ECONOMY-NIGERIA: Fears of Devaluation Trigger the Fall of Naira

By Toye Olori Reprint | | Print |

Toye Olori

LAGOS, Feb 12 2002 (IPS) - The Nigerian currency continues its slide this week, as fears of devaluation sweep through the West African country.

The Naira fell to an all low, fetching 137 on the parallel market. The official rate is pegged at 112 Naira to the U.S. dollar.

The Naira may further plummet if a proposal by the Parliamentary Committee on Finance last week to further devalue the currency is upheld.

The committee submitted a proposal in which it argued that it would be unrealistic to continue pegging the dollar at 112 Naira. It recommended a rate of 127 Naira to the U.S. dollar.

Mohammed Daggash, who is chairing the committee, said the “foreign exchange rate proposal by the Ministry of Finance of 112 Naira is artificial in view of the parallel rate of 137 Naira. The liberalisation, deregulation and the market determined rate posture of the federal government, dictates that it is untenable to defend and encourage commercial banking sector to continue round tripping within a wide margin of approximately 22 Naira.

“This is effectively a subsidy that benefits only a handful of bank owners and traders. There is a need as a matter of urgency to converge the market and the official rate immediately,” he added.

The committee’s proposal had sent the exchange rate skyrocketing last week with the dollar exchanging for 142 Naira to the U.S. dollar on the parallel market and 140 Naira in the Bureaux de Change.

Economists blame last week’s fall in the value of the Naira on the proposal by the House to devalue the currency, and on the high demand for foreign currency by Muslims travelling to Mecca, Saudi Arabia, on pilgrimage.

Muslims make up almost half of Nigeria’s estimated 120 million people.

Finance minister, Adamu Ciroma, cautioned against further devaluation of the Naira as proposed by the Committee, explaining that the move would aggravate an already disturbing trend of inflation, which currently stands at 15 percent.

Ciroma argued that inflation would rise if the committee’s recommendations were adopted. “If the Naira is devalued, there must be an increase in financing of capital projects which the country might not be able to sustain,” he said.

The minister ruled out narrowing the gap between the official and parallel rates because past efforts to do so have not yielded any fruit.

Analysts believe Nigeria, the largest African oil producer, could face severe problems keeping Naira at the new, lower level.

Falling oil prices and production cuts leave Nigeria, with external debt of 27 billion U.S. dollars, with rising demand for the foreign currency and falling supply.

Oil accounts for almost half of Nigeria’s gross domestic product (GDP) and about 85 percent of all foreign exchange earnings.

Industrialists, resisting further devaluation, applauded a move by the central bank of Nigeria to shore up the Naira’s value on the foreign exchange market.

Charles Ugwu, President of the Manufacturers Association of Nigeria (MAN), said: “Over the year poor records of foreign exchange earnings had put certain individuals at an undue advantage over others, which they use to influence the parallel market at the expense of the nation’s economy.”

The fall of Naira is further compounded by poverty which is still a growing problem in Nigeria – a country which is estimated to have earned about 280 billion U.S. dollars from oil during the past 30 years.

According to the World Bank, about 66 percent of the population now fall below the poverty line of about a dollar a day, compared to 43 percent in 1985.