—raised lending rate to 13 per cent
—increased private sector cash reserved to 20%
—Retain public sector cash reserve at 75%
The Central Bank of Nigeria yesterday devalued the naira as it moved the midpoint of the official window of the foreign exchange market from N155 to the dollar to N168 to the dollar. This means that the naira will exchange between N168 and N174 to the dollar at the foreign exchange market. Official devaluation of the naira became inevitable as a result of the reduction in government revenue from oil sale and production. The devaluation will increase the volume of naira available to the federation account and to the various level of government to prosecute their local programmes.
The CBN monetary policy committee also yesterday raised the interest rate bench mark from 12 per cent to 13 per cent thus signaling that interest rates charged by banks will go up further than they are now. The apex bank monetary policy committee further raised the cash reserve requirement for non government deposit in banks to 20 per cent from its previous 15 per cent position while retaining the cash reserve requirement of 75 per cent for government and their agencies deposit in banks.
Briefing the press on the outcome of the 98th meeting of the Monetary Policy Committee, in Abuja, the CBN Governor, Mr. Godwin Emefiele, said that the combination of low accretion into the nation’s foreign reserve, owing to falling oil prices at the international market; continual depletion of the reserve; and high demand at the foreign exchange made it difficult for the apex bank to continue to defend the Naira.
“All the 11 members voted to move the midpoint of the official window of the foreign exchange market from N155/US$ to N168/US$”, he said.
The CBN boss regretted that the high demand at the forex market was the handiwork of speculators and threatened to deal with those found to be involved in infractions. The wide gap between the exchange rate of N155 to $1 at the official market and about N178 to $1 at the Bureau the Change made round tripping obviously very attractive.
Justifying the devaluation, Mr. Emefiele noted that there have been a consistent devaluation at the interbank and BDC segnments of the forex market and that in spite of exclusion of some items from being funded through forex from those market, the demand pressure continued, necessitated a morefar-reaching measures to ensure stability of the exchange rate.
His words, “The depreciation at both the interbank and the BDC segments largely reflected recent demand pressures arising from the falling oil prices and dwindling external reserves. As part of the demand management measures, the Bank in two recent circulars excluded certain import items from the rDAS window.
Despite the tight measures, the high demand for foreign exchange has continued unabated, This demand does not seem to have any bearing on the genuine foreign exchange needs of the country, which the Bank stands ready and has the capacity to meet. The current level of external reserves provides approximately 7 months of imports cover.
Reserve falls from $40.7 b- $36.75 b
Justifying the decision to devalue the Naira, the CBN boss disclosed that the nation’s foreign reserve lost more than $ 3 billion in one and a half months to the efforts to defend the Naira.
His words, “Developments in the external sector since September 2014, manifested in a buildup of pressures in the foreign exchange market. While the Bank sustained its efforts to maintain the stability of the naira exchange rate at the rDAS window, a considerable degree of weakening was recorded at both the interbank and Bureau de Change (BDCs) segments.
“The exchange rate at the rDAS window during the review period opened at N157.31/US$ and closed at N157.32/US$, reflecting a marginal depreciation of N0.01k. To maintain and stabilize the exchange rate at that level, gross official reserves declined from US$40.7 billion on 17th September, 2014 to $36.75 billion at end-October 2014. From year to date, substantial currency depreciation has occurred in comparator oil exporting countries but the naira has depreciated by only 1.74 per cent.
“The depreciation at both the interbank and the BDC segments largely reflected recent demand pressures arising from the falling oil prices and dwindling external reserves. As part of the demand management measures, the Bank in two recent circulars excluded certain import items from the rDAS window. Despite the tight measures, the high demand for foreign exchange has continued unabated, This demand does not seem to have any bearing on the genuine foreign exchange needs of the country, which the Bank stands ready and has the capacity to meet. The current level of external reserves provides approximately 7 months of imports cover.
The apex bank also took steps to tighten money supply as it increased the MPR by 100 basis points from 12 to 13 per cent, widened the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent and increased the CRR on private sector deposits by 500 basis points from 15 per cent to 20 per cent with immediate effect.
It however, retained public sector Cash Reserve Ratio, CRR, at its current level of 75 per cent.
