Sanusi's CBN and Naira devaluation: Public Good, Double Talk and Contradictory Policy. Naira has been devalued up to N160 to $1
It is beginning to look that Sanusi Lamido Sanusi, the executive governor of Central Bank of Nigeria (CBN) is stepping into a pathway of perplexing contradictions. At the time that International Monetary Fund (IMF) recommended for Nigeria to devalue naira, Sanusi was insisting that there is no need for the devaluation. He did everything he can to make it absolutely certain to every one listening that there is no logical financial reason to devalue the already malleable and soft naira. Most Nigerians were singing his praises that Nigeria has gotten a financial leader that cannot be intimidate by overbearing IMF, a leader that is not willing to be genuflecting to the international financial institutions. But apparently not, the CBN chieftain is doing Texas-Two Step backward dance.
Sanusi has begun to sing a new tune; it is no more the IMF asking him to drink the bitter liquid of devaluation. The CBN titan has chose to do it for the public good as it appears to keep the economy floating as the bulwark to the anticipated nosedive of oil price, with subconsequent lower foreign reserve. The reason that is more plausible is to appease the international financial powers who are probably breathing per irately down his neck. The naira has been devalued up to N160 to $1 but the devaluation will not stop there. Go and mark this, it is a slippery slope and the devaluation will continue. But interestingly, Nigeria does not have the requisite dollar reserve to satiate the demand that comes with the devaluation.
Finacial Times of London wrote: “Nigeria devalued the naira on Monday as falling reserves, caused by weak oil revenues, forced its hand. The central bank announced the naira would be pegged to the dollar within a target range of N150 to N160, up from a bracket of N145 to N155 per dollar. The bank wants to converge the official forex rates with the interbank rate and narrow arbitrage trading opportunities – the chance for investors to profit from the two different rates"
David Kahone of Financial Times further reported that, "The main reason for Nigeria’s decision to devalue, according to Renaissance Capital, the Russian investment bank, is a fall in its reserves brought about by lower than expected oil production in 2011 and a low projected oil price in 2012. Africa’s biggest oil producer derives some 75 per cent of its revenues from oil and is revising down its benchmark oil price in the 2012 budget to $70 per barrel from $75 per barrel – not an insignificant shift"
The apparent devaluation will not bring about any affirmative result that compelled CBN in first place to devalue naira. Nigeria had passed through this path before and it did not make a difference nor did it change the economic paradigm of the nation in good trends. The problem with Nigerian economy is beyond the application of monetary policy and in this case the devaluation of naira. Nigeria has major structural problem that cannot be rectify by artificial depreciation of the naira. The problem with country's economy is over reliance on oil and by thinking that the party will last forever. The idea of diversification is a lip service given by policy makers as the country is busy chasing a shadow that is merely a mirage. A nation cannot become economically independent by exporting one commodity with a weak currency which will eventually attract IMF's neo-liberal policies. As the country implement neo-liberal policies, it will not stop with devaluation of naira, the shrinking of spending on social program will follow put including the removal of fuel subsidy and banning of importation of many essential commodities. The government will balance the budget on the back of the poor people of Nigeria and suffering will geometrically increase.
The major contradiction coming form naira's devaluation is threat it posed to stabilizing inflation and the further erosion of domestic value of naira. Devaluation is another method of creating more money in the circulation especially with the weaken naira. With devaluation and subsequent enormous soft naira in circulation the prices of food, goods and services will go up; that will make the ugly hand of inflation to rigidly standout and making it more difficult to rein in inflation. Then CBN will restore to further mopping of the liquidity by tightening monetary tool, thereby jacking up interest rate which will conversely slow down the economic growth. No matter from which perspective or angle one looks at the naira devaluation its benefit is quite limited and there is no optimum quantifiable outcome. One thing it can do is to discourage importation, but Nigerians are already addicted to foreign products and travelling abroad; surely Nigerians will find a way to circumvent it and continue with their addictions.
The price of oil and foreign reserve have the propensity to be gyrating cyclically and using naira's devaluation to stabiles the economy is not logical at long term. It should be a tactical response to a momentarily problem but it is not strategically plausible to become the panacea. Nigerian economy is standing on a dislocated table that can be easily be pull down by forces of the market. The economy is growing at above 7 percent but without infrastructure and security the growth may not be sustainable.
CBN's chief Lamido Sanusi may do the public good and world economy good by devaluation that will make oil cheaper. It can be accepted for a short time but Nigeria may not necessarily be the beneficiary because Nigeria does not have arrays of commodities and finished products to export. This boils down on the lopsided economy and portrays how weak the manufacturing and agricultural sectors are in the country. The source of country's earning of foreign exchange must be expanded beyond oil export by diversification of the economy. This must be made perfectly clear to the policymakers that Nigeria cannot devalue her currency to a successful economy.