The House of Representatives has urged the Central Bank of Nigeria (CBN) to urgently put in place a policy to check further devaluation of the naira to the United States dollar and other international legal tenders.
The House also directed its committee on banking and currency to ensure compliance and report back to the House in two weeks for further legislative action.
While considering a motion of urgent national importance moved by the member representing Ede North/Ede South/Egbedore/Ejigbo federal constituency of Osun State, Hon. Bamidele Salam, the House expressed worry that the CBN has adopted multiple exchange rates since last year in a bid to avoid an outright devaluation.
According to the motion, 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).
“The naira has traded in a tight range between 400 to 410 naira. The Nafex rate is different from the parallel market, considered illegal by the CBN, where the naira closed at 502,” Sallam noted.
“According to some traders, their strategy is to unify multiple exchange rates to boost the dollar supply through direct intervention. Having traded within a band of 380 and 381 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,” he said.
Sallam, however, expressed 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 and exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness. The concern is that the long-term devaluation may lead to lower productivity because of the decline in incentives.
He noted that devaluation of the naira makes it more difficult for Nigerian youths especially those in the information technology sector whose businesses are online and must necessarily transact businesses in the US dollars; it also reduces real wages. In a period of low wage growth, a devaluation that causes rising import prices will make many consumers feel worse off.
According to him, an enormous and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because the depreciation effectively reduces the actual value of their holdings. In some cases, rapid devaluation can trigger capital flight.
“If consumers have debts, for example mortgages in foreign currency, they will see a sharp rise in the cost of their debt repayments after a devaluation. This occurred in Hungary when many had taken out a mortgage in foreign currency, and after the devaluation, it became costly to pay off Euro denominated mortgages,” he added.