Alchemy of Naira’s devaluation and higher interest rate as Oil price plummets

By Emeka Chiakwelu

As crude oil price continues to nosedive and with limited war chest to shield naira, the Central Bank of Nigeria (CBN) has officially devalued Naira by 8 percent and raised interest rates by 100 basis points.

Godwin Emefiele, the CBN governor and the delegated chair of Nigeria’s Reserve apex bank announced the development in Abuja after the emergence meeting with the members of the Monetary Policy Committee. With this devaluation naira will be pegged at the exchange rate of N168 compared to the previous rate of N155 to one U.S. dollar, which will hinged on the target band of naira between 160-176  to the US dollar, compared with the previously 150-160 naira to the US dollar.

The interest rate was raised by 100 points from previously 12 percent to 13 percent in order to checkmate anticipated emerging inflation, deter currency speculation and to restrict capital flight from the financial market. The recent arrangement will possibly tame, if not slow the bleeding of the foreign reserve used in the defending of naira. Nigeria with a limited resources and a foreign reserve that stood at previously $39.5 billion could not afford to defend naira indefinitely from the aggressive currency speculators as price of oil continues to slide.

Nigeria just have to say no to fabricating a bulwark to protect weaken naira due to its inability to replenish its reserve as oil price continues to nosedive.

I am unconditionally optimistic on Nigerian project, but this latest move cannot in long-term solve the problems of the declining oil price and paucity of diversify source of foreign exchange reserve. An export orientated economy is inevitable for sustainable naira stability to be maintained.  Nigeria must have a mix of other revenues other than oil for replenishing and marinating an appreciable foreign reserve that can pose as an intimidating war chest, able to repel aggressive currency speculators. Other than Nigeria will be on roll coaster for foreseeable future because the fallen oil price is the future normality.

It is an expensive venture and unsustainable to vend off naira from the volatile oil price and currency speculators with the country’s relatively light-weight foreign reserve. The country’s dependency on oil for its majority of foreign exchange reserve has buttressed the weakness of Nigeria’s standing on its macroeconomics stability. The country’s GDP show an emerging diversity but it cannot be said of her accumulation of foreign reserve which relies mostly on the export of crude oil.

The hard reality is that the country’s foreign exchange is chiefly derived from oil revenues. And oil accounts for almost 80 percent of the foreign revenue and this must change if a stable value of naira is to be maintained and sustained. The herculean task for the policy makers and the government is to find ways to supplement crude oil export with arrays of meaningful exports of goods and services to offshoot the slavishly dependence on oil.

The new interest rate at 13 percent cannot be the panacea to the problems of macroeconomics stability especially the problem of inflation.   At the interim the country’s inflation rate is below 10 percent but at the consumer level the inflationary trends appears more ambiguous and detrimental in basic business transaction where naira could hardly buys anything of substance that can be affordable to average Nigerian.

Again the upward arrangement of higher interest rate may discourage borrowing at the monetary base, thus making it more difficult for small and medium business communities to borrow and invest in their businesses.

With the declining price of oil the subsequent tightening of belt will emerged. But one thing Nigeria cannot afford to do is to abandon her investments on country’s decaying infrastructures especially the provision of electric energy, roads and drinking water. The most important job of a given government is the protection of life and property. Stable and peaceful societies are the foundation for a prosperous society that has the propensity to attract and sustain investments. By doing well and administering the right vision the problems of macroeconomics can be corrected with logical monetary and fiscal policies.

Emeka  Chiakwelu, is Principal Policy Strategist at AFRIPOL.

- Culled from: http://www.vanguardngr.com