A professor of Finance and immediate past commissioner for finance in Imo State, Uche Uwaleke, has described the weekend’s technical devaluation of the naira as hasty and an action that will backfire.
In a reaction to central bank’s alignment of foreign exchange, which moved official exchange rate from 306/$ to N380/$, Uwaleke declared “this latest upset in the forex market could reverse gains already made.”
According to him, CBN could have delayed this action, especially coming few days after the CBN Governor had assured the nation that no devaluation was in the offing.
“While the upward ‘adjustment’ in Exchange rate may increase foreign portfolio investment in the near term and temporary halt capital flight, it rubbishes the 2020 federal and state budgets predicated on N305 to the dollar.
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“This is especially against the backdrop of the fact that the capital provision in the budget has huge dollar component.”
The professor of Capital Market noted that the action presented a major headwind to the country’s capacity to service public debt given the growing proportion of foreign debt, exacerbating in the process the fiscal imbalance.
“Furthermore, as an import-dependent economy, a major risk will be inflation. In the months ahead, the manufacturing and non-manufacturing purchasing managers index may contract due to high cost of inputs with adverse effect on the already high unemployment rate.
“This will be compounded by the impending deregulation of the downstream sector with NNPC ceasing to be the sole importer, as oil marketers are compelled to access forex at market-determined exchange rates.
“Even at the current price of N380 to the dollar at the Autonomous Forex market, not a few think the naira is overvalued.
“By implication, the exchange rate is likely to rise further.”
Uwaleke warned it could also result in speculators taking over the market and politicians, in particular, seeing it as an incentive to hold dollar as a store of value and “if our experience is anything to go by, even when oil price recovers, the exchange rate will remain sticky downward.
“Therefore, this action by the CBN has a signalling content that should not be underestimated.
“My take is that with external reserves of nearly $36 billion enough to finance many months of imports well in excess of the three months International threshold, the CBN ought to have continued to defend the value of the naira while it fine-tunes demand management strategies to further contain the pressure.
“If Nigeria has witnessed some level of macroeconomic stability post-recession, consistent with the objective of the ERGP, it is primarily due to the effort of the CBN in ensuing Exchange rate stability.”
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