The Devaluation of the Naira and Other Stories

It was Claude Ake who described Nigeria as a disarticulated economy, that produces what it does not consume, and consumes what it does not produce. This description summarizes the dilemma that faces Sanusi Lamido Sanusi and his team at the Central Bank of Nigeria (CBN).

It is no news that what we suspected is eventually happening. The Naira is under significant pressure, and the CBN has emptied its artillery to protect our beloved currency. In various official publications on the exchange rate, the CBN has indicated target exchange rate corridor of NGN150: US$1 ± 3% corridor (i.e. NGN 145.5 – NGN154.4). At the close of business yesterday, depending on who you talked to, the Naira closed at NGN165 – NGN168. At best this is 11 Naira above the CBN’s target.

At an “expected” emergency meeting of the CBN’s Monetary Policy Committee (MPC), three drastic measures were announced. The most celebrated was the 275 basis point increase in the Monetary Policy Rate (MPR) from 9.25% to 12%. This is the rate at which the CBN gives loans to banks, and is the nominal interest rate anchor. This means interest rates will go up in a bid to encourage savings in the Naira, as interest rates, for once, will provide real returns (after adjustment for inflation). This will reduce the supply of Naira in the market, thereby reducing demand for the US Dollar. The downside of this is a resulting increase in lending rates, and a re-pricing of existing loans, priced using a floating rate (usually the prime lending rate of the lender).

But this does not tell the full story. The apex bank also increased the Cash Reserve Ratio (CRR) from 4% to 8%. This is the proportion of bank deposits held in cash by the CBN; therefore this huge increase in CRR means a sharp reduction on the amount banks are able to lend to the real sector. If we assume an industry balance sheet size of N9 trillion, that is N360 billion that could have gone to private sector loans, taken out of the industry.

By reducing the Net Open Position (NOP) of banks from 5% to 1%, the CBN has effectively reduced the amount of foreign exchange a bank can hold at any time. The Net Open Position is simply the difference between assets and liabilities of a bank held in a foreign currency, usually measured as a percentage of the shareholder’s funds of a bank. This reduction will significantly reduce the volume of foreign exchange deals on the inter-bank market and autonomous purchase of foreign exchange, because of this reduction of the amount of foreign exchange banks can hold for mainly speculative reasons. This might mean a reduction in the short term profits of banks, as the treasury function, impaired by this rule, is usually one of the most profitable businesses of Nigerian banks.

The MPC is a team of nine, and the vote to increase the NOP was unanimous. The vote on increasing the MPR was 8-1, while that for the CRR increase was 7-2 (2 members voted for 200bp increase). The unity in the voting patterns suggests a room of worried policy makers. The CBN has blinked, and the result could be harsh.

We know lending rates will go up significantly, and supply of credit will reduce. If you are an existing or intending borrower, this is the time to say a prayer. It will be harder and more expensive to get a loan now, like it wasn’t already very difficult. Government is the biggest borrower in the economy, therefore its borrowing costs will increase, as government securities will be priced higher to accommodate for this MPR increase. The effect on the bond market could be interesting. An increase in the risk-free rate (the rate at which the FGN borrows) will mean states yet to issue sub-sovereign bonds might be forced into offering a higher coupon rate. The same will apply to corporate debt.

As always, unpredictability is an investor’s worst nightmare. This sharp depreciation will affect investor confidence, at least in the short term. So, it is safe to assume a few wrinkles were added to the face of a certain Mr. Aganga at the Ministry of Trade and Investment last night.

How does this affect us, the ordinary Nigerians? Our taste for imported goods from Brazilian weaves to Rich Tea Biscuits will come at a higher cost. . That is the price we pay for being so dependent on imported goods. The road ahead is cloudy; we have not been in a similar position since the rocky days of 2008/9. It is never good to be a harbinger of bad news, but it is time to tighten our belts and build up healthy cash reserves. One principle that never changes in difficult times is the well known mantra “CASH IS KING.”

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7 thoughts on “The Devaluation of the Naira and Other Stories

  1. Consequences of CBN MPR reveiw well outlayed.Wondering if can be an indirect catalyst for govt proposed fuel subsidy plan.

