Why Nigeria Will Not Devalue Naira

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Godwin Emefiele

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The Central Bank of Nigeria is not going to devalue the Naira although the Monetary Policy Committee is planning for a new foreign exchange framework

By Anayo Ezugwu  |  Feb 8, 2016 @ 01:00 GMT  |

DESPITE the fact that the Naira has depreciated to 305 against the dollar in the parallel market, the Central Bank of Nigeria, CBN, is not ready to devalue the currency. At the end of the Monetary Policy Committee, MPC, meeting, on Tuesday, January 26, Godwin Emefiele, CBN Governor, said the CBN would soon come out with an exchange rate framework to ensure a more effective and liquid foreign exchange market taking into accounts Nigeria’s strategic development priorities. The framework is to ensure consistency with monetary and fiscal policies.

The CBN governor gave no indication that he was ready to ease currency-trading and import restrictions that had kept the inter-bank exchange rate at 197-199 per dollar since March 2015, even though they had been widely criticised by investors and lawmakers.

The CBN decision was reached, taking into account Nigeria’s strategic development priorities.  The 12-member MPC voted unanimously to keep monetary policy rate unchanged. It also held the cash reserve ratio for commercial banks at 20 percent.

There had been no changes to the official naira rate to the dollar which has come under tremendous pressure due to the drying up of vital oil revenues.  On devaluation, Emefiele said: “The only answer I can give is that we are already working on different scenarios … under different crude prices. The committee observed that the last episode of low oil prices in 2005 lasted for a maximum period of eight months. However, the current episode of lower oil prices is projected to remain over a very long period.

“Consequently, it is imperative to brace up for a longer period of low government revenues from oil sources, which would necessitate hard and uncomfortable choices as the economy transits to more sustainable sources of revenue, consistent with the economic realities and strategic objectives of the country. In the circumstance, certain tradeoffs must be envisaged and duly accommodated. In view of the foregoing, the imperative for consistently sound and coordinated macroeconomic policy has become inevitable. In the medium term within which monetary policy is cast, the need to allow policy to produce the desired outcomes becomes a key consideration in the policy mix.

“Consequently, the bank is fine-tuning the framework for foreign exchange management with a view to ensuring a more effective and liquid foreign exchange market, taking into account Nigeria’s strategic development priorities; with the policies being designed within an environment of regularly ensuring consistency with monetary and fiscal policies.”

According to Emefiele, Nigeria’s foreign reserve currently stands at $28 billion. The apex bank was already building several scenarios around the oil price and that it would ensure the best options possible. He said: “With time, you will see how we will provide the needed framework for a flexible forex regime. We are already working on different scenarios. And we will look at them. We will look at different scenarios at both management and the monetary policy committee.

“We will continue, as much as possible, to engage the fiscal authorities and share our positions to see that notwithstanding the drop in the oil prices, we will continue to run the government and continue to do business. We have said it before that the drop in oil prices is going to be with us for much longer than it used to be. Before, it used to be for about eight months. This time, it has been with us for more than 14 months and yet, we have not seen the light at the end of the tunnel. But we will continue to be alive to our responsibilities.”

Emefiele also explained that the new CBN Stamp Duties policy would make a difference in raising the non-oil revenue of the federal government at this time that oil revenue was facing great challenges. The CBN had no option than to support the federal government on raising revenue from other sources, he said, adding: “We will work with the banks to make sure that stamp duty is paid on each transaction above N1000 in the banks.”

The MPC in consideration of the headwinds in the domestic economy and the uncertainties in the global environment decided by a unanimous vote to retain the Monetary Policy Rate, MPR, Cash Reserve Requirement, CRR, Liquidity Ratio, LR, and the asymmetric corridor of +2/-7 around the MPR.

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