Nigeria’s central bank governor, Godwin Emefiele, has weighed in on the ongoing debate regarding a likely devaluation of the naira, saying such adjustment to the local currency will not be happening anytime soon.
Emefiele, while dismissing devaluation concerns, acknowledged the recent fluctuations in global oil prices as well as in Nigeria’s foreign reserves, which analysts consider the basis for their prediction of an unavoidable currency devaluation this year. But he noted that reserves level remained high and strong enough to be able to meet obligations in the economy despite the challenges.
“It is important for us to note that reserves are there to meet the country’s obligation,” the CBN governor was quoted as saying by Nairametrics. “At a reserve level of about $38 billion today, and crude price at about $57, $60, $65 and sometimes hit $70, we … should continue to sustain the existing foreign exchange management and stability that we have seen in the market.”
Analysts divided on devaluation
Emefiele’s comment on the matter was a reaction to the recent differing projections by analysts concerning the devaluation of the naira.
Weaker crude oil prices, structural imbalances from the revenue standpoint and declining foreign external reserves – gross foreign reserves stood at just over $38 billion as of January 27 – increase the probability that a currency devaluation may occur in the first half of 2020, some experts say. Moreover, the CBN governor had set benchmarks for naira devaluation at $50/bbl oil price and foreign reserve levels closer to $30 billion.
“The Federal Government’s revenue position is alarmingly untenable … the CBN simply cannot continue to defend the Naira at current levels,” said Cheta Nwanze, Head of Research for SBM Intelligence. “We expect the government to be forced into the hard choice of devaluing the currency sometime within the first half of 2020.”
Projections by analysts at United Capital Limited meanwhile show that a currency devaluation is unlikely in the immediate-term on the basis that the CBN can still harmonize the official rate at N305.5 per dollar to something closer to the Investors’ & Exporters’ (I&E) FX Window rate at N360.0/$1.
CBN’s stance is good for Nigerians
The CBN continues to defend the naira using foreign reserves in order to sustain exchange rate stability. The bank has been an active buyer and seller of currencies since launching the I&E window despite repeated calls by international organizations and economic experts for the adoption of a free-float market-driven approach to the exchange rate.
Regardless of the costs associated with keeping the exchange rate stable even with shrinking foreign reserves, the central bank has always stood firm on its decision to defend the naira. And this is good news for Nigerians considering the effects a naira devaluation would have on the economy.
Devaluation means an official lowering of Nigerian naira against foreign currencies within the fixed exchange rate system. A devaluation in the naira means ₦1 would be worth less against other currencies such as the Dollar, Pound, and Euro, compared to the current rate.
Although a devalued or weakened naira would save Nigeria a huge chunk of reserves that would have been spent defending the currency at a higher rate, it would simultaneously make imports into Nigeria more expensive. The latter effect would affect the economy more as it highly depends on imports.
A fall in the value of the naira means imports, such as refined petrol, food, and consumer goods will become more expensive. Considering minimum wage at a stagnate rate, end consumers would have to pay more for almost every item bought and businesses may be forced to downsize, increasing unemployment and poverty level.