The danger in Naira devaluation

The danger in Naira devaluation

By Unknown   04:44   No comments:

DEVALUATION means official lowering of the value of a country’s currency relative to other foreign currencies. Currency depreciation refers to falling exchange value of a currency for other foreign currencies as a result of the forces of demand and supply which may be temporary. Currency redenomination on the other hand means changing the currency to a lower digital value due to its outrageous falling exchange rate over time. In effect, it means changing the face value of a highly devalued currency.
The debate on whether or not to devalue the Naira in Nigeria is as old as the second republic. Economists of the time vehemently kicked against it on technical ground. Their argument was that Nigeria was a highly import dependent economy and has an export that was mainly raw material with weak elasticity. This means that devaluation was likely to usurp the living standard of the citizens because it was not going to increase exports to earn more foreign exchange but liable to make imports of necessities dear. Strategically speaking, a country having weak elasticity of export and import and is aspiring to industrialise through the import of technological equipment and know-how should not make the blunder of devaluing its currency.
Although currency devaluation, depreciation, and redenomination are different, they originate from same source – economic policy slip. For example, trade deficit causes naira depreciation. This happens when foreign exchange realised from export lag behind the amount required to accomplish the desired import. Consequently, the competitions over scarce foreign exchange pull-down the price of domestic currency. Currency depreciation is therefore caused by falling domestic production of exportable commodities, falling price of exports, decreasing output of necessities, and a corresponding increase of imports.
Continuous depreciation can suffocate economic activities and compel the monetary authorities to opt for naira devaluation. This is possible when the persistent currency depreciation go beyond the capacity of the monetary authorities to use the traditional measure of stabilising the domestic currency through providing subsidy for imports from the foreign reserve. Invariably, the government may have to continue subsidising imports in order to avert the political implication of the unpopular devaluation but at the expense of depleting the foreign reserve. This forces the economy into dire straits and a serious dilemma akin to the proverbial statement – between the devil and the deep blue sea: devalue and enslave the economy, not devalue and remain economically wobbly.
In any case, Nigeria has been devaluing Naira from its official exchange rate of $1: N0.75k in 1980 to the current rate of about $1: N200. Usually spurious promise is made to entice the populace that the devaluation can increase export, reduce imports, increase foreign reserve, attract foreign direct investment, create employment and promote economic growth and development. Despite the fact that Naira was devalued severally since 1986 when the Structural Adjustment Programme (SAP) of the Babangida Administration was introduced, the promise of economic progress has not been realised. The cataclysmic effect of devaluation compounded the debt burden, made repayment of debts difficult and depressed the economy. For this reason, we should have a second thought about devaluation otherwise we may eventually redenominate the Naira.
Redenomination is caused by excessive devaluation just as the latter is caused by excessive depreciation. For example, assume an exchange rate of Naira to the USA Dollar to be 1:1 and eventually Naira is devalued to $1:N10, leading to policy redenomination of Naira back to $1:N1. This means that the new one Naira can only purchase same commodities the former N10 used to purchase before the redenomination. In the same reasoning, suppose we are to redenominate $1: N200 by introducing a new Naira with ratio $1: N2, it means that the new one Naira can only purchase what the old N100 used to purchase.
Opting against redenomination requires guarding the Naira against series of devaluation. This entails a concerted effort using both economic and social measures to revive the Naira. Economically, the government can reinvigorate the productive sectors through instituting the appropriate measures on industries, agriculture, mining, use of research in development by especially laying emphasis on youth employment and the substitution of imports. No matter how inconsequential, the production of goods should be encouraged. Even production of teaspoon, tissue paper, locally sewed clothes, and so on can generate employment and reduce imports. Socially, it is high time we understood that Nigerians have low taste for domestic products thereby affecting demand, profitability, and sustainability of local industries. This dangerous habit cannot reduce imports to strengthen the Naira.  Therefore, this should be corrected through proper national orientation. Alternatively, heavy custom duties should be imposed on the undesirable goods.
From the foregoing, devaluation and any of its elements is a defeatist position. The government should not only kick against it but also take appropriate measures to revaluate the Naira. This is necessary because the extreme case of devaluation is indebtedness, import dependency, unemployment, loss of patriotism, disrespect of constituted authorities, and triggering on large scale poverty, insecurity, low literacy level and diseases. In fact, the manifestation of these negative indices has been the major challenge for Nigeria. Therefore, the government should be extremely cautious in order not to be cajoled by the creditors. In effect, Nigeria should not succumb to a calamitous Naira devaluation.
• Professor  Magaji is of the Department of Economics, University of Abuja.


