Why FG is Against Naira Devaluation

The presidency has thrown its weight behind the Central Bank of Nigeria (CBN) on its decision not to devalue the naira and lift its currency curbs, which culminated in the decision on Tuesday by US investment bank JP Morgan & Chase to phase out Nigerian government bonds from its Government Bond Index for Emerging Markets (GBI-EM) by the end of October.

N100 note

Speaking on the issue to THISDAY on Wednesday, a top presidency official who preferred not to be named, said the CBN, Federal Ministry of Finance and Debt Management Office (DMO) had the endorsement of the presidency in their joint statement reacting to JP Morgan’s announcement on the delisting of Nigeria’s bonds from its indices starting from September 30.

The official while acknowledging that JP Morgan had raised concerns over liquidity in Nigeria’s currency market, he argued that the joint statement by the finance ministry, CBN and DMO showed that the federal government  was not in support of the devaluation of the naira as this would lead to a further spike in inflation and to the export of jobs.

He quoted JP Morgan as stating that “foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency”.

“However, CBN, the finance ministry and DMO made it clear that it introduced an order-based, two-way forex market,

resulting in the stability of the exchange rate in the interbank market over the past seven months and largely eliminated speculators from the market.

“The CBN also enhanced transparency by mandating that all forex transactions are posted online on the Reuters trading platform so that all stakeholders could easily verify all transactions in the market.

“All this was done to ensure that participants are not allowed to simply trade currencies, speculate against the naira and engage in round-tripping, but are only in the market to fulfill genuine customer demand to pay for eligible imports and other transactions.

“Yet, JP Morgan’s preference is for Nigeria to devalue its currency in the face of falling oil prices and dwindling reserves in order to satisfy foreign portfolio investors who do not have Nigeria’s interest at heart,” he said.

The official said if the central bank had succumbed to JP Morgan and foreign investors’ sentiments, this would have led to a massive depreciation of the Nigerian currency, leading to import-induced inflation, exporting jobs, and the continued depletion of Nigeria’s foreign reserves.

“Lest we forget, there is a high possibility that the US Federal Reserve could raise interest rates very soon and with the economic problems in China, foreign portfolio investors will exit the Nigerian economy without a second glance.

“Should we deplete our reserves now, how will we meet their demands when they elect to exit the Nigerian market in droves for other destinations?” he asked

The presidency official added that another major concern for the federal government was the fuel subsidy regime.

“Devaluation at this time will be disastrous because since the fall in the price of crude oil over a year ago, foreign exchange differentials alone today account for almost 50 per cent of the subsidy bill that is paid by the federal government to oil marketers.

“Bank charges and interest rates account for another 25 per cent while the difference between the actual market price of petrol and the official price stipulated by government, which is the real subsidy element, accounts for another 25 per cent of the total subsidy bill.

“So should the CBN devalue, the foreign exchange differential will rise and put more pressure on the government’s finances,” he explained.

The official added that going back to the two-way quote system demanded by JP Morgan would have adverse consequences on the little foreign reserves Nigeria has, which provide cover for only five months of imports.

“So we are concerned about all this and will continue to support the CBN to encourage market stability over a sustained period and meet demand for only legitimate transactions,” he said.

He noted that whilst the federal government considered the inclusion of Nigeria’s bonds on the JP Morgan GBI-EM index good for the integration of the Nigerian economy with other global markets, “but if remaining on it would amount to devaluing the naira,  increasing inflation, exporting jobs and depleting our reserves, it is not worth the bother. It would amount to a vanity project not in Nigeria’s best interest”.

He assured THISDAY that as the federal government moves to block more leakages in the public sector and unfold its economic agenda in the weeks ahead, Nigerians would begin to feel the gains of its policies.

“The government and CBN’s primary responsibility is to enunciate policies that would reverse the decline in the country’s GDP, create jobs and keep inflation low.

“A devaluation of the currency will hamper these objects. So if the price we have to pay for this is our ejection from the JP Morgan index, it is a temporary price we will have to live with until our finances improve,” he said.

Why FG is Against Naira Devaluation