$73 oil overly optimistic
Mr. Emefiele said that the new oil price benchmark of $73 pb was considered too high as he warned that the falling oil prices were likely to become a permanent feature rather than an episode that would go away soon.
He said that the US Shale Oil, the Nuclear deal with Iran portend worse situations wore oil prices as predicted greater glut at the international oil market.
Already , he said, oil futures for the next six months were being sealed at less than $70 pb an indication that the nation benchmark could not but be reviewed further downward.
His words, “The Committee also noted that unlike in previous episodes, the current downturn in oil prices is not transitory but appears to be permanent; being a product of technological advancement. Currently, the US which use to be Nigeria’s former major oil export destination now meets on average 80 per cent of its domestic oil demand from local shale oil retorting technology production and exports over 8 million barrels of crude oil daily.
Explaining the basis of the decisions of the Monetary Policy Committee to devalue the naira and raised lending rate, the CBN Governor Mr. Godwin Emefiele 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 from 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 Committee is fully aware of the short run implications of a tight monetary policy stance on lending and growth. However, available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market. While the Committee remains fully committed to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, banks as agents of financial intermediation have a critical role to play in the nation’s development process. A banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking license. Under the circumstance, monetary policy must be bold and emphatic on the goals macroeconomic management seeks to achieve and encourage the flow of credit along those lines.
“The current situation demands that the Bank confronts the issue of declining external reserves head-on in order to strengthen the value of the domestic currency. Consequently, stabilizing prices and maintaining exchange rate stability and charting a sustainable path for medium to long-term growth are the immediate top priorities. The Committee remains committed to these in order to sustain the credibility of our policies and anchor the expectations of our core stakeholders.
“In the Committee’s opinion, a more flexible naira in the face of non-existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices. The Committee was, therefore, of the view that if it failed in taking the right policy actions now, the market would force the Bank to take more drastic actions in the future with far less foreign exchange reserves. Also, given the level of excess liquidity in the banking system, it becomes imperative for the Bank to address the sources of the foreign exchange demand pressure.
In the light of the above considerations, the Committee was of the opinion that the economy stood to gain by: Further tightening of monetary policy stance to anchor inflation expectations; and Allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves.
The naira exchange rate depreciation coupled with persist increase in the inflationary rate has been a major bane on economy of Nigeria. To a layman inflation is a phenomena to embrace as his income increases daily without knowing the harmful side of such an increase. Whether there is anything like depreciation or an improvement in the exchange or whether income is is nominal or real the layman do not know.
But this complementary problem so to say of naira exchange rate depreciation and inflation has been a thought of obesity in the hearts of Nigerians past and present governments and many patriotic Nigerians.
The value of naira as against dollar and pounds sterling started to deteriorate, in 1970; it was a naira to $1.400 dollar and 0.584 pounds sterling. In 1971, it was 1.44 dollar and 0.582 pounds sterling to a naira. In 1973, it was 1.519 dollar and 0.614 pounds sterling to a naira. In 1974 it was 1.589 and 0.675 pounds sterling to naira which increased to 1.623 dollars and 0.734 pounds sterling in 1975 as a result of Udoji salary award of 1974 which increased wage extensively. Higher wages increased the purchasing power of consumers thus, leading to increase in their prices.
The introduction of Structural Adjustment Programme (SAP), and second-Tier Foreign Exchange (SFEM) in 1986 on one of government’s major policy packages, was aimed at making the over, valued naira exchange rate more realistic and responsive to market forces. Regrettably the SAP/SEFEM was a disaster that was fast destroying the foundation of Nigeria economy. There was consequent persistence of exchange rate depreciation of the naira from N1.5691 to $1.0 at the end of September 1986, N7.8950 to $1.0 dollar by mid February 1990. Also by August 1998, the dollar was sold for N21.9960 at the Foreign Exchange Market (FEM) while at parallel market it was sold for N45. The value of naira continued to depreciate to the extent that the exchange rate was less than one dollar to a naira before 1990. It was $0.119 to a naira in 1990. This depreciated to N115.7 to a dollar by the 12th of April, 2001 and by 2003, it has raised N130 to the US dollar and today the CBN has devalued the currency to N168 to a dollar.
Nigeria then continued to adjust the currency from N1.5691 to the dollar in 1986 to the N168 today. The economy is still in on it’s kneel as the exchange rate moved further in
