The recent decision by the US Federal Reserve Bank (Fed) to hike interest rate for the first time in almost a decade is triggering serious concerns around the world and poised to further pressure the Central Bank of Nigeria (CBN) to devalue the Naira.
The move is expected to lead to a reversal of the flow of cheap money, which had found home in emerging markets in search of higher returns. With over $500 billion already withdrawn from emerging markets in 2015, the expected adverse capital flow portends a bleak 2016 for many African Countries, who would be left to contend with the impact of the imminent capital flight.
In his article; “US rate rise: Why it matters”, BBC Business Reporter; Ben Morris posits; “For almost a decade money has been cheap – some would argue too cheap. But today’s rise in US interest rates could be the beginning of a new era, one in which the cost of borrowing rises – possibly for years.”
That reality brings fear to many African governments burdened with huge dollar debts and a minimized capability to service them. The development is rather worrisome as the cost of borrowing will rise as interest rate increase.
However, beyond the capital outflow from emerging economies, the other key impact is that the move will see the dollar strengthen against most currencies. For a country like Nigeria, who depends on commodities export for a high proportion of their government revenues, this is bad news. The sustained low price of oil is already hindering the national budget as the government is unable to meet recurrent expenditure needs due to the dwindling revenues. It is also expected that commodity prices which had fallen drastically in the past year with the slump in demands from china, would drop further with the strengthening of the dollar, considering that commodities are traded in dollars.
The US Fed might have inadvertently pulled the rugs off the feet of the Nigerian economic managers by this singular decision to raise interest rate by 0.25 per cent. Having stuck to the inexplicable decision to continue propping up the Naira throughout 2015, when there were clear indications that devaluation was inevitable to ease the barrage on the currency, that stoic stance now seems highly unsustainable. The local economy after all, is not as insulated from global events as they would have us believe.
With the CBN still unable to satisfy the demand for foreign exchange, the strengthening of the dollar will put even further strain on the economy as many genuine users of foreign exchange whose commercial activities are being hampered, would be willing to buy at any rate to avoid a disruption of their operations. At some point, necessarily, the Country’s dwindling reserves would be unable to cushion the shocks, leaving the CBN with little option but to devalue the Naira.
The Naira traded at a new low of 280 Naira to the dollar in the parallel market within the week and the continued intervention by the CBN at 196-198 Naira to the dollar to a privileged few would not just be ridiculous but irresponsible. The CBN intervention window has been shut for the year and it is critical that the CBN reassesses its foreign exchange policy when the interbank market reopens in January 2016.
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