The devaluation of a currency can be a divisive strategy, but some market analysts anticipate that the Central Bank of Nigeria (CBN) will be left with no choice but to intentionally weaken the naira in 2020. Concerns over the rising US dollar and threats to Nigerian exports have prompted these calls for devaluation in some quarters.
While this move would be undertaken with the goal of stimulating economic growth, other analysts are wary of the long-term ramifications of a self-inflicted weakening of the naira.
The team at Nairametrics has been privy to a report by experts at EFG Hermes, the international investment bank, with this report concluding that the CBN may be compelled to weaken the naira by between 5% and 10% over the course of 2020. Read More Europe wants G20 to make taxing digital giants top priority this year
The case for devaluation EFG Hermes floats the notion that excessive pressure on Nigeria’s external reserves may force CBN’s hand, with those reserves slumping to $38 billion at the close of 2019 – a two-year low for the country.
Outside factors may also make the concept of devaluation more attractive. A rise in crude prices may have helped the CBN to stave off calls for devaluing the naira, but the opening weeks of 2020 have been tricky for economies across the world.
The nature of currency pairs means that as one economy thrives, another can suffer. In the case of Nigeria and many other emerging markets, the resurgence of the US dollar may hinder growth prospects. The relative economic hardship of China, Nigeria’s most significant trade ally, furthers the cause for devaluing the naira.
The rise of the US dollar Healthy job data sent the dollar flying to a four-month high at the start of February. If the US dollar continues to send encouraging signs, then traders will respond accordingly and get back on board with the greenback. This will have negative effects on smaller currencies, such as the naira.
The goodwill from the jobs report may be comparatively short-lived, with the US presidential election later this year inevitably set to inspire more circumspect trading behaviour. However, for now the bounce of the US dollar spells bad news for economies like Nigeria.
The exchange rate between the USD and the NGN has averaged at around N362 in recent months, although the USD’s mini bounce sent that rate up to N365 approaching mid-February. Many traders will be observing the changing fortunes and taking a long position with forex brokers on the USD/NGN currency pair, particularly given the impact of reduced exporting power on the Nigerian economy in the early weeks of 2020.
Struggles with exports China is Nigeria’s largest trading partner, with the two nations securing over $3 billion worth of trade in the third quarter of 2019. However, the coronavirus scare has significantly reduced China’s demand for oil, with prices depreciating by 12% in January. Source: Pixabay
Nigerian exports have subsequently reduced, which is a potentially hefty blow to the economy and the naira. This trend is not easily reversed; even when the coronavirus scare is resolved, it will take time for China and its trading partners to recoup the losses from the early weeks and months of 2020.
Michael Emefiele, governor of the CBN, stated that an improvement in Nigeria’s non-oil exports would be an integral part of its economic growth in 2020. However, those plans were made under the assumption that the oil sector would continue to be dependable. With oil prices falling and the US dollar recovering, the pressure on the naira and Nigeria’s external reserves may make a devaluation impossible to avoid.
The case for stability The central bank’s strategies in recent years indicate that if the CBN can avoid devaluing the naira, then it will do so. While circumstances may be less than ideal, some voices have called for the CBN to maintain its protective stance towards the naira.
The report by EFG Hermes identifies popular demand as the potentially decisive factor in prompting CBN to adopt a strategy of devaluation. The influential opinion of Aminu Gwadabe, president of the Association of Bureau de Change of Nigeria (ABCON), is that a devaluation is not a necessity.
Gwadabe stressed that a rate around the N360 mark would be acceptable for economic growth, although recent developments may prompt a reassessment of that opinion. The CBN has consistently sought to keep exchange rates stable, making regular capital injections into markets to maintain liquidity.
This approach is intended to sustain Nigeria’s appeal to investors, but that appeal may be in short supply while uncertainty reigns. The naira may be unable to recover until oil prices increase, so the country could struggle to make good on the promises of economic growth set out by the CBN’s 2020 budget.
For now, the CBN is remaining steadfast in its protection of the naira, while there is not yet sufficient support among traders and businesses behind the idea of consciously weakening the currency. There may come a time where the short-term uncertainty caused by devaluing a currency is a necessary evil, particularly if it can help to secure meaningful economic growth for Nigeria in the longer term.Click Here to Join Newsnow Nigeria WhatsApp Group for Breaking News Alerts More News