The House of Representatives has directed the Central Bank of Nigeria, CBN, to urgently put in place a policy to check further devaluation of the naira to dollar and other international legal tenders.
The resolution of the House was sequel to the adoption of a motion of urgent national importance moved at plenary on Wednesday, June 9, 2021, by Hon. Bamidele Salam.
Moving the motion, Salam recalled that in February this year, the CBN Governor, while addressing the Bankers Committee at a summit on the economy in Lagos, informed the committee about the naira devaluation against the dollar, saying the official exchange rate stood at N410 to the dollar.
The lawmaker said while the value of the naira to the US dollar has declined by 9 percent in the last six months, the South African rand and Ghanaian cedi have appreciated by 11.4 percent and 1 percent respectively.
Salam said for instance, further details as presented in January 2021, the naira exchanged to dollar at about N377, adding that by June 7, 2021, it exchanged for about N411.
He noted that the South African rand, on the other hand, exchanged for about R15.14 to the dollar in January and at about R13.41 as of June 7, 2021, while the Ghanaian cedi, which exchanged for $1 at about ¢5.818 in January, has remained relatively stable in the last six months and even appreciated by about 1 percent.
Salam noted that it clearly showed that all is not well with the naira and whatever policy is being adopted to manage it at the moment.
He stressed that the CBN has adopted multiple exchange rates since last year in a bid to avoid an outright devaluation.
Salam explained that the official rate used as a basis for budget preparation and other official transactions differs from a closely controlled exchange rate for investors and exporters known as the Nigerian Autonomous Foreign Exchange Rate Fixing Methodology (Nafex).
He pointed out that the naira has traded in a tight range between N400 and N410, adding that the Nafex rate is different from the parallel market, considered illegal by the CBN, where the naira closed at 502.
Salam stated: “Some experts believed that Nigeria devalued the naira to record low against the dollar on the official market; according to some traders, their strategy is to unify multiple exchange rates to boost the dollar supply through direct interventions.”
He said having traded within a band of N380 and N381 to the dollar since July last year, the naira hit a record low of 419.75 against the dollar and closed at 411.25 – the previous closing rate for the naira on the over-the-counter spot market.
Salam noted: “Concern that devaluation is likely to cause inflation because imports will be more expensive (any imported good or raw material will increase in price) Aggregate Demand (AD) increases – causing demand-pull inflation. Firms/exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness.”
The lawmaker lamented that the concern is that the long-term devaluation may lead to lower productivity because of the decline in incentives, adding that devaluation also makes it more difficult for Nigerian youths especially in the IT sector whose businesses are online and must necessarily transact businesses in US dollars and also reduces real wages.
Salam said in a period of low wage growth, a devaluation that causes rising import prices would make many consumers feel worse off.
The lawmaker expressed worry that an enormous and rapid devaluation may scare off international investors and also make investors less willing to hold government debt because the depreciation effectively reduces the actual value of their holdings.
Salam further argued that in some cases, rapid devaluation can trigger capital flight.
He expressed concern that if consumers have debts, for instance, mortgages in foreign currency, they would see a sharp rise in the cost of their debt repayments after a devaluation.
The House resolved: “Direct the CBN to urgently put in place a policy to check further devaluation of the naira to USD and other international legal tenders.”