Will Naira devaluation boost Nigeria’s economy?

Governor of the Central Bank of Nigeria (CBN), Lamido Sanusi, is insisting that the suggestion by the International Monetary Fund (IMF) calling on Nigeria to devalue its currency “is not based on sound economic logic.” Sanusi insisted for the umpteenth time during an interview with CNBC Africa that the Naira is not overvalued and should therefore not be “losing its value.” Is Nigeria in a desperate situation that it has to devalue her currency to boost the economy? Group Business Editor, ROTIMI DUROJAIYE, writes 

Last Monday, the Central Bank of Nigeria (CBN) Governor, Lamido Sanusi, rejected the advice by the International Monetary Fund (IMF) to weaken the naira, saying the currency is not overvalued.   

Sanusi criticised the advice from the IMF for greater exchange rate flexibility, saying he did not believe the naira was overvalued and that the advice was based on flawed logic.

After ending consultations with Nigeria 10 days ago, the IMF noted in a statement that forex reserves had been falling and said speculation against the naira could become “intense.” 

IMF said its staff believed the naira, which has traded in a narrow band around 150 to the U.S. dollar for more than a year, was overvalued and that greater flexibility would cushion external shocks to the country’s economy.

“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,” Sanusi told CNBC Africa television.

“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.”

He said he agreed with the Fund’s assessment that further monetary tightening may be required if inflationary pressures continue, but said it was “naive” to believe that monetary policy alone could rein in rising prices.

He noted that expansion in credit to the private sector had remained weak despite an accommodative monetary policy.

“The link between monetary policy and inflation is at best tenuous; it is theoretical. The reality is that the bulk of inflation is being pushed by structural forces,” Sanusi said.

“So, we do agree that we should tighten, but we think the IMF is a bit naive in its overestimation of the potency of monetary variables in the short term,” he said.

Tightening liquidity

The CBN raised the country’s benchmark interest rate by 25 basis points to 6.5 per cent three weeks ago and took aggressive measures to tighten liquidity, raising the cash reserve requirement and liquidity ratio for banks in a bid to reduce lenders’ ability to create more money. 

Sanusi has made getting inflation into single digits a priority. Consumer inflation edged up to 12.1 per cent year-on-year in January from 11.8 per cent the previous month, although food inflation eased slightly.

Despite being Africa’s biggest crude oil exporter, Nigeria imports most of its domestic fuel needs because of the shambolic state of its refineries. It also imports everything from rice to toothpicks, due to the neglect of agriculture and manufacturing since it started pumping oil half a century ago.

“We think we need to have a proper structural adjustment to reduce import dependence,” Sanusi told CNBC.

“The IMF should talk more to trade issues and other structural reforms that have not been ongoing rather than trying to compel or push the country into an unnecessary round of devaluation,” he said.

He also repeated that four of the nine banks rescued in a $4 billion bailout in 2009 would sign memoranda of understanding with new investors over the next one or two weeks. He said at least two more were in “very advanced” talks and were trying to resolve final details.

“Once that is done, I think all the systemically important banks would have signed MOUs,” Sanusi said. 

The CBN governor said that the depleting reserves has been as a result of repairing oil wells that were bombed in the Niger-Delta at the height of militancy.

According to Sanusi, “Oil prices are up; output is up, the demand for reconstruction and rehabilitation of structures is not where it was, the power reforms are going on, so we do not see any fundamental reason at this point in time for an oil- producing economy when oil prices and output are going up, for us to depreciate or devalue.”

Sanusi added: “I’d like to first of all start by saying that we appreciate IMF’s comments on our economy and the support they have given us so far. However, it is important to state that the days have gone when Central Bank governors simply accept everything that they have said and conflicting objectives in central banking are not unique to Nigeria.

“There are a lot of structural problems. First of all, there is a question of the serious limitation of monetary policy. A lot of the components of inflation in Nigeria are structural. We are an import- dependent economy, we import inflation through imports of food and energy,” he said.

Sanusi explained that, contrary to the belief that the foreign reserves were depleted to keep the naira strong, most of the reserves were used to increase foreign reserves by repairing oil wells that were damaged during the height of militancy in the Niger-Delta.

