The central bank (CBN) was forced to devalue the naira, following the steep fall in global oil prices which have eaten into the country’s oil revenues and foreign exchange reserves.
As the country’s apex baank battles to preserve macroeconomic stability, it devalued the naira by eight percent and raised interest rates sharply, as it sought to stem losses to its foreign reserves from defending the currency against weaker oil prices.
“The pressure on the naira will continue the best thing to do would be to depreciate more than they have done. You have to start looking at levels of 190 or 200 in the interbank market before it makes sense,” according to Phillip Blackwood, a London-based money manager at EM Quest Capital LLP.
With oil prices continuing to fall – OPEC daily basket stood at $74.28 per barrel on Thursday – a continued defence of the naira with the foreign exchange reserves will be disastrous for the economy, as the pressure on the currency continues.
“The fall in the oil price forced the hand of the central bank, but it is political and policy issues that will continue to negatively affect confidence in the naira. A further devaluation after the 2015 elections seems likely,” according to Philip Walker, economist at Economist Intelligence Unit London.
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The apex bank responded with a devaluation, to stem the pressure against the naira. It also increased the interest rate as a way of guarding against domestic inflation, which comes with currency devaluation.
The CBN Governor admitted that inflationary pressures were moderating; he noted that election-related spending could cause a spike in inflation.
“The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” Godwin Emefiele, Governor, Central Bank of Nigeria (CBN) in an address to journalists during the presentation of the Monetary Policy Committee (MPC) report in Abuja.
The poor fiscal position of the Nigerian government and most states comes amid a 30 percent decline in oil prices since June 19.
The fiscal situation in the country is not good, “five states cannot pay salaries as we stand today”, said Brismark Rewane, Chief Executive Officer, Financial Derivative Company, at a BusinessDay conference on the impact of falling oil prices on the Nigerian economy held recently.
“Oil price volatility has affected Nigeria over the years with the economic distractions becoming higher”, he added.
The Minister of Finance, Ngozi Okonjo-Iweala, in an attempt to protect and insulate the Nigerian economy from the volatility of the global crude oil prices, announced the first tranche of fiscal austerity measures cutting the 2015 oil benchmark from $77.5 to $73 per barrel.
In as much as this measures on budget cuts are in the right direction, fiscal measures are not necessarily sufficient to insulate the Nigerian economic from the global oil decline.
Combinations of both fiscal and monetary policies are more likely to go a long way in stabilizing the economy amid declining oil prices.
The Federal government revenue to percentage of gross domestic product (GDP) stands at 12.2 percent which is quiet low compare to other oil producing countries.
Despite Nigeria having the largest economy in Africa, countries like Angola, Algeria, South Africa, Morocco and Egypt all have government revenue to GDP above 20 percent with Angola having the highest of 41 percent.
“Nigeria needs to raise tax revenues, Nigeria has the lowest tax rate in the world with 5 percent Value added tax (VAT) – with 10 percent being the standard globally”, according to Ayo Teriba, CEO of Economic Associates said at BusinessDay conference.
We need to overhaul the country’s fiscal expenditure, fiscal policy needs to be more active, Teriba added.
JOSEPHINE OKOJIE
