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An Analyst's Academic Guide To Naira Devaluation
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This week was a big one for the Naira. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria met for their bi-monthly deliberations on the health of the Nigerian economy at home and in the context of the global economy; and the world was watching.

There was some speculation about how they would respond to the oil price falling 30% since Q2 and now trading at about $78 per barrel, down from about $110 per barrel in Q1 2014. The government’s dollar savings at about $37bn at the time are enough to cover about 5-7 months of Nigeria’s imports depending on how you measure it.

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Oil revenue is the lifeblood of Nigerian government finances and government finances are the lifeblood of the Nigerian economy. Stakeholders were right to be worried, especially as Nigeria hadn’t saved for a rainy day as well as some other oil producing countries.

The committee took three actions including:

1. A move in the benchmark exchange rate to N168 (+ or -N5) from N155 (+ or -N3).
Firstly, this means that the government gets more in Naira for every barrel of oil sold than if the rate was kept the same. This should help to support government spending and reduce the need for drastic budget cuts.

It also means that the Naira sold at CBN auctions will be anywhere between N159.6 and N176.4 to the Dollar depending on the demand, excluding any fees. This compares with the previous range of N150.35 - N159.65.

This means that the rates in the Interbank market (typically used by importers of finished goods, those making payment of school fees and medical bills etc.) will rise. It also means that the rate at the Bureau de Changes, will rise; we think N179/180 is probably a comfortable level under current conditions.

2. Increase in the Monetary Policy Rate (MPR) by 1% to 13%.

This is what determines how much interest banks earn for depositing money at the CBN or the rate they pay when they need to borrow from the CBN. There is a corridor of +/- 2% and this means that banks will borrow from the CBN at 15% and earn 11% on deposits placed at the CBN.

Usually, in times of FX rate uncertainty, it is tempting for anyone who has spare Naira to buy US dollars, and wait, unless the returns for keeping money in Naira becomes more attractive. If this money is tucked away at the CBN, it is not available to chase US Dollars, relieving some pressure on US Dollar demand.

The idea here is that it is more attractive to keep money on deposit at the CBN than it was before.

3. An increase in private sector Cash Reserve Requirement (CRR) to 20% from 15% previously.

This means that for every N1.00 deposited in a bank from a private sector source such as an individual or a company, the receiving bank MUST deposit 20 kobo with the Central Bank. We estimate that this has the effect of taking about N550 billion out of the banking system into the CBN at zero interest for the depositing banks. This money is also not available for loans to customers by the banks.

The effect to the “woman on the street” is likely to be that interest rates will rise as the banking system becomes less liquid. The banks will need to offer higher rates to attract deposits as competition for money grows and they will in turn have to charge more for those who want to borrow it.

So where do we go from here?

Well, the Organisation of Petroleum Exporting Countries (OPEC), which accounts for around 30% of global oil production, met yesterday (Thursday, 27 November) and they have decided to keep producing 30 million barrels per day between all member countries. This means that the price of oil could fall further; perhaps closer to $70 – the price of Brent Crude oil drifted down towards $75 per barrel after the OPEC decision. This could mean more pressure for the Naira in the coming weeks and months.

In the meantime, the cost of goods that are imported into Nigeria or that are manufactured with imported inputs are likely to rise. So as we move into the festive season, it is time to unwind and enjoy with family and friends after a year of hard work but it is a good idea to maintain a degree of measure.

There may be more difficult times to come in 2015.