Nigeria Tam Tam: the raging debate over valuation of the naira

The raging debate over valuation of the naira

Wednesday, 23 February 2011 00:00 By Bukky Olajide Business Services - Money Watch 

 

 HAVING taken a wholesome  look at the   Nigerian economy, the International Monetary Fund (IMF), last week, among other suggestions, called for a devaluation of the naira. The advice was an old tune that couldn’t find harmony with some analysts. Some of them pointed out to BUKKY OLAJIDE that logic was being made to stand on its head by the Bretton Woods institution.

LAST week, the International Monetary Fund (IMF), in its “sincere” assessment of the Nigerian economy, raised optimism about its outlook projecting that it could grow from seven and a half per cent to eight and a half per cent this year.

It based its optimism on the country’s recovery in oil production and ‘perceived’  continued strong growth in other sectors.

For 2011, the IMF also expressed optimism saying that the economy was projected to grow by seven per cent, moderating gradually in subsequent years. Though it noted that inflation had been stuck in the low double digits for the past two years and foreign reserves had been falling as the Central Bank of Nigeria had focused on maintaining exchange rates, yet inflation was projected to decline to nine per cent by end of 2011.

The International financial institution also based its optimism on risks balancing, that is, the fact that the CBN reduced the rate on its standing deposit facility despite inflation.

It noted that in response to pressure on the currency, the CBN sold reserves rather than raise interest rate or let the exchange rate depreciate. The CBN recently raised interest rates, but shot term real interest rates remained negative.

But the IMF stirred the hornets’ nest when it assessed the Naira as overvalued and therefore needed to be weakened, to curb inflation in the country.

The IMF executive staff Board, in its report gave an assessment of an over valuation of the naira, arguing that greater exchange rate flexibility would prevent one-way bets the foreign exchange market and cushion external shocks.

Financial analysts and experts had called appropriate authorities to disregard this recommendation saying that further devaluation of the naira would put the Nigerian economy in jeopardy.

The naira first experienced devaluation in 1986, when former President Ibrahim Babangida introduced the Structural Adjustment Programme (SAP) but financial experts believe that naira actually experienced its first devaluation in the first month of its existence in 1972.

They said that was because there was a correlation between what happened afterwards in 1972 and the subsequent devaluation of the naira exchange rate in the 1990s and 1999.

Looking at 20 years of devaluation of the naira “Without benefit”, Paul Adujie, a Nigerian, but resident of New York, United States observed that the Naira had been allowed to plummet in unprecedented free fall for a national currency.... Read more...