The continuous fall in the price of crude oil in
the international market and the recent
devaluation of the nation’s currency, the naira,
are putting serious pressure on the economy,
with the currency experiencing a free fall.
The naira exchanged for between 192 and 194 to
the United States dollar at the parallel or
street market on Friday. Earlier in the week, it
sold for N188 against the dollar at the same
market.
Our correspondents similarly gathered that the
pound and euro sold for between N294 and
N296, and N236 to N238, respectively on the
streets of Lagos on Friday.
The continued fall in crude oil price had forced
the Central Bank of Nigeria to use a huge
chunk of the nation’s external reserves to
defend the naira.
The persistent depreciation of the naira,
however, forced the CBN to on November 25
devalue the currency against the dollar by eight
per cent from N155 to N168.
The central bank thus expected the naira to sell
against the dollar for between N160 and N176.
However, the naira has been selling outside the
CBN target band at the interbank forex market
(where the banks sell to themselves and their
customers), a situation that has fuelled
speculation among analysts that the bank may
be forced to devalue the currency soon again.
As of Friday, the naira closed against the dollar
at N184.50 at the interbank market.
The continued fall in the value of the naira
forced the CBN to on Thursday introduce new
rules aimed at halting the slide. It barred banks
from holding any amount of their funds in
dollars.
It also directed the banks and members of the
public who buy dollars from it to use them within
48 hours or return the unspent funds.
The implications of the fall in the value of the
naira include the fact that manufacturers will
have to spend more naira to buy foreign
currencies with which they will import raw
materials as well as purchase machineries and
spare parts.
For Nigerian parents who send their children to
schools abroad, paying for tuition in foreign
currencies and sending upkeep money to their
children will not come easy.
Analysts said the recent policy measures
introduced into the forex market by the CBN
had made many Nigerians, including importers
who need dollars and other foreign currencies,
to take to the parallel market.
According to them, parents who want to pay
their children’s tuition overseas and importers
will have to get their forex in the street rather
than wait endlessly at the interbank market.
In a circular on November 6, the central bank
said it would no longer sell dollars to importers
of electronics, finished products, information
technology equipment, generators,
telecommunications equipment and invisible
transactions at its Retail Dutch Auction System
forex market.
School fees fall in the category of invisible
transactions.
Consequently, parents who used to buy say
$10,000 to pay their children’s tuition overseas
for N1.68m, will now need to part with N1.94m,
an increase of 15.4 per cent.
The Acting National President, Association of
Bureau De Change Operators of Nigeria, Alhaji
Aminu Gwadabe, predicted on Friday that in the
next one week, the dollar would likely sell for
N200 to a dollar at the parallel market.
correspondents, linked the development to the
continued fall in the prices of crude oil in the
international market and recent developments
in the nation’s financial regulatory environment.
The national currency has fallen by over 10 per
cent against the dollar at the interbank forex
market since the crude oil prices started
tumbling in June.
Brent crude oil, which sold for over $110 per
barrel in June, had fallen by over 40 per cent
so far. As of Friday, it sold for $60 per barrel.
The development has reduced the nation’s
capacity to earn more foreign exchange to
defend the naira.
Nigeria, which is Africa’s largest oil producer,
receives 70 per cent of government revenue and
90 per cent of all foreign exchange earnings from oil.
Analysts have, however, criticised the directive,
saying it would be counterproductive.
They said
the naira would keep falling because the CBN
did not have adequate forex to defend the
naira as a result of the falling crude oil prices.
With the recent tightening of the conditions
that allow access to dollar by the CBN, experts
expressed concern that it would increase the
pressure on the cost of locally manufactured
and imported goods, among others, as naira
looks set to depreciate further.
A financial analyst at Ecobank, Mr. Olukunle
Ezun, said the real impact of the CBN’s
Thursday circular would be far-reaching.
He said, “Looking at the fact that the Nigerian
economy is mostly import dependent, if the
naira is allowed to depreciate significantly, the
impact is going to be on the goods being imported.
“I think the impact is quite huge on all imported
goods, and if care is not taken, it can actually
impact the inflation outlook. By and large, the
cost of goods will go up and it can impact on the
employment rate. We may start seeing
downsizing or downgrading. The impact is going
to be huge and that is why I believe the CBN
will not allow the naira to weaken further.”
Prof. Sheriffadeen Tella of the Department of
Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, said there had been shortage of foreign exchange as a result of
falling oil revenue amid the decline in prices, which were affecting the naira.
Tella said, “What the CBN should be doing is to
find a way of reducing the pressure on the
naira by making sure that importation is highly
reduced. But the policy of the CBN alone can’t
do the magic, it has to be with the support of
the fiscal sector. The Ministry of Finance should
make a policy to reduce importation and ensure
that whatever is exported, the money should be
repatriated on time.
“More importantly, the central bank should
ensure that money being made by government
agencies is domiciled within the CBN.
A situation
where other agencies like the NNPC are also
acting as bankers to the Federal Government is
not tidy. At this point, there must be serious
control of the inflow and outflow of foreign
currencies by the CBN.”
He said the depreciation of the naira had
already increased the cost of production in the
manufacturing sector as most of the raw
materials being used were imported.
Tella said the increase in the cost of production
would affect the prices of goods, adding that
“cost of production will continue to increase if
the naira deteriorates further. Even the
producers will have to cut their level of
production, which of course implies that we are
going to be in a serious problem in terms of
employment generation.”
The Director-General, Lagos Chamber of
Commerce and Industry, Mr. Muda Yusuf, said
any offshore obligations, including payment of
school fees of students outside the country,
servicing foreign debts and going for vacation
would be difficult at this period.
“The depreciation of the currency is already
putting upward pressure on the cost of
production and services because quite a lot of
activities that take place here are dependent on
imports. It will lead to a reduction in companies’
profit margins and some companies may be
forced to downsize. We are also likely going to
see inflation,” he said.
A report by Ecobank Research on Thursday
stated, “Tightening the conditions that allow
access to dollar while making no changes to how
foreign exchange is supplied will further
heighten the naira volatility with further
depreciation most likely; as such, we expected
the naira to trade between 190 and 195 to the
dollar month-end December 2014.
“While the CBN’s reason for the circular is to
maintain the stability of the naira, it is not
clear how it intends to achieve this objective,
given following recent sharp fall in Brent oil
prices and uncertainty over the normalisation of
the US monetary policy following the end of QE III in October.
“Overall, the circular will create more volatility that will require another set of CBN circulars to address the dollar supply and demand bottlenecks.
As such, the CBN might need to
continue to intervene in the interbank FX market.”
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