Economy & Politics
Defending the naira at a cost
President Muhammadu Buhari has made currency stability a key pillar of his plan to revive an economy still reeling from the collapse of oil prices in 2014.
President Muhammadu Buhari has made currency stability a key pillar of his plan to revive an economy still reeling from the collapse of oil prices in 2014. He had previously said that weakening the naira would stoke inflation.
The Central Bank of Nigeria recently revealed in a press release that naira devaluation is unlikely in 2020 despite it being 9% overvalued and a deteriorating external foreign reserve.
Godwin Emefiele, the governor of the Central Bank of Nigeria also supports President Buhari’s controversial decision to close the country’s land borders to goods in order to stop smuggling, defending the move that it would quell insecurity by creating agricultural job opportunities for young people.
The stability of Naira is expected to continue to be the main policy aim of Mr Emefiele’s second five-year term, which began in June, even as he pursues expanded financial inclusion, increased access to credit for small businesses and consumers, as well as the diversification of Nigeria’s oil-dependent economy.
[READ MORE: Oil price crash, Coronavirus: The trouble that lies ahead for Nigeria)
Emefiele has been praised for overseeing a fall in inflation over his tenure and the near doubling of Nigeria’s foreign reserves amid a drop in the price of oil, which accounts for nearly 90% of foreign exchange earnings and 60% of government spending but recently, inflation has crept back up around 12.5% and reserves have fallen greatly to about $36 billion.
A Fx dealer at Access Bank, who spoke to Nairametrics in a phone call interview, said that the action of the CBN to defend the naira through different interventions was commendable as it restored calmness in the Fx market, though in the short run, he expected volatility, as soon as the coronavirus outbreak recedes, foreign inflow would pick up.
CBN has restricted importers’ access to dollars and stepped up the sale of high-yielding debt to attract inflows from portfolio investors. It has also backed the government’s closure of some land borders, designed to stop smuggling of food and other foreign goods.
However, CBN’s policy of defending the naira has been disastrous, creating shortages of products such as milk and fuel, and bringing factories to a standstill for want of imported inputs.
Yet, it is clear Mr Emefiele has gained the confidence of President Buhari, who appointed him for a second term earlier this year, a first for a CBN governor. Emefiele has acted in virtual lockstep with the Buhari administration, using the bank’s tools to enhance government policy.
He has been particularly active in agriculture, one of Mr Buhari’s highest priorities, and dedicated to diversifying the overall economy away from oil.
Urenna, an Intelligence & Communications Analyst at Taxaide told Nairametrics that though CBN had assured Nigerians there would be no devaluation of the Naira.
He said, “We also need to brace ourselves in the eventuality occurs. What will be the fate of Nigerians? We are looking at another round of high inflation rate. Already it stands at one of the highest experienced in years at the rate of 12.13%, according to the latest CPI report released by the National Bureau of Statistics.”
[READ ALSO: CBN slashes special interest rate to 5%, directs banks to restructure loan terms)
LAGOS, NIGERIA – JULY 15: A detail of some Nigerian Naira,(NGN) being counted in an exchange office on July 15, 2008 in Lagos, Nigeria. (Photo by Dan Kitwood/Getty Images)
With the inflation rate rising, consumer spending will drop, and this will, in turn, affect the economy. Devaluation of the naira will badly affect the nation as it would lead to a decline in economic growth of the nation. In terms of taxation, this will reduce tax revenue. Would the FIRS be able to meet the N8.5 trillion target if economic activities in Nigeria drop?
Will investors be interested and have confidence in investing in Nigeria if naira weakens?
“Exchange rate stability also clearly remains one of the key policy objectives, and intensifying pressure on reserves, thus raises the risk of additional capital controls being pursued. This could serve to weigh further on the still-fragile economy,” he added.
In addition, foreigners hold about $13 billion of Open Market Operations (OMO), which makes FX reserves vulnerable to a sell-off.
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IMF lifts 2021 global GDP growth to 6%
The group also warned that economic recoveries are diverging dangerously across and within countries.
The International Monetary Fund has lifted its global growth outlook to 6% in 2021 (0.5% point upgrade) and 4.4% in 2022 (0.2 percentage point upgrade), after an estimated historic contraction of -3.3% in 2020 due to the effects of the COVID-19 pandemic. This disclosure was made on the organisation’s website on Tuesday.
The group also warned that economic recoveries are diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.
READ: Corruption erodes the constituency for aid programmes and humanitarian relief – IMF
What the IMF is saying
“The upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent this year.
This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic.
China is projected to grow this year at 8.4 percent. While China’s economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.”
READ: Nigeria needs structural and monetary policy reforms to unlock potential – IMF
On divergent recoveries
The IMF stated that divergent recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations.
“The average annual loss in per capita GDP over 2020–24, relative to pre-pandemic forecasts, is projected to be 5.7 percent in low-income countries and 4.7 percent in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3 percent,” they said.
“Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways.“
For Africa, IMF forecasts economic growth of 3.4% in 2021 and 4% by 2022, Nigeria is expected to grow by 2.5% in 2021 and 2.3% by 2022, while South Africa is projected to hit growths of 3.1% and 2.0% for the respective years in focus.
READ: The 4th industrial revolution and the birth of a new international monetary system
In case you missed it
The International Monetary Fund (IMF) identified some factors that hamper the economic recovery of low-income countries from the devastating impact of the coronavirus pandemic, factors including access to vaccines, limited policy space to respond to the crisis, the lack of means for extra spending, pre-existing vulnerabilities such as high levels of public debt in many low-income countries and sometimes weak, negative, total factor productivity performance in some low-income countries. These factors continue to act as a drag on growth.
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