As CBN Adjusts Exchange Rate…

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CBN Governor, Mr. Godwin Emefiele

The naira at the official foreign exchange market has lost about 5 percent of its value when placed side by side with the dollar. The act which Central Bank of Nigeria termed ‘price adjustment’, according to economists, was a step in a right direction as the biggest exporter of oil in Africa contends with dearth of foreign exchange inflow due to current global market realities. Meanwhile, the decision of the bank may have its fallout on every sector of the economy. Bamidele Famoofo reports

Very recently, the Central Bank of Nigeria (CBN) took the decision to readjust the pricing of the naira compared to the dollar. That decision reduced the value of the naira at the official market by about 5 percent in comparison with the dollar as the value dropped from N361 to N380 to the dollar.

Goldman Sachs, in a report published by Bloomberg, said the move by Central Bank was expected, given the dearth of inflow of foreign exchange into the nation’s coffers. This on the other hand has had a negative impact on the nation’s external reserves.

“A significant devaluation of the Nigerian naira is likely in 12 to 18 months to stabilise the external accounts of Africa’s biggest oil producer. An exchange rate of N500-N550 per dollar should bring external balance”, economists Dylan Smith and Andrew Matheny say in research note produced by Goldman Sachs.

The Goldman Sachs Group, Inc., is an American multinational investment bank and financial services company headquartered in New York City.

Goldman Sachs hinted that the process is expected to continue as it said the “minor adjustments to official rate by Central Bank of Nigeria last week is a step towards rebalancing the foreign exchange market.”

“Recent inflows stemming from loans from international financial institutions and import restrictions not sustainable and will prolong buildup of imbalances before adjustment,”Goldman Sachs added.

Another economist, Dr. Boniface Chizea, agreed with the position of Goldman Sachs, as he said the CBN appears to be in a fix, given a slowdown in exchange rate flow from oil which is the biggest foreign exchange earner for the country.

His words: “So what has just happened is the CBN accepting the reality of foreign exchange crunch while attempting to make it more costly in Naira terms.”

Not Devaluation

Chizea noted that since the Central Bank adjusted the rate of exchange from N361 to N380 to the dollar, discussions have since raged on whether what happened is really prize adjustment or simply out right devaluation. So, for me, I am reminded of the old adage; “what really is in a name”?

“The CBN that owns the process has tagged it price adjustment and therefore so the matter should rest. But once you officially increase the exchange rate; that usually in common parlance is devaluation as opposed to depreciation which is the variant of loss in value which is market driven in a floating market value determination environment. What has just happened is also to a large extent market driven. The reality on ground is that the CBN has been doing its best to stop rapid loss in value of the exchange rate mindful of its implications for price stability. Also it is a fact that the current administration at the CBN is not particularly attracted to devaluation as a policy option going by its well informed belief that the only justification for devaluation is for a country intent on embarking on export led growth. But hitherto the major source of foreign exchange inflow to the country is oil with its price denominated in dollars. And therefore there is no prospect of boosting foreign exchange inflow from this source adopting devaluation strategy. But the situation is now dynamic as the oil market has confronted head winds which meant that both the quantity sold and the market price had been undermined by the Coronavirus environment. The challenge now confronting the country in this regard is that there is hardly any accretion to the reserves. The recent reported increases are due to dollar denominated transfers and loans which the Country obtained to confront the pandemic induced economic paralysis. The CBN has also dubbed what has just happened price adjustment because of the thinking and mindset which is fostered by devaluation,” he explained.

“Devaluation is a slippery slope which once a country gets to is difficult to know when it will stop as one devaluation begets the expectations of follow up devaluation. But compatriots are free to adopt whatever nomenclature they think better describes the situation for them”, he said.

He also explained that what has happened is not tantamount to an attempt to bridge the exchange rate gaps which might lead to the unification of the exchange rate.

“What would really result in exchange rate unification is adequate supply of foreign exchange so that at least legitimate foreign exchange demands are met at the official exchange rate window. The reality is that the only significant parameter that separates all the exchange rate windows in the country is the rate differential”, he added.

Implications

The implications of this development for the economy at large, the Small and Medium Scale enterprises, according to Dr. Chizea, is that inflationary pressures will be on the increase as the rate of exchange is a veritable factor cost. “Inflationary spiral depresses purchasing power, undermine capacity utilisation, result to reduction on the levels of employment, constrain economic growth and development and generally increase the misery index in the land. So there are no sections of the economy that will not be negatively impacted by this development,” he said.

Chizea, however, exonerated the CBN from bearing the blame of the negative impact of the decision on Nigerians as he said the reality of the matter is that the Central Bank had been fighting a rear guard battle to stem the rapid fall in the rate of exchange which is increasingly becoming daunting task.