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Naira devaluation: Expect double-digit inflation, experts warn

By on November 27, 2014

Economic and financial analysts have said that a general rise in the prices of goods and services is expected to follow the Tuesday’s sudden devaluation of the naira by the Central Bank of Nigeria’s Monetary Policy Committee.

The MPC rose from its 98th meeting and officially devalued the naira by eight per cent from N155 to N168.

Among other things, the central bank also moved the bench mark interest rate called Monetary Policy Rate from 12 to 13 per cent, and increased private sector’s Cash Reserve Ratio from 15 to 20 per cent.

Although economic and financial analysts commended the CBN Governor, Mr. Godwin Emefiele, and the MPC team for having the courage to take such ‘drastic and bold decisions’, they noted that the development would inflict ‘pains’ on Nigerians, at least in the short term.

According to the experts, currency devaluation for an import-dependent nation like Nigeria means an imminent general rise in the prices of imported goods.

They said the economy had enjoyed single-digit inflation for a very long time but the current policy decisions might take the inflation rate from the current 8.1 to about 10.5 per cent.

Analysts at Afrinvest, a research firm, said, “The decision of the CBN is a bold step in the right direction. However, we expect the decisions will be accompanied with short term pains and long term gains.

According to the Afrinvest analysts, the increase in private sector CRR means the CBN will withdraw about N502bn from the over N10tn private sector deposits banking system in order to curtail the volatility of the naira.

This is because the CBN believes the exchange rate volatility being witnessed in the forex market was caused by excess liquidity in the banking sector.

“Due to the two-month lag effect on inflation, we expect a significant rise in core inflation with will impact the overall headline inflation,” the research firm added.

A Professor of Economics at the Olabisi Onabanjo University, Tella Sheriffden, believes the MPC’s decision will lead to inflation by January.

He, however, said the policies might not stop the naira from falling, adding the best bet was for the country to diversify the economy, a situation he said might not be possible in the short or medium term.

“We are really in for turbulent times. These are the implications of not diversifying the economy on time.”

Ecobank Nigeria Analyst, Mr. Kunle Ezun, commended the CBN for the decision but said the nation might need to pay for it with higher inflation.

“It is a painful decision but this is what the CBN needs to do, otherwise, the naira will crash more than this. If the CBN does not set the mark for the naira, the market will do, and this will be more distrastrous.”

Analysts at BGL, a research firm, said the increase in the MPR would support the foreign exchange rate supply side by improving the attraction of Nigerian assets to foreign investors.

The firm said the banking industry would lose about N42bn as a result of the increase in the private sector CRR.

On the naira devaluation, BGL said, “In our opinion, while this is a very bold and necessary action, it might have been too drastic and a bit too harsh on the banking system as it appears that the committee largely discounted the impact of the foreign portfolio investment (content of the economy.”

The Chief Executive Officer, Eczellon Capital, Mr. Diekola Onaolapo, said, “Although the economy has been facing this barrel for a while, in view of falling oil prices and depleting reserves, the above adjustment will have ripple effects on the real sector (the main engine for economic growth). Increase of MPR to 13 per cent from 12 per cent directly affects interest rates and automatically increases cost of funds for the real sectors.”

Other experts including the Chief Executive Officer, Economic Associates, Dr. Ayo Teriba; and the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said there was the need to treat the ailment and not the system.

Specifically, Teriba said Nigeria needed to overhaul its fiscal situation in a reaction to the falling global oil prices

He said, “You save during expansion and spend during contraction. But when you look at Nigeria’s history, we spend during expansion and cut for spending during contraction. That is fiscal ineptitude.

“After years of benchmarking, we don’t have buffers to fall back on. Where are the savings from last year’s benchmark? Where are the savings from the benchmarks of two to five years ago?

Teriba said the domestic response of every country to the falling oil price cut was what would make the difference.

“Our fiscal and monetary policies need to be active. Policy inertia is a problem. We need to treat the ailment and not just the symptoms,” he said.

Stressing the need for structural reforms, he said the country’s export was dominated by oil because of lack of production of non-oil items for exports amid the absence of functioning rail transportation.

“Nigeria’s biggest problem is democratic ineffectiveness. What has the National Assembly said or done about this situation? What has the Presidency said or done? In other countries, the elected people will react and will be more concerned,” Teriba said.

He said the reform of the rail sector would give manufacturing in the country some competitiveness, while also calling for the development of the country’s crude oil refining capacity.

With a depleting Excess Crude Account and declining external reserves, Nigeria is more vulnerable to the current slide in global crude oil prices than it was in 2008, Rewane has said.

He said between 2008 and now, almost every oil-producing country had replenished its reserves, with Nigeria being an exception.

Rewane, in his keynote presentation at The Future of Energy Series organised by BusinessDay on Tuesday, said the country’s reserves, which stood at $53bn in 2008, had slumped to $37.2bn as at Monday.

 

[Punch]