“We had run down reserves because we had special power projects. We had run down reserves because we had to invest money to replace oil wells that had been bombed, and production centres that had been attacked during the Niger Delta crisis and get to production, and we had run down reserves to support the naira at the time when it had speculative attack. 

“Now, that has gone. If you look at the demand profile, if you look at the exchange rate, we’ve been at 150, we have always been 150 ± three per cent, and stability in the exchange rate is central to our price stability objective and we totally disagree that the Central Bank should just devalue based on these short- term shocks which are a reflection of a global crisis especially since it was driven by liquidity, and we know that liquidity was necessary for the banking system”, he said.

According to him, the reserves position in Nigeria today covers more than 12 months imported goods; it covers about seven months imported goods and services. 

“We are not in any way in a desperate situation and when people say that the naira is overvalued, I ask them in relation to what? Nobody has given me an answer to that,” he said.

Can IMF dictate to Nigeria?  

Stakeholders in the Nigerian economy also disagreed with the IMF that the naira is overvalued and that more exchange rate flexibility is needed to prevent the CBN from running down the foreign currency reserves to fix the rate.

Finance analysts disagreed with the position of the IMF, noting that a reduction in the purchasing power of the country’s currency would only help to hasten the collapse of local industries.

The House of Representatives, in its reaction, said that the IMF could not dictate to the country on how to run its economy, just as the Labour Party (LP) urged President Goodluck Jonathan to ignore the advice to devalue the naira.

Spokesman of the House, Eseme Eyiboh, said that the organisation could only make observations or advise nation-states on how to get good results from governance.

He added that the decision on whether to accept its opinion was solely that of the country involved.

Eyiboh 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 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.”

LP National Chairman, Dan Iwuayanwu, said his party expected the Federal Government to know that both the IMF and the World Bank had never been helpful in their advice on how to move the economy of any third world nation forward.

Iwuayanwu said that it was ironic that while the IMF and the World Bank usually called for a reduced interest rate in advanced countries, they usually gave a contrary advice to Third World countries.

He also lambasted the two institutions for their efforts at making the euro and the pounds sterling stronger, while seeking to weaken the Nigerian currency.

He said, “If IMF advises a nation, it is left for the nation to know the motive behind such an advice. Nigerians should recollect how the IMF advised the regime of Gen. Ibrahim Babangida (retd.) to devalue the naira. Up till now, we are yet to recover from that action, which he agreed to.

“Babangida went ahead to start the Structure Adjustment Programme (SAP) and children that were not born then are still paying for that unwise action today. We should have learnt our lesson by now.”

Economic analysts, who made their position known also, explained that rather than advocating for a devaluation of the naira, the IMF should help to initiate complementary monetary policies that would help stimulate the Nigerian economy.

The President, ValueFronteira Limited, Dr. Martin Oluba, said that neither the devaluation of the naira nor an increase in interest rate would help curb inflation.

He said that the country was an import-dependent nation, and as such, its current economic position did not call for any of such policies.

He said, “I don’t agree with them on that for many reasons. What are we devaluing for? Are we devaluing because we are exporting something? Devaluation is not depreciation. The truth is that the current fiscal policy disposition of government, which does not permit investment in infrastructure that are not entrepreneurial supporting and does not also permit the diversification of the economy into other foreign exchange earnings areas like agriculture and solid minerals, will eventually make us to witness a depreciation of the naira. The pressure, over time, will result into devaluation.

“But that is a futuristic thing, and to that extent, I agree with the IMF; but for devaluation to be pursued at this point in time, it will not help because we do not have anything that we are going to export. So, even if we devalue at this point, are we devaluing because we are giving incentives for others to come and carry our produce?

He added, “We are only exporting oil, which is not influenced by the value of our currency. If we now devalue, what it means is that it becomes slightly more difficult for local entrepreneurs to thrive.

“What the IMF should be advocating for is a complementary policy disposition of the government, such that single digit inflation and low interest rates are pursued, and not the other way round.” 

Also speaking on the issue, the Head, Research and Strategy, BGL Securities Plc, Olufemi Ademola, said: “The concern I have with what they said is that now that food prices are going up, and with Nigeria having the opportunity to export some food and making more money, then we shouldn’t be thinking of devaluation.

