Nigeria Needs To Update The Devaluation Playbook

Nigeria Needs To Update The Devaluation Playbook

Devaluing the Nigerian Naira without supporting policies will only result in another devaluation in 3-4 years. What Nigeria needs now is to reduce tariff on raw materials while increasing tariff on non-essential finished goods. And quickly offer tax-incentives to any firm that generates at most 1MW of power by itself so that independent power can enter balance sheets, not as pure expenses, but as leverageable investments to cushion P&L statements. Spending 50% of the power budget on independent power  via tax credits will put urgency since the national grid concept has clearly failed in Nigeria.

The central bank will scale inflation and Nigeria will not benefit through a boost on export if we continue to devalue Naira as a pure mono-policy. More so, to encourage exports, I will waive fees on exports through an index where if companies meet local demand levels, exports can go free of most fees.  The goal would be to accelerate non-crude oil exports to diversify sources of foreign exchange. I expect this devaluation to hit at least N420 per $1.

The derivative and black markets suggest the naira is still under plenty of strain. The price of three-month non-deliverable forward contracts has surged to 421 naira per dollar, signaling traders see another 10% devaluation in that period. One-year NDFs rose above 500 for the first time on Monday. The black-market rate has weakened to 403 from 380 this week, according to abokifx.com, a Lagos-based website.

“While it’s commendable that they’ve weakened the currency, it falls short of our fair value estimate of 410,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg, said. “It would be positive if the central bank were to also introduce a flexible foreign exchange rate, and move away from near peg.”

The Abuja-based central bank will likely lower its key rate by 50 basis points to 13%, according to a Bloomberg survey of analysts. That may help the economy, which will be hit by lower crude prices and the spread of the coronavirus, with the government suspending international flights and closing land borders on Monday. But it would still leave Nigeria with one of the highest base rates globally.

Previous devaluations have not positioned our foreign exchange, this one should be different.

I posted this on LinkedIn also:

Here are the possibilities on how Nigeria could recover post-coronavirus pandemic. Let’s do some academic work here: which one do you expect for  Nigeria by 2023.

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One thought on “Nigeria Needs To Update The Devaluation Playbook

  1. We really need to sit down and think critically on how we wish to get this economy working again, as the pandemic levels out. This is not something we can rely on the CBN to do, it’s way beyond their pay grade. Monetary tool has its limitations, so nothing much from there that can get us up and running anytime soon.

    We have been singing and shouting diversification, yet there’s no clarity on how we intend to achieve it. Focusing heavily on agriculture won’t give us that, because there are countries who produce bigger, with lower cost; so most of what we do there is for local consumption, it won’t give us much leverage on exports, which we also need.

    There are many policies that neutralise creativity and entrepreneurship here, so until we first give chance to a lot of people who are willing to take risk and create wealth, before the government starts fighting for its share of the largesse; we will keep running with handbrake on.

    As the government doesn’t have a lot of money to inject and stimulate the economy, it should also not be greedy in asking for its share. Allow the wealth to be created and scaled first, then it can open its revenue holes to ask for its share.

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