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, Principal Policy Strategist at AFRIPOL. His works have
appeared in Wall Street Journal, Huffington Post, Forbes and many other
important journals around the world. His writings have also been cited in
many economic books, publications and many institutions of higher learning
including tagteam Harvard Education. Africa Political & 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. info@afripol.org http://www.afripol.org

Advertisements

Contact Us…

Please send your Press Release/Articles/ Stories/Enquiries to: editor@newafricanpress.com

Views expressed herein are not necesarily that of  New African Press  but that of the individual writers. Facts and accuracies are the responsibilities of the authors. Please also note that some people may use pseudo names or generic emails, to which New African Press may not be able to verify. Therefore, an author’s identity should not be inferred on the basis of name, subject matter, or any other characterization presented here.

Pls leave your comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Disclaimer

This blog claims no credit for any images posted unless where otherwise stated. Images on this blog are copyright to its respectful owners. If there is an image appearing on this blog that belongs to you and you do not wish for it to appear on this site, please E-mail with a link to the image and it will be promptly removed.

%d bloggers like this: