On this note, the Committee wishes to reiterate that the Bank remains committed to a stable exchange rate within the limits of available resources and would continue to maintain sufficiently strong level of external reserves to meet its short term obligations and other regular balance of payments commitments. Without prejudice to this commitment, our foreign exchange management framework would have zero tolerance for infractions and would penalize economic agents whose primary objective is to speculate in the Nigerian market.”
The Naira has been taking sharp dive downwards lately with the parallel market exchange rate rising to N180 per dollar from N177.3 on Monday.
The situation was said to have been triggered by the restrictions introduced by the CBN to curb foreign exchange demand at the official market.
