Foreign investors holding Naira denominated assets are voting with their feet mainly because of the fear that the country is likely to devalue. In fact some of the investors who have been around for some time and have benefited from the above average return on their investments are holding out believing the authorities as they pledge to defend the rate of exchange of the Naira. The moment the first step is taken to confirm their worst fears by devaluing the Naira the run is going to be a torrent which will be difficult to handle.
One must also remember that foreign investors are also concerned about the risk of the forthcoming elections not forgetting the risk arising from the insurrections in the North East arising from the unfortunate activities of the Boko Haram. There are those who have argued that most other countries have had their currency devalued in relation to the dollar and therefore Nigerian manufacturers will be at a disadvantage if the country does not devalue.
But that is essentially the argument that we do not have a manufacturing export base to make devaluation value adding. Some are even of the view that there will be penalty for being late in taking this decision. That because we have not seized the tide when it is most opportune the country would be paying a price! But we do not agree that devaluation is the panacea.
It is also necessary to bring into the picture the scenario the last time the country devalued in 2008. We should bring to the table our experience following that decision to ask ourselves how beneficial it was, but what is most important is that the circumstances are not the same today as they were then.
In 2008 the price of oil dropped from 140 dollars per barrel to about 37 dollars within a comparable period of about five months. Certainly we are thankful that the drop in the price is not as precipitous as it was then and considering the level of reserves we are still able to try and defend the exchange rate.
The fact of the matter is that the oil market is volatile which could stabilise overnight even if informed opinion is that it is going to be difficult to witness the era of high price again in the immediate to near term. If for instance Saudi Arabia reputed to be in the recent past a swing producer is convinced that it is in the country’s strategic best interest to defend the price of oil and decides to withdraw just one million barrel a day from the market, stability would begin to return to the market and the price of oil would firm up. OPEC secretariat estimates that the amount of excess crude in the market is currently about 600,000 a day.
We align ourselves with the steps taken so far by the authorities. It is important to remind ourselves always that there is the need to avoid any panic decisions. The decision to review downwards the benchmark price of oil in the MTEP is well conceived but even at 73 dollars if the fall continues we might as a country still be caught on the wrong side.
The decision to boost non-oil revenue is well thought through and must be sustained as that should really be the source for the funding of recurrent expenditure. The decision by the Central Bank to defend the value of Naira is the only option available to try and checkmate the psychology of the market.
We hope that OPEC would rise to the challenge to impose more discipline amongst its members and to withdraw some supplies from the market to try and facilitate badly needed stability. We hope in the best interest of this country that the situation of the oil market would not deteriorate to the extent that devaluation becomes an inevitable option.
Source: Leadershipng
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