Between CBN And The Free Fall Of The Naira

Following the drastic response by the Central Bank of Nigeria (CBN) to the free fall of Naira against the United States Dollars, tongues are now waging on why such a fist clinching measure should be adopted in a pre-election year like we are currently in; especially when the status and wellbeing of the nation's economy is going to be one of the major campaign issues for next year's general elections.

But, doing the cost benefit analysis of our current economic predicament, one will have no other reason than to dispel any toll the apex bank's action would have on next year's rounds election. This is because; the consequences of its inaction on the economy would be grievous than the consequences of its actions!

Last week, the Monetary Policy Committee (MPC), the highest policy making body of the apex bank met to review the economic and financial conditions in the country and as well determine the appropriate stance of policy both on the short and medium term basis in accordance with the principal objectives of the CBN which is to promote monetary stability and sound financial systems in Nigeria.

At the end, the Committee resolved to increase the Monetary Policy Rate (MPR) from 12 percent to 13 percent, the Cash Reserve Ratio (CRR) on private sector from 15 percent to 20 percent while at the same time retaining the CRR on public sector at 75 percent. For emphasis sake, the Monetary Policy Rate (MPR) is the rate at which private banks can borrow liquidity from the Central Bank of Nigeria in furtherance of their financial activities.

While the Cash Reserve Ratio (CRR) is a stated minimum amount of the total deposits of customers which commercial banks have to hold as reserve with the banker's bank.The aim of this reserve is to ensure that commercial banks do not run out of cash when it wants to meet the payment needs of the depositors. Hence, the CRR is crucial because it is the monetary policy tool the apex bank uses in controlling money supply in the country.

Apart from the highlighted monetary policies of the apex bank, there are other market-based interventions the Central Bank of Nigeria (CBN) has introduced to stabilise the economy and prevent the free fall of Naira in parity with the United States Dollars. For example, using the Retail Dutch Auction System (RDAS), the banker's bank moved its exchange rate from N155 per dollar to N168 per Dollar with Naira as the base currency while Dollar is the quote. Also, the apex bank directed commercial banks not to make financial instrument available to the unproductive sectors, so that working capital would not be trapped as illiquid assets in the face of declining crude oil price at the international market. Unproductive sectors in this category includes but not limited to Casinos, betting, speculation as well as subprime lending.

While some analysts view the devaluation of Naira as a right step in the right direction, others view it as another premature decision of the apex bank. They question the timing of the devaluation, saying it will affect the current administration when it wants to engage its opponents on any debate about the economy. Before proceeding, I want to want to explain what devaluation of Naira means. Devaluation of Naira or currency means an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority which is the Central Bank of Nigeria formally sets a new fixed rate with respect to a foreign reference currency which is the United States Dollar. Subsequently, the other school of thought argued that the apex bank acted right to prevent the Zimbabwean experience in Nigeria.

So, the bankers bank acted right because, there would be no justification for still keeping the exchange rate of Naira at N155 per Dollar when the currency is already selling at about N190 per Dollar at the parallel market.

Nevertheless, the new financial policy became necessary because the CBN must act to safeguard the national currency in the mist of declining oil price which is already having effect on our financial system. Hence, apart from the decline in crude oil price, other factors like capital flight, import oriented structure; fiscal imbalance and absence of other viable foreign exchange earner like tourism, exportation of finished goods among others have all contributed to the scarcity of dollar in a country where over 90 percent of her export commodity is crude oil.

And with the United States, our hitherto major trading partner now meeting about 80 percent of her domestic energy needs from Shale Oil Production, the country no longer buy our crude. According to reports, America stopped buying our oil since July this year, the first time since 1973. Similarly, apart from meeting her domestic energy needs, the United States now exports about 8 million barrels of crude oil on daily basis.

So, with such volume coming from America, Russia, Norway and other non-members of the Organisation of Petroleum Exporting Countries (OPEC), the supply of crude oil at the international market would be more than the demand. And from the law of demand and supply, when the supply is more than the demand, there must be reduction in price, because there are many sellers than buyers. This is what has just taken place in our own case. So, whatever happens to our major source of revenue or foreign exchange earner must have chain reaction on the entire economy.

Hence, with this unfolding scenario, the Central Bank of Nigeria must act to maintain the external reserve and as well safeguard the international value of our legal tender, the Naira. This drastic measure taken by the apex bank is proportional to its principal objective of promoting monetary stability and sound financial systems in the country. The bankers bank however have done this by selling about $169 million at N168, it new exchange rate through the Dutch Auction System to users. Therefore, Nigerians expect more policies that will save our economy from the uncertainties in the global market from the apex bank.

Comrade Edwin Uhara is an Activist,
Media Consultant and Public Affairs Commentator
He writes from Abuja.
Reach him on 07065862479 or [email protected]