  2. Re: IMF “Global Challenges, Global Solutions”:

    Re: Trading Economics ” Government Debt to GDP, List by Country”:

    http://www.tradingeconomics.com/government-debt-to-gdp-list-by-country

    Re: Trading Economics “Unemployment Rates, List by Country”:

    http://www.tradingeconomics.com/unemployment-rates-list-by-country

    Re: Trading Economics ” Inflation Rates, List by Country”:

    http://www.tradingeconomics.com/inflation-rates-list-by-country

    The best idea/solution in the long-run for macroeconomics crisis, which foster socio-political and ethno-religious crisis; is the valuation of food and agriculture as the unit of account. The values of food and agriculture as the unit of account, are enormous when compared with gold and silver, as the unit of account. These include: food and agriculture can be produced in abundance to meet demand and aspirations of billions of peoples wanting to become wealthy at the same time. While, with gold and silver, wealth creation is limited to privileged persons in the society. And as a result, discontented and poor persons envy and seek to deprive privileged wealthy persons, of their legitimate wealth, unjustly. Food and agriculture as the unit of account, shall foster a sustainable green economic growth. In an ideal situation, where and when Real Gross Domestic Necessity Goods (RGDNG) such as Food and Agriculture is the unit of account, demand and supply of necessity goods (food and agriculture) is directly proportional to Real Gross Domestic Product (GDP). Thus, Real Gross Domestic Necessity Goods (RGDNG) prevents inflation and unemployment. An intrinsic, limited and scare non-necessity commodity such as gold, silver nor fiat money, as the unit of account, and non-globalization of macroeconomics is to blame for financial crisis. Food and Agriculture, as the unit of account, is the long-term solution for financial crisis, with complement to rules under the Rome Declaration on World Food Security. http://www.fao.org/docrep/003/w3613e/w3613e00.htm

    Obligation of government on Employment

    Minding rules including those under the “right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” clause under Article 23 sub-art…icle 1 and 2, of the Universal Declaration of Human Rights, states: “(1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.(2) Everyone, without any discrimination, has the right to equal pay for equal work.” Government should foster an efficient, effective, and sustainable employment and job-creation policy such as giving incentives to production companies which sustains their growth rate complementary to government macroeconomic and resources management policies such as production subsidies on necessity goods; and by de-robotized with manualized production techniques on non-necessity goods, such as those methods used in precision and limited/restricted products i.e. aircrafts, cars,…production. For instance in the manufacturing of the Buggati Vyron “the engine pre-assembly, there are three assembly stations where Veyrons are assembled entirely by hand (one car at each station).” Logic to create more jobs for the growing population; without prejudice to government product, price, and resources management policies.

    Furthermore, and likewise, an effective, efficient and sustainable skills acquisition policy to foster training and recruitment of persons into services inclined professions such as in health care, information and communication technology and software development sectors should be fostered; to accommodate and balance efficiency, and effectiveness in productivity, consumerism, macroeconomic and resources management policies. Read more:

    Analysis of inflation and unemployment in Nigeria

    https://www.facebook.com/note.php?note_id=254215627946522

    The Rome Declaration on World Food Security: http://www.fao.org/docrep/003/w3613e/w3613e00.htm

    The ineffectiveness, inefficiency and unsustainability of national and international macroeconomic policies/models, were emphasised in a conference paper/research: “The Global Economic Crisis: Systemic Failures and Multilateral Remedies Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation” by the United Nations Conference on Trade and Development (2009): “UNCTAD’s longstanding call for stronger international monetary and financial governance rings true in today’s crisis, which is global and systemic in nature. The crisis dynamics reflect failures in national and international financial deregulation, persistent global imbalances, absence of an international monetary system and deep inconsistencies among global trading, financial and monetary policies.”

    Read more: http://www.unctad.org/en/docs/gds20091_en.pdf http://www.unctad.org/

  3. Thank you for sharing. I have been looking for information on how the increase impacts SME’s.

    Repricing exsiting loans could put a lot of SMEs out of business. What can they do to protect their businesses or cushion the impact?

    It also sounds to me like the black market price of the USD may spiral out of control to meet CBNs short falls. SME’s frequently buy forex on the black market. Same question.

  4. The CBN has pulled out all its guns to keep the naira stable. If the fall continues, which I think it eventually will, then we can say hello to SAP 2. In theory a devaluation should be good for the country but we know domestic production won’t pick up. We will all just get a bit poorer. The reforms from the FG’s end aimed at electricity, security and reducing the bottlenecks to business really need to happen soon.

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