[BRACE UP] Devaluation Is Coming…..

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The Federal Executive Council came out of its emergency meeting on Monday proposing an unprecedented N6 trillion budget that is expected to set aside about N1.8 trillion in capital expenditure and another N500 billion in welfare programs. The Budget is expected to be financed through a mixture of aggressive taxes, oil revenue and to a larger extent lending. This budget is massive by most counts and analysts believe that funding it will not be without sacrifices for ordinary Nigerians. One of such sacrifices that is close to being reality is the devaluation of the Naira.

According to several undisclosed sources, the Central Bank is close to agreeing to devalue the Naira and a decision could be made as early as January 2016. Ever since the CBN introduced stringent capital controls on the foreign exchange market they have been under pressure from both local and international investors to devalue the currency.

Most foreign owned multinationals in Nigeria have already started preparing for devaluation. For example, major international airlines are said to be considering issuing tickets in naira.

Why devaluation is imminent

Reserves depleting

According to most sources, Nigeria’s external reserves is fast depleting and the CBN is losing it’s grip on the jealously guarded currency deposit. Unmet legitimate dollar demand is said to be anything between $3 billion to $4 billion depending on who you talk to. The opinion on the streets suggest the Apex bank can no longer continue to repress this demand and will have no choice but to devalue the currency. It is even mooted in some quarters that the external reserve could be possibly lower than the $29.5 billion currently being published by the CBN on its website.

With reserves dipping below $30 billion this week, the only way it can possibly meet this demand and still retain a significant chunk of the currency is to devalue.

Parallel vs Official Market

Another plausible reason for the imminent devaluation is the huge disparity between the official exchange rate and what is obtainable in the black market. The dollar closed at between N250 and N253 at the black market compared to N196.97 on the CBN’s website.

The CBN has for months claimed not to be concerned with the parallel market insisting that no country can benchmark its currency on a black market price. Unfortunately, in the absence of a floating currency, the country has historically relied on the black market as an alternative and more reliable gauge of the value of the naira. As such, the wider the gap between the parallel and official rates, the more pressure is piled on the CBN to close this gap. The CBN has tried several measures including suspending some BDC’s in a bid to eliminate any form of round tripping. It appears though that for every move it makes the gap widens even more.

A cross section of analysts also opine that the removal of fuel subsidy could also positively impact on the value of the naira. But while the government will be saving hundreds of billions in fuel subsidy, the demand for dollars will still remain as importers of petroleum products will still need to source dollars to fund their imports.

Pressure on the CBN

The current CBN Governor has been under significant pressure from the international media, investors and even ex CBN Governors to devalue the currency. In some articles, he has been ridiculed and the Economist recently even called for his sack. “Some wonder which would be worse for Nigeria: allowing him to serve the remaining four years of his term or undermining the independence of the central bank by sacking him”

Recently the Emir of Kano and former CBN Governor Mallam Muhammad Sanusi II was recently quoted as saying that “It is wrong to continue to pretend that you can keep the naira at a certain level, when the price of oil is falling, without depleting your reserves. You have to make a choice.”

Former CBN Governor Prof. Soludo also released an article chastising the current government for its approach to its exchange rate policy. “We now know what works and what doesn’t even at a time of crisis. As one reads the confusing statements from government in the media: ‘we won’t devalue’, ‘we won’t devalue for now’, and the emotional debate about ‘nationalism’ around issues of import ‘bans’ and capital controls, one wonders whether it is still a ‘short-term crisis response’ or a permanent shift back to the old policy regime of pre-1986.

Devalue to what?

Analysts have also debated what the ideal value of the Naira is following the fall in oil prices. With the Brent Crude dipping below $40 for the first time in over 7 years, the initial projection of a 10-20% depreciation of the Naira is looking more and more realistic. The difference between the black market and official rate is about 25% and based on this analysts are already predicting that the official rate could be N240 when it is devalued. The last time the CBN devalued the naira in February, it went from N166 to N199 representing an 18% devaluation. Brent was about $61.3 at the time. Brent has since dropped by 34% since then making it unlikely that we will see a devaluation below 20%.

Culled from: http://nairametrics.com/brace-up-devaluation-is-coming/

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