Economic experts have expressed concerns about the recent devaluation of the Naira by the Central Bank of Nigeria (CBN), warning that it will make the 2020 budget unrealistic and unachievable.
According to them, abolishing the official exchange rate and leaving the fate of the Naira entirely to market forces has grave implications for a mono product economy, crude oil, as the principal source of foreign exchange.
The devaluation of the Naira from 360/$1 to N380.5/$1 at the official market is part of efforts by the CBN to unify the exchange rates in the Importers and Exporters (I&E) window, a move the experts say has both merits and demerits.
They noted that with oil revenue accounting for over 90 per cent of foreign exchange, the unification of exchange rates means that the dollar-denominated components of government spending will now be done at a higher exchange rate, thus putting pressure on the local currency as more naira will be needed to make government purchases.
Professor of Finance and Capital market, Uche Uwaleke, said the currency devaluation makes the 2020 budget unrealistic and unachievable since it was based on exchange rate of N360 per dollar and by extension the recently-approved Medium Term Expenditure Framework.
Besides, he said essential items that have enjoyed access to forex at the official subsidised rate, such as petroleum products’ imports, will have no choice than to use the single market for forex.
“The immediate implication is increased cost of importing petroleum products which will lead to a hike in the pump price of fuel especially now that the downstream sector is being deregulated,” Prof Uwaleke said.
In view of the import-dependent nature of the Nigerian economy, Prof Uwaleke said the upward adjustment of exchange rate “will feed into higher inflation rates at least in the short run necessitating tight monetary policy by the CBN and high interest rate environment.”
If the monetary policy is tightened, according to him, it would help rein in inflation expectations, further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.
Investment analyst, Stephen Kanabe who agreed with the position of Uwaleke, expressed fear that tightening may also result in deposit money banks re-pricing their assets and loans, thus raising the cost of borrowing and therefore heightening the already weak investment climate.
He however agreed that the devaluation will strengthen the stability in the foreign exchange market.
The Monetary Policy Committee of the Central Bank had restated its commitment to maintaining stability in prices, without which meaningful economic recovery cannot be achieved.
On his part, economic analyst, Seye Adetunmbi, noted that the action of the CBN became inevitable due to the reality of the pressure on the national reserve towards meeting the federal balance of trade obligations.
Adetunmbi said the fact that Nigeria allowed most of its factories and manufacturing centres to die off, induced by failed power sector, brought the country to its knees.
“Nigeria is no longer the net exporter of refined petroleum products as it used to be in the 1980s,” a situation he said now exacts pressure on the Naira.
However, the experts agreed that the devaluation also came with positive potentials for the economy.
On the upside, Uwaleke and Kanabe said it translates to increased naira inflows into the federation account, implying that the three tiers of government will have more money to distribute.
They added that it also eliminates opportunities for currency round-tripping and sharp practices associated with having multiple exchange rates, thereby promoting transparency in the country’s forex market.
By the same token, Uwaleke who is also a former commissioner for finance in Imo State said it will enable price discovery as the real value of the naira becomes established through demand and supply forces, since many are of the view that the naira is overvalued.
He said the action of the apex bank will engender clarity in the country’s forex market with the potential to attract foreign investors.
Kanabe added that the associated fall in the value of the naira in the near term could encourage non-oil exports and discourage imports, thereby facilitating government’s import substitution policy and improving the balance of payments.
Moreover, he said the measure will be in line with the expectations of international financial institutions especially the IMF and the World Bank encouraging them to further support Nigeria’s economic recovery efforts.
The economic experts said it was important to ensure that while leveraging the upsides of exchange rates’ unification, policy makers in Nigeria should ensure that the downside risks are mitigated.
Their advice is that the authorities should develop multiple sources of foreign Exchange outside oil, especially via Agriculture and Solid minerals, while vigorously promoting the use of domestic products and services by supporting their availability at competitive prices.
Why Revised Budget Was Increased – Presidency
Meanwhile, the presidency explained yesterday that the federal government increased the revised 2020 budget despite the drop in revenues accruing to the government with a view to addressing the impact of COVID-19 on the nation’s economy.
Senior special assistant on National Assembly matters to President Muhammadu Buhari (House of Reps), Umar El- Yakub, disclosed this to State House correspondents at the weekend.
President Buhari had on Friday signed the N10.81 trillion revised budget into law.
The original budget size when it was signed into law in December 2019 was N10.594 trillion.
However, El- Yakub said the government had to prioritise infrastructure projects that would reflate the economy.
He said, “Some parameters were looked at. In any event, the 2020 budget has oil benchmark of $25 per barrel of crude oil, while the amended budget is at $28 per barrel.
“So, because of that you can see there is an increase in revenue and thank God also the price of oil from then has picked up. There has been a leap recently in the price of oil and even though the production benchmark was reduced from 1.9 million barrels to 1.8 million barrels per day, it was certainly because of the increment in projections as far as the cost of oil is concerned.
“In addition to that, one needs to understand that the whole essence of the review is to prioritise government projects to the extent that projects that will certainly address infrastructure and ginger the economy more as well as address health issues are given priority.
“All these necessitated the new look at the budget, so as to free certain amounts of money hitherto appropriated for certain projects, which in the circumstances are not as expedient, and look at other infrastructure that need prioritisation so as to address the pandemic and the difficulties that it has brought to Nigerians.”