The current Central Bank Governor, Godwin Emefiele is probably the most hated banker in Nigeria. Even though much of his policies can be said to be a result of the script already written perfectly by President Buhari, he gets much of the flak nonetheless. One of the most criticized policy or lack off it is his refusal to devalue, a decision anticipated mostly by foreign investors and a cross section of local investors.
A lot believe devaluation may just be the near perfect response to the foreign currency crisis affecting Nigeria and many other emerging economies. Most emerging countries have seen their economies under pressure since the fall in commodity prices particularly oil. In response, some of these countries they have devalued not once and not twice, some have devalued more than 4 times all in a bid to solve the currency crisis. Solving the crisis by the way is by reducing demand by jacking up prices rather than using executive might.
Take the case of North African country Egypt! Egypt is said to have devalued about 4 times in 2015 alone. Last March (14 to be precise) they decided to devalue their currency for the umpteenth time, only that they took it a step further with its largest devaluation in 13 years. The decision was hailed as the right one and true to their assertions the disparity between the Egyptian Pound at the official and black market narrowed. Even analysts at Nairametrics hailed it.
Unfortunately, this was short-lived as things have taken a turn for the nasty. According to a Bloomberg report, the black market rate for the Egyptian Pound is selling at 11.47 Egyptian pounds, “a record 29 percent premium to the official rate of 8.8 pounds per dollar”. At the time the country’s Central Bank Governor, Governor Tarek Amer decided to devalue, the disparity between the black market and official rate was 24 percent. That gap has now widened to 29 percent according to the article.
So what exactly went wrong? The answer lies within the reason why those against devaluation believe it’s the wrong medicine. Egypt just like Nigeria suffers a currency crisis that has more to do with liquidity that with pricing. So long as liquidity remains an issue the price will continue to skyrocket provided the official rate of their currency remain fixed. Devaluation can only be short-term in nature and will continue to lag the price at the parallel market provided a fixed exchange rate remains. Once you start, you keep devaluing so frequently, the uncertainty experienced with the refusal to devalue will also occur. Rather than devaluation what the market is looking for is a float. The article from Bloomberg, confirmed this much.
“The market is looking for the value of the pound to be set by the aggregate of supply and demand, not by the central bank,” said Simon Williams, HSBC Holdings Plc’s London-based chief economist for central and eastern Europe, the Middle East and North Africa. “If that isn’t taking place, then it’s no surprise markets are disappointed.”
Nigeria’s CBN Governor is looking at Egypt and probably saying “you see I told you so”.