“Their situation is that because CBN is managing the exchange rate, therefore, it means that there are no market forces at play. So, they want CBN to make it flexible so that the market can determine what they do.

“But if we do that at this moment, we won’t have any problem because we are having lots of resources coming in. So, what that means is that we have lot of avenues to meet the demand of exchange rate without outstripping the supply.

“However, we have a problem in Nigeria because we can’t get credit from the local financial market, which is making corporate performance to be very slow and what that means is that it will be difficult to import to meet that gap, and if we can’t import, there will be pressure on the naira and when that happens, it will lead to a fall in the naira and all these reasons have severe implications on inflation. So, the CBN needs to look at it from all perspectives.”

Inflation edges up 

The National Bureau of Statistics (NBS) reported last week that inflation edged up marginally to 12.1 per cent year on year (y/y) in January, from 11.8 per cent y/y in December, although it was still below the 12.8 per cent and 13.4 per cent recorded in November and October.

The persistent rise in food prices, globally and locally notwithstanding, the Bureau’s report states that food inflation dropped to 10.3 per cent y/y (a record low since February 2008), from 12.7 per cent, and 14.4 per cent in December and November. The “All items less farm produce” inflation also increased to about 12.1 per cent from 10.9 per cent in December and 11.7 per cent in November.

Emerging markets strategist, Standard Bank, Samir Gadio, however noted that it is rather unusual to have a negative food inflation rate at this month of the year.

“This implies that month-on-month (m/m) food inflation declined to -0.9 per cent in January, from 0.9 per cent in December and 0.3 per cent in November; interestingly, a negative m/m food inflation rate is somewhat unusual in Nigeria this month of the year,” he said, adding that this happened in January 2007 for the last time.

“In this regard, the negative imported food sub-inflation rate appears to highlight that Nigeria has until now been somewhat immune to exogenous pressures associated with rising oil and global food prices, but the magnitude of the downturn in this category, to -5.6 per cent in January, from 13.7 per cent in December and 15.1 per cent in November, is somewhat intriguing and will probably require further official clarification,” Gadio said.

According to him, most of the pressure still continue to originate from the “Housing, water, electricity, gas and other fuel” sub-component (16.7 per cent of the CPI basket) which registered a 13.2 per cent increase, from 13.0 per cent in December and 12.6 per cent in November.

“As such, there was no sign of a tangible structural shift in core inflation that would be fuelled by the demand side of the economy on the back of the loose fiscal policy stance, which we think has been offset by a weak money multiplier and sluggish private sector credit metrics over the past couple of years,” he further said.

 Gadio is, however, hopeful that inflation could drop in February.

“According to our calculations, year-on-year inflation would drop in February if month-on-month consumer prices are below 1.9 per cent. This looks possible at this stage since such a m/m rate has been recorded only once in the second month of the year since 2006 (in 2010) and the average of monthly inflation rates in February between 2006 and 2011 is 1.06.

Gadio said if this scenario materialises, it would positively support bond prices, especially as the liquidity ratio is also increased from 25 per cent to 30 per cent on March 1 by the Central Bank.

“Nevertheless, the slight pickup in consumer prices in January could still push the Central Bank to moderately hike the Monetary Policy Rate during its March MPC meeting, as the policy focus has shifted from a recovery in credit and growth to inflation in recent months,” he said.

Managing Director, Financial Derivative Company, Bismarck Rewane, is of the opinion that the nation’s inflationary threats are distinct and prominent.

“World banks are shifting their focus away from the main objective of controlling inflation. Until now, there were split between those that adopted the explicit inflation targeting framework or implicit,” Rewane said.

According to him, the average inflation for 2010 was 13.8 per cent and the Central Bank’s single digit target was not achieved, though inflation declined for the 6th consecutive month to 11.8 per cent (y/y) in December.

“Robust liquidity growth, combined with recovery in bank lending is expected to cause strong growth in money supply. Inflationary threats remain real and pronounced,” he said, adding that the increase in minimum wage, tighter fiscal policy and election spend, sale of the rescued banks, imported food inflation, among others, are factors that fuel the pressure on the nation’s inflation echelon.