Naira weakens further as dominant currencies alter pricing decisions
With many trade transactions benchmarked against dominant currencies like the U.S. dollar, the International Monetary Fund (IMF), has expressed concerns that currency movements pose great challenges to developing countries’ domestic economy, especially trade. Indeed, the concerns speak to the challenges of the Nigerian economy, where trade invoices are benchmarked against the dollar, just as the Naira continues to lose value at the parallel market.
At N472 to $1, the IMF noted that the weakening of other countries’ currencies vis-à-vis the US dollar leads to higher domestic currency prices of their imports, including from countries other than the U.S., and, thus, lower demand for them. With Nigeria juggling with volatile oil prices, rising inflationary pressures, and wounds inflicted by strict lockdowns, members of the private sector have expressed worry about the weakening exchange rate.
Already, Nigeria’s foreign trade volume fell from N10.12 trillion in the Q4 2019 to N8.30 trillion in Q1 2020, according to the latest report from the National Bureau of Statistics (NBS). With the Central Bank of Nigeria (CBN), adjusting the foreign exchange rates in a move to have a uniform rate, local manufacturers equally warned that many factories may shut down if outstanding obligations of over one year to foreign suppliers are not met.
According to the Manufacturers Association of Nigeria (MAN), while the move is gratifying, the apex bank should urgently put a measure in place to minimize the intensity of the pain by considering outstanding obligations of manufacturers from the second quarter 2019 till date.
To them, the outstanding obligations given at N345/$ prior to the unification should be given the privilege to be settled at between N330 and N360/$, to enable banks to redeem these obligations to foreign suppliers of manufacturers. If not done, MAN said many factories may close shop, and CBN stimulus packages to the manufacturing sector will suffer a huge setback, as cash flow crunch becomes the order of the day.
MAN, in its position on the matter noted that it is important to recognize the existence of the unavoidable pains that naturally come with the transition from a multiple exchange regime to the domain of a single exchange rate, particularly the burden of dollar-denominated loans, and offsetting existing credit commitments to foreign suppliers of raw materials.
According to the IMF, when export prices are set in US dollars or Euros, a country’s depreciation does not make goods and services cheaper for foreign buyers, at least in the short term, creating little incentive to increase demand.
“Thus, in emerging markets and developing economies’ (EMDEs) EMDEs, where dominant currency pricing is more common, the reaction of export quantities to the exchange rate is more muted and so is the short-term boost of depreciation to the domestic economy.
“Our analysis on dominant currencies suggests that the weakening of EMDE’s currencies is unlikely to provide a material boost to their economies in the short term as the response of most exports will be muted, besides the physical disruptions to trade from supply and demand disruptions.
“Meanwhile, key sectors that would normally respond more to exchange rates—like tourism—are likely to be impaired by COVID-related containment measures and consumer behaviour changes,” IMF analysts explained.
Additionally, the IMF said the global strengthening of the US dollar, which mainly reflects a flight to safe haven assets, is likely to amplify the short-term fall in global trade and economic activity. This is because higher domestic prices of traded goods and services and negative balance sheet effects on importing firms lead to lower import demand among countries other than the United States.
“Nevertheless, we are weary of the implication of the sudden unification of the exchange rate to the economy at this time. We believe this will be counterproductive, as the nation depends hugely on importation of raw materials, equipment, fuels (most especially). We are sure this will imply higher cost of all imported products, with increased potential for reintroduction of the subsidy regime,” says NECA’s Director-General, Dr. Olawale Timothy.
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