Therecent depreciation of the naira against major international currencies may continue in the coming weeks as the Central Bank of Nigeria has given an indication that it will devalue the currency.In a move, which it hoped would help address the fluctuation in the value of the naira, the apex bank hinted that the official exchange rate would drop to N156 from N150 to a dollar.The new policy is expected to be announced in two weeks time.Currently, the banks policy is to maintain the naira within three per cent either below or above the N150 level.The Governor, CBN, Mr. Lamido Sanusi, disclosed this on Monday in Abuja during a programme to commemorate 50 years of capital market regulation in Nigeria.The conference was organised by the Securities and Exchange Commission and was attended by the Minister of Trade and Investment, Mr. Olusegun Aganga; Director-General, SEC, Ms Arunmah Oteh; Commissioner for Insurance, National Insurance Commission, Mr. Fola Daniel; Country Representative, African Development Bank, Dr. Ousmane Dore; and Director-General, National Pension Commission, Dr Mohammed Ahmad, among others.Sanusi, who did not give details of the new policy, said the move was imperative in order to protect investors from losing their money to exchange rate fluctuations.He said, The primary responsibility of the CBN is price stability; we dont really provide growth, but we provide the environment where investors feel safe to invest.We want investors to know that they are not going to lose their money to exchange rate fluctuations. As a regulator, we are focussing on this and we have made a lot of progress in terms of interest rate in Nigeria.The apex bank boss added, Interest rates are now positive in real terms but there is still concern about the exchange rate and I believe that in the next two weeks, people will begin to see what will be the stance for the next 12 months. We will come and say what the stance is.I think recently we had a situation where all the major currencies were hit and the naira lost three, four or five per cent and the whole world is screaming. We did have a band and we never said we have a fixed rate; what we said was that we are going to have a stable rate and I dont care if it is N155 or N156 to the dollar because thats not important, but the investor who changes naira into dollar to invest at 15 per cent and lost three per cent wants to know that in three months, the naira wouldnt have lost up to 15 per cent.He said nobody would want to have all the gains in fixed income or equities wiped out by exchange rate bubbles.Sanusi explained, So, what we have tried to do at the CBN is to provide people with expectations and so long that we are not running reserves at an outrageous rate, we will try to get that stability.We think we might move to N155 or N156 and people know that over the next 12 months, they can expect the CBN to keep within that band.The naira hit an all-time low against the dollar earlier in October, as worsening global economic conditions curbed risk appetite and dollar demand from importers and speculators increased.The bank took measures to stabilise the currency in response, including lowering the amount of dollars banks could hold relative to shareholders funds to three per cent from five per cent, and aggressively raising interest rates by 2.75 basis points to 12 per cent.It also sold dollars directly to banks at the Inter-bank market. The measures seemed aimed at keeping the naira within the three per cent of 150 to the dollar target.But Sanusi said the bank was flexible on the exchange rate.This gives us an opportunity to show the markets we were never committed to fixed exchange rate. All we are trying to do is let people have a band within which to manage their expectations, he said.However, the Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said adjusting the value of the currency was a necessary condition for achieving macroeconomic stability.If a countrys currency is devalued, the goods imported into that country become more expensive, while prices of exports will become cheaper. However, devaluation comes with some level of inflation. In the foreign exchange market, devaluation will increase the price of naira to the dollar, which will reduce the demand currently witnessed at the forex market, Rewane added.The Chief Executive Officer, Economic Associates, Dr. Ayo Teriba, agreed with Rewane, saying devaluation would reduce dollar demand at the forex market.Teriba said, The level of reserves is limited. It will get to a level where you cannot continue pumping cash reserves to support the naira. Demand should fall if the naira is devalued because the amount of dollars that companies can buy will reduce.A consulting economist, Dr. Kayode Familoni, however, said that devaluation was inflationary and would further impoverish Nigerians.He pointed out that devaluation was a logical option to reduce the excess dollar demand in the forex market.He said, If you devalue the naira, foreign goods will be more expensive in terms of foreign prices, which means imported goods into the country will become more expensive. For an import-dependent country like Nigeria, virtually all goods will become more expensive. Devaluation is also hyper inflationary, which can worsen the welfare of the masses.Devaluation to correct trade imbalance is a standard prescription for economies that are structurally in equilibrium. If the purpose of the CBN is to reduce the demand in the forex market, then it is an obvious option. But because Nigeria is a structurally disequilibrium economy, it will raise up prices of every good in the country and there will be serious poverty.
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