the Naira, devaluation, IMF recommendations and the options

I wrote something a few days ago about the foreign reserves and the story behind its current free fall and a few days later the IMF also came out with a statement urging the CBN to allow the naira to devalue and raise interest rates to curb inflation. Trust Nigerian’s to shoot down the messenger though. The basic line is “isn’t that the same IMF that screwed us in th 80’s, abeg they should free us”.

However is the IMF right? Does the CBN need to devalue the naira or technically stop trying to back the naira? Well Yes and No. Yes because the CBN does NOT print dollars and cannot back the naira forever. Sooner or later they could run out of reserves and if that happens then the naira will devalue itself but a lot more violently. Secondly if the central bank chooses not to devalue then they are left with the sole option of raising interest rates even further than they already have to to curb inflation. A move which will be tough given that the real interest rates are already thought to be too high. Finally there is the issue of speculation. Everyone knows the CBN is actively backing the naira and short of some big event the market is trying to devalue the naira also. What does this imply? If I have dollars I am better off holding onto them until the devaluation occurs. Banks, Oil companies, businesses all see this and they will all choose to hold on to their dollars as much as they can. This means that the CBN will have to deplete its reserves even more to maintain the exchange rate. This accelerates the inevitable devaluation.

So should the CBN devalue the naira now? No. The tensions in the middle east and rising demand for crude oil means the price of crude oil should rise further than expected which gives the CBN a bit more excess dollars and a bit more time. A bit more time to get it to the heads of the people at aso rock that the reforms need to happen and happen now and that they need to stop spending like there is no tomorrow. But if there is no real change in the levels of domestic production and exports then something will have to give. The naira is probably the most like candidate.


4 thoughts on “the Naira, devaluation, IMF recommendations and the options


    Hello Dr. Obikili, Regarding your comment, please note that no one has said anything about pegging of the naira rate, nor the payment of dollar cash in the article “CBN & EMT FUMBLE ON MONETARY POLICY”. The appropriateness and advocacy of the adoption of dollar certificates for the payment of dollar revenue allocation to the constitutional beneficiaries has been widely canvassed since the past 10 years, to curb the insistent burden of excess liquidity, which has remained the poison in our economy.
    You are also encouraged to take a look at our paper titled: “A Liberalised Foreign Exchange Market – a proposal for a liberalized forex market in Nigeria, and its economic benefits” by Boyo/Ojomaikre _ 2002 at
    Also, you may skip through our graphic cartoon illustration: “Nigeria: A Sensible Road to Economic Prosperity” at and a recent paper presented at the NACCIMA National Conference on “Transforming Nigeria” on November 21, 2011.
    The following articles will also enable you make an intellectual rebuttal of the advocacy, if ultimately found wanting:
    1. The Wrong way to defend the naira at
    2. The Bogey of Fuel Subsidies at
    3. Fuel Cartel & Related Issues at

  2. Well the devaluation has happened and I’m trying to find out what I and other SMEs can do since we don’t have USD reserves but are dependent of forex. Repricing could put alot of us out of business, availaibility of credit is even tighter. What are the creative solutions or risk mitigators?

    MzAgams is on twitter

    1. The CBN is still struggling to delay the devaluation but it probably will still eventually happen. The long term agenda for any SME should be reducing dependence on external suppliers and looking for local solutions. Not the easiest thing to do in a country like Nigeria but survival just might depend on figuring that out.

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