There were clear indications at the weekend that Nigeria may not allow free float of the local currency, the naira, as the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, cited rising inflation as a reason why it was not healthy for Africa’s largest economy.
Speaking while receiving the Vanguard Newspaper Personality of the Year Award, held in Lagos over the weekend, Emefiele said that a simple Purchasing Power Parity analysis will confirm that the Naira is not as weak as the rate at which it is traded at the parallel market.
Linking the call for float of naira to Egypt’s experience, he noted that he is not convinced that Nigeria should follow suit as it might increase inflation, adding, “I have heard commentators suggest we should follow Egypt’s example and free the naira.”
The Central Bank has faced criticisms from investors for keeping the naira at a rate some 30 percent above the black market where entrepreneurs are forced to go amid dollar scarcity on official channels.
Commenting on calls for the free float of the naira exchange rate in order to address the gap between the interbank and parallel market exchange rates, Emefiele said: “Even if one were to allow for risk pricing and other uncertainties, it does appear that there is no basis in our economic fundamentals to support the prevailing exchange rate at the parallel market. The only logical explanation to the high rates in that market therefore is that a lot of illegal and criminal
activities are being carried out there.
“Let me assure everyone listening that the CBN is acting in the best interest of ordinary Nigerians, regardless of the noise from the few entrenched interests whom our policies maybe hurting.
Let me also reiterate the central bank’s willingness, determination, and capacity to continue to meet all legitimate transaction-based FX demands in the market. I obviously cannot be of help to people or businesses who are into speculative FX demand. My promise instead to this group, whether foreign or local, is that the CBN will make sure they lose money!”
On the challenge of rising inflation, high interest rate, and declining Gross Domestic Product (GDP), Emefiele said: “In view of the fact that our current episode of inflationary pressure is coinciding with contracting economic growth, we have to recognize the dilemma it poses to policy making.
“This is because no single macroeconomic policy can address rising inflation and slow growth simultaneously, because tightening inflation may require implementing policies that might, in the short term, be inimical to economic growth, whereas, adopting expansionary policies to stimulate growth usually worsen inflation”.
“This is the reason the Monetary Policy Committee has, rather than concede to reducing rates, decided to hold its position through the adoption of tight monetary policy and this is also the reason we have seen a deceleration in the rate of month-on-month inflation in the last couple of months
“If we can approximate cost of capital as the average saving interest rate, which is about 6 percent, what then accounts for lending rates at 25 or more percent? It is cost of doing business. For example, a typical Nigerian Bank must employ the services of policemen and other
security people deployed constantly to protect its branches. The bank must also provide a significant amount for reliable electricity and broadband Internet services to keep its systems running. These expenditures only further increase costs of doing business for lenders, a cost they must pass on to borrowers.”