Sanusi’s CBN & Naira devaluation: Public Good, Double Talk… – By Emeka Chiakwelu

Posted by admin Articles, CBN (Central Bank of Nigeria), Columnists, Emeka Chiakwelu, NNP Columnists Tuesday, December 27th, 2011

By Emeka Chiakwelu, NNP, Dec. 27, 2011 – It is beginning to look that Sanusi Lamido Sanusi, the executive governor
of Central Bank of Nigeria (CBN) is stepping into a pathway of perplexing
contradictions. At the time that International Monetary Fund (IMF)
recommended for Nigeria to devalue naira, Sanusi was insisting that there
is no need for the devaluation. He did everything he can to make it
absolutely certain to every one listening that there is no logical
financial reason to devalue the already malleable and soft naira. Most
Nigerians were singing his praises that Nigeria has gotten a financial
leader that cannot be intimidate by overbearing IMF, a leader that is not
willing to be genuflecting to the international financial institutions.
But apparently not, the CBN chieftain is doing Texas-Two Step backward
dance.

What’s up?

Sanusi has begun to sing a new tune; it is no more the IMF asking him to
drink the bitter liquid of devaluation. The CBN titan has chose to do it
for the public good as it appears to keep the economy floating as the
bulwark to the anticipated nosedive of oil price, with subconsequent lower
foreign reserve. The reason that is more plausible is to appease the
international financial powers who are probably breathing per irately down
his neck. The naira has been devalued up to N160 to $1 but the devaluation
will not stop there. Go and mark this, it is a slippery slope and the
devaluation will continue. But interestingly, Nigeria does not have the
requisite dollar reserve to satiate the demand that comes with the
devaluation.

Finacial Times of London wrote: “Nigeria devalued the naira on Monday as
falling reserves, caused by weak oil revenues, forced its hand. The
central bank announced the naira would be pegged to the dollar within a
target range of N150 to N160, up from a bracket of N145 to N155 per
dollar. The bank wants to converge the official forex rates with the
interbank rate and narrow arbitrage trading opportunities – the chance for
investors to profit from the two different rates”

David Kahone of Financial Times further reported that, “The main reason
for Nigeria’s decision to devalue, according to Renaissance Capital, the
Russian investment bank, is a fall in its reserves brought about by lower
than expected oil production in 2011 and a low projected oil price in
2012. Africa’s biggest oil producer derives some 75 per cent of its
revenues from oil and is revising down its benchmark oil price in the 2012
budget to $70 per barrel from $75 per barrel – not an insignificant shift”

The apparent devaluation will not bring about any affirmative result that
compelled CBN in first place to devalue naira. Nigeria had passed through
this path before and it did not make a difference nor did it change the
economic paradigm of the nation in good trends. The problem with Nigerian
economy is beyond the application of monetary policy and in this case the
devaluation of naira. Nigeria has major structural problem that cannot be
rectify by artificial depreciation of the naira. The problem with
country’s economy is over reliance on oil and by thinking that the party
will last forever. The idea of diversification is a lip service given by
policy makers as the country is busy chasing a shadow that is merely a
mirage. A nation cannot become economically independent by exporting one
commodity with a weak currency which will eventually attract IMF’s
neo-liberal policies. As the country implement neo-liberal policies, it
will not stop with devaluation of naira, the shrinking of spending on
social program will follow put including the removal of fuel subsidy and
banning of importation of many essential commodities. The government will
balance the budget on the back of the poor people of Nigeria and suffering
will geometrically increase.

The major contradiction coming form naira’s devaluation is threat it posed
to stabilizing inflation and the further erosion of domestic value of
naira. Devaluation is another method of creating more money in the
circulation especially with the weaken naira. With devaluation and
subsequent enormous soft naira in circulation the prices of food, goods
and services will go up; that will make the ugly hand of inflation to
rigidly standout and making it more difficult to rein in inflation. Then
CBN will restore to further mopping of the liquidity by tightening
monetary tool, thereby jacking up interest rate which will conversely slow
down the economic growth. No matter from which perspective or angle one
looks at the naira devaluation its benefit is quite limited and there is
no optimum quantifiable outcome. One thing it can do is to discourage
importation, but Nigerians are already addicted to foreign products and
travelling abroad; surely Nigerians will find a way to circumvent it and
continue with their addictions.

The price of oil and foreign reserve have the propensity to be gyrating
cyclically and using naira’s devaluation to stabiles the economy is not
logical at long term. It should be a tactical response to a momentarily
problem but it is not strategically plausible to become the panacea.
Nigerian economy is standing on a dislocated table that can be easily be
pull down by forces of the market. The economy is growing at above 7
percent but without infrastructure and security the growth may not be
sustainable.

CBN’s chief Lamido Sanusi may do the public good and world economy good by
devaluation that will make oil cheaper. It can be accepted for a short
time but Nigeria may not necessarily be the beneficiary because Nigeria
does have arrays of commodities and finished products to export. This
boils down on the lopsided economy and portrays how weak the manufacturing
and agricultural sectors are in the country. The source of country’s
earning of foreign exchange must be expanded beyond oil export by
diversification of the economy. This must be made perfectly clear to the
policymakers that Nigeria cannot devalue her currency to a successful
economy.
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Emeka Chiakwelu is the Principal Policy Strategist at Afripol
Organization. Africa Political and Economic Strategic Center (Afripol) is
foremost a public policy center whose fundamental objective is to broaden
the parameters of public policy debates in Africa. To advocate, promote
and encourage free enterprise, democracy, sustainable green environment,
human rights, conflict resolutions, transparency and probity in Africa.
http://afripol.org/ [email protected]_posts