Nigeria’s CBN Governor May Be Forced To Devalue Currency

VENTURES AFRICA – New Central Bank of Nigeria Governor Godwin Emefiele has only spent a week in office, but his presentation upon assumption of office has opened up several talking points harping on lowering interest rates without devaluing the naira.
“We shall pursue a gradual reduction in interest rates,” the former Zenith Bank CEO had said in his presentation last week. But days later, the CBN governor has moved to offer clarifications to his earlier statement, as speculations had become rife that interest rates would be reduced soon.
Emefiele described the speculations as mischievous, noting that he made it clear in his presentation that the plan was a five-year agenda.
He said lending rates will be reduced gradually, stressing that “the lending rate aspect is not an action that we are taking now,” as the bank will take into account, liquidity as well as the environment ahead of the upcoming general elections.
The ex-Zenith banker admitted that “reducing the interest rate and maintaining the exchange rate are very daunting twin goals,” but expressed the bank’s readiness to work assiduously towards achieving its goal. Although Emefiele noted that nothing concrete will happen in this regard until after the 2015 elections.
He reiterated his resolve to “continue to hold unto the exchange rate” and not devalue the naira.
The struggle of maintaining a stable exchange rate and keeping the currency stable, with the country’s external reserves being used to shore up deficits, forcing gradual shrink of the account, devaluation would seem to be inevitable; Emefiele however maintained that CBN will not devalue the currency.
Several analysts have doubted the feasibility of the task levied before the new governor, with investment firm, Renaissance Capital (RenCap) stating in a recent report titled “Nigeria: Emefiele’s Policy Agenda,” that in the short term, using the reserves to defend the naira would become unsustainable. The report stressed that dwindling external reserves may undermine price stability.
Forex reserves as at Monday was $37 billion, signifying a $12 billion fall since it peaked at $49 billion in April 2013.
RenCap had, in a February 2014 report, predicted a devaluation of the naira in 2015. The investment firm stated in the report, that a cumulative deterioration in Nigeria’s external position in 2013 and 2014 implies devaluation in 2015.
The investment firm predicted that forex reserves would see a continuous shrink as import demand heightens, which the company says is typical before an election.
Emefiele however says his plans to maintain the (N155 +/- 3%) exchange rate remains, and he will strive to build up and maintain a healthy external reserves position to achieve this.
Whether the new governor will be able to bring down interest rates and stabilize prize without devaluing the naira remains to be seen.