Slide in Oil Price Forced Central Bank of Nigeria to Devalue Naira

Governor of Central Bank of Nigeria Godwin Emefiele chooses this election period to devalue the naira

Slide in oil prices has forced the Central Bank of Nigeria (CBN) to devalue the Nigerian currency by 13 Naira. At its monetary policy committee, MPC, meeting in Abuja today, Tuesday 25 November 2014, the bank pegged the exchange rate of naira at N168 to a dollar, no longer N155. It also adjusted the cash reserve ratio (CRR) on private sector funds held by banks to 20 per cent from the current 15 per cent, but retains the public sector cash reserve ratio at 75 percent.

Governor Godwin Emefiele, 53, explains: “The current challenge requires bold policy measures, moves on both the demand and supply sides of the foreign exchange market.”

It is not surprising that the CBN chooses this election period to devalue the naira. The president of Nigeria, Goodluck Jonathan has already submitted his expression of interest to contest the 2015 Presidential election and has been drawing cash massively from the Central Bank to settle oppositions in the National Assembly and other political jugglers. Adding such executive recklessness to the recent fail in oil prices at the international market, there Nigerian currency was under massive pressure that the CBN had to quickly intervene.

The devaluation of the Naira is seen by many economic watchers as a bold move. Stuart Culverhouse, head of research at Exotix Ltd. London, told Bloomberg in an email that “the combined measures should help to support market sentiment in the near term and ease pressure on reserves. It gives the Central Bank of Nigeria a better chance that it can get through to February’s elections without further or even stronger measures becoming necessary.”

Still, this rescue operation is a massive u-turn from the CBN. The massive slide in oil prices recently had sparked speculation from experts last week that Nigeria would be forced to devalue the naira. But the Central Bank had vehemently denied that it was ever going to do so.

The devaluation of the naira is the second in just three years. In 2011, the Central bank of Nigeria under the governorship of Malam Sanusi Lamido Sanusi, now the Emir of Kano, devalued the naira by setting the exchange rate at N155.00 to the US dollar from its former rate of N150. The reason given then was because of the astronomical rise in demand for forex and the depletion of the country’s foreign reserves.