-Guardian 

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Naira crashes to 300 against dollar

Naira crashes to 300 against dollar

By Unknown   15:36   No comments:

Monday’s stoppage of foreign exchange sales to Bureau De Change operators by the Central Bank of Nigeria failed to lift the naira on Tuesday as the currency exchanged for 300 against the United States dollar in Kano, 290 in Lagos and 292 in Abuja.

Financial experts said the naira would decline further, while private sector operators described the move as a welcome development.

The ban was announced on Monday, when naira trading at 285 against the dollar at the parallel market from 278 on Friday.

The Acting President, Association of Bureau De Change Operators, Alhaji Aminu Gwadabe, told one of correspondents in a telephone interview that the currency traded against the greenback at 300, 290 and 292 in Kano, Lagos and Abuja a day after the CBN announcement.

“There is cut of (dollar) supply to the market. The BDC sub-sector has been murdered. We are not coping. The naira is going to head northwards. There is no solution in sight,” Gwadabe lamented.

The Head of Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said the stoppage of forex sale to the BDCs meant that the CBN wanted everybody to apply to the banks for dollars.

He stated, “But we feel the pressure now will move from the BDCs to the parallel market. We will see significant spike in the value of the naira at the parallel market because the little supply to the BDCs have also helped to cushion the demand at the parallel market.

“It will further compound or increase the spread between the parallel market and the interbank market. So, it will also increase round-tripping and unethical practices within the financial system.”

On the lifting of the ban on cash deposits into domiciliary accounts, Ebo said, “I am still sceptical about how this will work except they are also assuring us that if you deposit it, you can consummate business with it.”

A professor of financial economics at the University of Uyo, Akwa Ibom State, Leo Ukpong, said, “I don’t think the stoppage of dollar sale to the BDCs will solve the problem. The currency will depreciate some more.

“This move will make the naira to weaken more as demand for dollar will skyrocket because of the short supply.”

Members of the organised private sector, however, applauded the CBN for the stopping the sale of dollars to the BDCs and lifting the ban on cash deposits into domiciliary accounts.

The President, Manufacturers Association of Nigeria, Dr. Frank Jacobs, said industrialists had earlier kicked against the funding of the BDCs by the central bank, adding that with the development, the forex could be channelled towards funding the real sector in terms of importation of raw materials.

On the removal of the restriction of cash deposits into domiciliary accounts, Jacobs said manufacturers were still waiting for more clarification as to how the money deposited could be utilised by the customers.

The Director-General, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Mr. Emmanuel Cobham, said the forex sale ban was a welcome development.

According to him, although the BDCs are necessary in the economy, they are licensed entities and should, therefore, source for their own funds.

Also speaking on the matter, the Director-General, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, lauded the forex policy review, noting that it had addressed the concerns of economic operators.

According to him, it is a source of worry that the CBN continues to maintain its official exchange rate at N199 to the dollar at a time of dwindling forex inflow.

“The pressure on the official window will persist. The risk of round-tripping and distortions in the foreign exchange market will consequently remain high,” he said.

-Punch

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No more CBN forex for BDCs

No more CBN forex for BDCs

By Unknown   21:10   No comments:

