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Home Markets Currencies

Emefiele Explains Four Reasons Why The CBN Devalued The Naira

Nairametrics by Nairametrics
December 10, 2014
in Currencies, Politics
Emefiele Explains Four Reasons Why The CBN Devalued The Naira
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Emefiele

The CBN Monetary Policy Committee agreed to devalue the naira back in November following massive pressures that have had the naira depreciate at the interbank and the parallel markets. The decision came as no surprise to most analysts as the CBN had little options at its disposal. Whilst the committee communique contained various factors that shaped up their decisions, the CBN Governor still deemed it fit to explain to his fellow bankers why they agreed to devalue. He gave his reasons at the Annual Banker’s Dinner organized by the CIBN as reported by the Nation. These were the key reasons I noted (I highlighted his quotes in blue).

1. Forces of Demand and Supply

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In explaining the difficulties in managing exchange rate stability, the CBN boss raised a poser: “What then can a Central Bank do to react to such a situation of falling reserves and pressurised exchange rates? One course of action would be to continue to deplete the foreign exchange reserves in trying to keep the official rate at a stable level. But there are several difficulties with this option.”

Firstly, he said regardless of its critical nature in an import-dependent country such as Nigeria, the exchange rate operates like any other ‘price’ in the market.

The dollar/naira exchange rate is simply the ‘price’ of dollars in naira. The forces of demand and supply, he said, determine its movement. “When demand rises, the price rises. When supply falls, the price also rises as well. In recent times, Nigeria has faced a perfect storm of simultaneous dwindling supply of dollars and rise in demand. Both forces have led to a rise in the price of dollars, that is, significant reduction in supply of dollars to the market, even with constant output of crude oil production,” he said.

2. End of Quantitative Easing in  the US

The other global factor, which has significantly reduced the supply of dollars in the market, is related to the end of Quantitative Easing by the U.S Federal Reserve. At the height of the programme, the Federal Reserve was supplying a total of about $85 billion into the United States (U.S) economy on a monthly basis, through asset purchases. This programme came to an end in October this year, thereby significantly reducing the supply of U.S dollars in the global economy.

3. Combination of QE and Fall in Crude Prices affected most world currencies

The third difficulty, which has contributed to the continuing depletion of Nigeria’s foreign reserves, and its capacity to defend the naira is that the combination of a fall in oil prices and the end of the Quantitative Easing programme by the U.S Federal Reserve have led to a depreciation of most currencies in the world against the dollar. Emefiele said an analysis of the year-on-year change in the exchange rate of 26 Emerging Market countries (including Brazil, China, India, South Africa, Turkey, Mexico, and Nigeria) indicates that their currencies have depreciated by about 8.1 per cent on average against the dollar.

4. US Led Sanctions Against Russia

Also, he said the current U.S-led sanctions against Russia for its alleged role in the ongoing Ukrainian crisis do not appear to be abating anytime soon. More also, current negotiations between Western powers and Iran could end in a deal that may open up Iranian oil supply lines to more parts of the global economy, a development that is likely to depress prices even further.

He explained that it was on the basis of these analyses and realities, the CBN reached the decision that it would be sub-optimal to indefinitely continue to deplete the country’s foreign reserves in defending the naira.

You can read the full article here

Tags: Black MarketCapital controlsCBN Forex PolicyNaira DevaluationNews Review
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