President Muhammadu Buhari has finally succumbed to the pressure of allowing market forces to determine the ‘true’ value of the Naira as he announced government’s backing to the recent ‘flexible forex’ policy introduced by the Central Bank of Nigeria (CBN).
By this policy shift, the tough stance of government not to “devalue” the Naira has given way to allowing the local currency to find its ‘true’ value in a tripartite forex system that hinges on official, inter-bank and autonomous markets.
This policy shift is contained in President Buhari’s nation-wide broadcast Sunday, to mark the 2016 Democracy Day.
According to the President, the biting effects of the prevailing global economic challenges had compelled government to find urgent solutions to the sharp drop in the nation’s revenue, occasioned by the slump in oil prices in the international market.
He said that Nigeria, like other economies, is grappling with effects of three major global developments that had altered the economic fortune of many nations, particularly the oil-producing states, which include Nigeria.
“On the economic front, all oil dependent countries, Nigeria included, have been struggling since the drop in prices.
“Many oil rich states have had to take tough decisions similar to what we are doing.
The world, Nigeria included has been dealing with the effects of three significant and simultaneous global shocks starting in 2014: 1) A 70% drop in oil prices. 2) Global growth slowdown. 3) Normalization of monetary policy by the United States federal reserve”, the president said.
Announcing government’s resolve to achieve a “stable” Naira amid lingering volatility in the forex market, Buhari maintained that “devaluation” had done great harm to the economy in the past.
He, however, did not specifically state whether or not to “devalue” the Naira to steer the economy away from impending recession.
The CBN governor, Godwin Emefiele, had warned last Tuesday that Nigeria was heading toward an imminent recession.
He made this revelation at the post-CBN Monetary Policy Committee (MPC) press briefing in Abuja last week.
In a tacit confirmation of government’s adoption of a currency adjustment system in the bid to close the wide gap between the official and parallel exchange rates, the president said:
“We resolved to keep the Naira steady, as in the past, devaluation had done dreadful harm to the Nigerian economy.
“Furthermore, I supported the monetary authority’s decision to ensure alignment between monetary policy and fiscal policy.
“We shall keep a close look on how the recent measures affect the Naira and the economy.
“But we cannot get away from the fact that a strong currency is predicated on a strong economy.
“And a strong economy pre-supposes an industrial productive base and a steady export market.
“The measures we must take, may lead to hardships.”
Analysts and industry experts had warned against CBN’s capital control policies and the dire consequence of maintaining a hold on the Naira, saying it might lead to the economy grounding to a halt as foreign investors exit the economy in droves.
These restrictions have led to massive capital flight in the economy with little capital inflow in recent times.
The Nigerian Stock Exchange (NSE) Foreign Portfolio Investment (PFI) reports showed that a total of N470.83 billion inflow was recorded in the equity market in 2015 as against N692.39 billion in 2014 – a whopping 47 per cent decline.
Total outflow was also massive both in 2014 and 2015: N846.53 billion and N554.24 billion respectively.
Similarly, total foreign participation in the Nigerian bourse showed a decline of N313.85 billion from N1.538.92 trillion in 2014 to N1,025.07 trillion in 2015.
Managing Director/CEO, Financial Derivatives, Bismarck Rewane, had maintained that Nigeria’s economy was like an anaemic patient in need of blood infusion and that government had chosen to treat the symptom rather than the cause.
“We see a Central Bank that is attempting to defend a currency at a value which is unsustainable.
“It therefore appears to send panic and frantic signals into a market that is extremely nervous.
“The CBN means well but is confusing economic agents with mixed signals.
“Therefore the key issues facing the government are the fact that adjustment of the Naira is now imminent, inevitable and imperative.
“This adjustment will have huge consequences for government finances, investment flows, export values and trade patterns.
“There will be short term pain, but medium term gain,” Rewane said at a lecture earlier.
The president acknowledged that the flexible exchange rate and the recent hike in pump price of petrol would entail hardship on Nigerians.
He promised that his administration would provide means of ameliorating the pains of the economic hardship by encouraging individual and group entrepreneurship with focus on agriculture and small enterprises.
Buhari said: “In respect of the economy, I would like to directly address you on the very painful but inevitable decisions we had to make in the last few weeks specifically on the pump price of fuel and the more flexible exchange rate policy announced by the central bank.
“It is even more painful for me that a major producer of crude oil with four refineries that once exported refined products is today having to import all of its domestic needs”
“The economic misfortune we are experiencing in the shape of very low oil prices has provided us with an opportunity to restructure our economy and diversify.
“We are in the process of promoting agriculture, livestock, exploiting our solid mineral resources and expanding our industrial and manufacturing base.”
The CBN had 10 months ago drawn attention to severe macroeconomic pressures that were pushing the economy into a recession and called for urgent steps to avert the impending crisis.
Emefiele pointed out that the long delay in the passage of the 2016 budget had worsenen the situation, leaving the apex bank with no option than to adopt tight monetary measures.
“The Committee acknowledged the severely weakened macroeconomic environment, as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment.
“The Committee recalls that in July 2015, it had hinted on the possibility of the economy falling into recession unless appropriate complementary measures were taken by the monetary and fiscal authorities.
“Unfortunately the delayed passage of the 2016 budget constrained the much desired fiscal stimulus, thus edging the economy towards contractionary output.
“As a stop-gap measure, the Central Bank continued to deploy all the instruments within its control in the hope of keeping the economy afloat.
“The actions, however, proved insufficient to fully avert the impending economic contraction.
“With some of the conditions that led to the contraction in Q1, 2016 still largely unresolved, the weak outlook for growth which was signaled in July 2015 could extend to Q2.”
Members of the organised private sector (OPS) have applauded the shift in CBN’s rigid foreign exchange position which, had led to a wide gap between official exchange rate of the Naira at N199 as against N320 to a US Dollar on the parallel market.
The Director-General, Lagos Chamber of Commerce and Industry ( LCCI), Muda Yusuf, said that the flexible exchange rate and the deregulation of the petroleum sector was in the peoples’ interest.
The Acting President, Association of Bureau de Change Operators of Nigeria (ABCON), Muhammed El-Amin, had told The UNION that the new floating exchange rate policy would not salvage the Naira contrary to what the CBN wants the public to believe.
He maintained that it would escalate the crisis and make the Naira weaker in relation to the US Dollar, thereby spiking inflation, cost of production and putting greater pressure on the local currency.