The House of Representatives, today, 9th June, 2021 directed the Central Bank of Nigeria (CBN) to immediately embark on fiscal measures that will stop further devaluation of Naira against other currencies.
The House further mandated its Committee on Banking and Currency to ensure compliance and report back to the House in two weeks for further legislative action.
This was sequel to a motion moved on the floor by the member representing Ede north, Ede south, Egbedore and Ejigbo federal constituency of Osun state, Representative Bamidele Salam and seconded by Hon. Oladodo Saka Cook.
The motion which came under Order V111, Rule 4 was titled: “Matter of urgent public importance on the need for the central bank of Nigeria to urgently put in place monetary policies to stop the free fall of the naira against the dollar and other international legal tenders”.
While shedding more light on the motion, Rep. Salam noted that in February this year, the Governor of the Central Bank of Nigeria (CBN) Mr. Godwin Emefiele while addressing the bankers committee at a summit on the economy in Lagos, informed the committee about the Naira devaluation against the USD during which he added that the official exchange rate stands at 410 to the dollar translating to 7.6% weaker than the rate of 379.
“Further note that while the value of the Nigerian naira relative to the US dollar has declined by 9% in the last 6 months, the South African Rand and Ghanaian Cedi, have appreciated by 11.4% and 1%, respectively.
“For instance, further details as presented in Table 1 show that in January 2021, the naira exchange to the US$ at about N377. By June 7th, 2021, however, it exchanged for about N411. The South African Rand, on the other hand, exchanged for about 15.14 Rand to the US$ in January and at about 13.41 Rand as of June 7th, 2021.
“Likewise, the Ghanaian Cedi, which exchanged for 1 US dollar at about 5.818 Cedi’s in January, has remained relatively stable in the last six month and even appreciated by about 1%. Clearly, Honourable speaker, distinguished colleagues, all is not well with the naira and whatever policy is being adopted to manage it at the moment”, Rep. Salam stated.
He expressed worry that the CBN has adopted multiple exchange rates since last year in a bid to avoid an outright devaluation, yet the official rate used as a basis for budget preparation and other official transactions differs from a closely controlled exchange rate for investors and exporters known as the Nigerian Autonomous Foreign Exchange Rate Fixing Methodology (Nafex) appear unrealistic in the prevailing circumstances.
He emphasised that the Naira has traded in a tight range between 400 naira to 410 naira pointing out that the Nafex rate is different from the parallel market, considered illegal by the CBN, where the Naira closed at 502.
The rest of the motion reads:
Further aware that some experts believed that Nigeria devalued the Naira to record low against the dollar on the official market.
According to some traders, their strategy is to unify multiple exchange rates to boost the dollar supply through direct interventions. Having traded within a band of 380 and 381 to the dollar since July last year, the Naira hit a record low of 419.75 against the dollar and closed at 411.25, the previous closing rate for the Naira on the over-the-counter spot market.
Concern that devaluation is likely to cause inflation because imports will be more expensive (any imported good or raw material will increase in price) Aggregate Demand (AD) increases – causing demand-pull inflation. Firms/exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness. The concern is that the long-term devaluation may lead to lower productivity because of the decline in incentives.
Further concerned that devaluation of the Naira makes it more difficult for Nigerian youths especially in the IT sector whose businesses are online and must necessarily transact businesses in the US dollars; it also reduces real wages. In a period of low wage growth, a devaluation that causes rising import prices will make many consumers feel worse off.
Worried that an enormous and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because the depreciation effectively reduces the actual value of their holdings. In some cases, rapid devaluation can trigger capital flight.
Further worried that if consumers have debts, e.g. mortgages in foreign currency, they will see a sharp rise in the cost of their debt repayments after a devaluation. This occurred in Hungary when many had taken out a mortgage in foreign currency, and after the devaluation, it became costly to pay off Euro denominated mortgages.