Experts say Naira devaluation will push inflation to 25% 

Posted by News Express | 13 October 2021 | 300 times

Gmail icon

•Vice President Yemi Osinbajo
 
 
By BAMIDELE OGUNWUSI
 
Financial experts on Tuesday told Vice President Yemi Osinbajo that his propos­al for a further devaluation of the naira will worsen the already fragile economic situation in the country as it is capable of pushing inflation to 25 percent in no distant time and give room for agitation for salary increment, among others.
 
Those who spoke to Daily Indepen­dent said the Central Bank of Ni­geria (CBN), which is currently making efforts at stabilising the foreign exchange market, knows that a further devaluation of the naira will truncate progress al­ready made.
 
On Monday, at them idtermre­ view of President Muhammadu Buhari’s second tenure in office, the conversation about naira de­valuation found a good place to grab centre stage.
 
Vice President Yemi Osinbajo explained how the country’s Eco­nomic Sustainability Plan helped Nigeria get out of recession. At the end of his presentation, Osin­bajo told a hall full of ministers, captains of industries, diplomats, and civil servants, how he expects the CBN to devalue the naira to reflect the state of the market.
 
He said the CBN’s de­mand-management strategy needs a rethink.
 
“As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my own re­spective view, is the only way to improve supply,” Osinbajo said.
 
“We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view.”
 
Cyril Ampka, an Abuja based analyst, said the decision to devalue the naira is “the easiest thing for the CBN which can follow these sentiments and move the naira to say N550/$1. It is quite easy but the implications may be too disastrous at this time”.
 
He said government debt service, which is already over 70 percent of revenue, will make it over 100 percent easily, adding that this will also affect inflation which has been trending down in the last five months.
 
He said, “ You can see now that inflation is currently at 17 percent after five months of downward movement. Devaluation to N550/$1 will push inflation to over 25 percent. Fixed income earners, which include all government workers, will see their real wages (take home pay minutes inflation) evaporate into thin air. The same pay they got last month, which they were already struggling to use to make ends meet, will sim­ply buy less than half of what it bought them last month”.
 
Stephen Iloba, another ana­lyst, said the call for devaluation will ignite justifiable calls for salary increases and could cause social unrest, in a country where tensions are already high.
 
He said, “Civil servants will have no other option than call for salary adjustment while loans that were indexed on FX will be immediately repriced (higher interest rates) and terms will be made much tougher. This could lead to wide spread defaults, higher non-performing loans (NPLs) and financial system instability.
 
“Imports will become much more expensive, translating into higher production costs. Producers will pass the higher costs onto consumers, who will pay more for the same goods. Producers who cannot pass on the cost will shut down their operations over time.
 
“Nigerians who buy FX from the CBN for school fees, medical bills, BTA, PTA, etc will pay much more in naira. Since imports val­ue will rise astronomically and exports, the country’s current account balance will go into defi­cit and make our balance sheet much worse.
 
“Leaving aside these argu­ments, it is shortsighted to assume that the rate sin the tiny parallel market (only 7% of Nigeria’s FX market), which serves many corrupt and illegal activities, should determine the rate of the naira. How can rates in 7 percent of the market determine rates in 93 percent of the market? How can the tail wag the dog?
 
“Given all these, it is really dif­ficult to see why the naira should be devalued at this time. Rather than the intellectually lazy resort to devaluation, and a politically motivated scapegoating of the CBN, are sponsible interrogation of the issues should have been better. We should be looking at the more structural reasons for the sustained pressure on the naira”.
 
I Didn’t Advocate Naira Devaluation— Osinbajo
 
Meanwhile, the presidency has refuted report credited to Vice President Yemi Osinbajo, calling for further devaluation of the naira to boos tit against the dollar.
 
Senior Special Assistant to the Presidenton Media and Publicity, Laolu Akande, debunked the re­port in a statement on Tuesday, saying:
 
“Our attention has been drawn to statements and reports in the media mis-characterising as a call for devaluation, the view of Vice President Yemi Osinbajo, SAN, that the naira exchange rate was being kept artificially low.
 
“Prof. Osinbajo is not calling for the devaluation of the naira. He has at all times argued against a willy-nilly devaluation of the naira.
 
“For context, the vice presi­dent’s point was that currently the naira exchange rate benefits only those who are able to obtain the dollar at N410, some of who simply turn round and sell to the parallel market at N570. It is stopping this huge arbitrage of over N160 per dollar that the vice president was talking about. Such a massive difference discourag­es doing proper business, when selling the dollar can bring in 40% profit!
 
“This was why the vice pres­ident called for measures that would increase the supply of foreign exchange in the market rather than simply managing demand, which open sup irresistible opportunities for arbitrage and corruption.
 
“It is a well-known fact that for­eign investors and exporters have been complaining that they could not bring foreign exchange in at N410 and then have to purchase foreign exchange in the parallel market at N570 to meet their various needs on account of unavailability of foreign exchange. Only a more market reflective exchange rate would ameliorate this. With an increase in the sup­ply of dollars the rates will drop and the value of the naira will improve.” (Daily Independent)


Source: News Express

Readers Comments

0 comment(s)

No comments yet. Be the first to post comment.


You may also like...