Godwin Emefiele

Bureaue de Change (BDC) operators got yesterday a piece of bad news – the Central Bank of Nigeria (CBN) will no longer sell to them foreign exchange.
They are to source their foreign exchange from autonomous sources.
Addressing journalists on the development in Abuja, CBN Governor Godwin Emefiele said BDCs “must, however, note that the CBN would deploy more resources to monitoring these sources to ensure that no operator is in violation of our anti-money laundering laws”.
The CBN also reversed its decision on the deposit of foreign currency in commercial banks, announcing that it will henceforth “permit commercial banks in the country to begin accepting cash deposits of foreign exchange from their customers”. Both decisions are to take effect immediately.
These measures, the CBN governor said “are not intended to be punitive on anyone or any group; rather, it is meant to ensure that the CBN is better able to carry out its mandate in an effective and efficient manner, which guarantees preservation of our scarce commonwealth, and that our hard-earned financial system stability remain intact to the benefit of all Nigerians.”
The apex bank took these decisions because of what Emefiele described as “total disregard of the difficulties that the CBN is facing in meeting its mandate of maintaining the country’s foreign exchange reserves to safeguard the value of the Naira”.
Emefiele lamented that the CBN has “continued to observe that stakeholders in some of the subsectors have not been helpful in this direction. In particular, we have noted with grave concern that Bureau de Change (BDC) operators have abandoned the original objective of their establishment, which was to serve retail end users who need US$5,000 or less. Instead, they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction. Thereafter, they use fake documentations, like passport numbers, BVNs, boarding passes, and flight tickets, to render weekly returns to the CBN.”
Emefiele noted that “despite the fact that Nigeria is the only country in the world where the Central Bank sells dollars directly to BDCs, operators in this segment have not reciprocated the bank’s gesture to help maintain stability in the market.”
According to him, “whereas the CBN has continued to sell US Dollars at about N197 per dollar to these operators, they have in turn become greedy in their sales to ordinary Nigerians, with selling rates of as high as N250 per dollar”.
Given this rent-seeking behaviour, Emefiele said, “it is not surprising that since the CBN began to sell foreign exchange to BDCs, the number of operators have risen from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licences every month, indicating that some individuals have identified a lucrative business venture that had become a threat to the Naira”.
Rather than help the CBN to achieve its objectives for which they (BDCs) were licensed, Emefiele said, “the Bank has noted the following unintended outcomes: Avalanche of rent-seeking operators only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates; Potential financing of unauthorised transactions with foreign exchange procured from the CBN; Gradual dollarisation of the Nigerian economy, with attendant adverse consequences on the conduct of monetary policy and subtle subversion of cashless policy initiative; and Prevailing ownership of several BDCs by the same promoters in order to illegally buy foreign currencies multiple times from the CBN.
More disturbing to the CBN is the financial burden being placed on the Bank and the country’s limited foreign exchange.
The CBN, Emefiele said, “sells US$60,000 to each BDC per week.” “This amount translates to US$167 million per week, and about US$8.6 billion per year. In order to curtail this reserve depletion, we have reduced the amount of weekly sales to US$10,000 per BDC, which translates into US$28.4 million depletion of the foreign reserve per week and US$1.476 billion per annum.”
This, he stressed, “is a huge hemorrhage on our scarce foreign exchange reserves and cannot continue, especially because we are also concerned that BDCs have become a conduit for illicit trade and financial flows.”
Asked why it has proven difficult or impossible to prosecute erring BDCs, Emefiele said the CBN would now look at that possibility but added that “there are many things that the CBN is mandated to do, we would have lived a situation what people should do is obey and work within extant rules and regulations within which they are supposed to operate and do what is right, but if they begin to do what is wrong, in this case, it becomes a problem”.
Emefiele also said it was almost impossible for the Bank to monitor over 2700 BDCs with its limited number of examiners. “It is almost practically impossible,” he said, adding that “because of inadequate foreign exchange the BDCs have to source their foreign exchange autonomously. We do not have the resources to cope with over 2,000 BDCs in the country right now”.
BDCs not happy with this decision, the CBN said, “are free to return their licences and get a refund of the N35 million cautionary fees.” “Besides, we need more people go into other forms businesses like agriculture where we believe there is a lot of scope at this time,” Emefiele said.
On the reversal of its decision to have commercial banks accept foreign currency deposits again, the CBN governor said the banks “stopped deposit of foreign exchange then because we thought Nigerians were fast approaching dollarisation of the economy because a lot of people were speculating, and there was a lot of speculative attack on the currency”.
The CBN, he added, “saw a situation where people were going into their accounts, took their naira out of their accounts to buy dollars and indeed some were going to their banks to borrow money to buy dollar and stack those dollars in their accounts and, of course, it got to a point where the banks’ vaults were full and the banks wanted us to collect the cash and give them electronic dollar which we said we will not do and so what we had to do at that time was to plug the torrents of flow of the dollar, that has been achieved and at this point, we are beginning to think of opening the tap a little and let’s begin to see whether there will be proper orderly behaviour by operators as well as people in the market.”
“We believe that there are some people who would love to have the opportunity of depositing their foreign currency cash in their banks rather than in their houses, that is why we decided to open that tap again”, the governor said.
The immediate impact of the decision to stop selling foreign exchange to the BDCs, Emefiele explained, “it is the dollars that the CBN is giving the BDCs that is being round tripped to the banks; that is the reason why we said at this time because of limited resources we would not be able to fund the BDCs, they will believe there is always autonomous market and, indeed, in every part of the world there is the autonomous market. We believe that the autonomous market should be allowed to flourish and let’s see how it goes with the CBN out of that market.”

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