NEW MINIMUM WAGE MAY INCREASE PRESSURE ON NAIRA –EXPERTS

Filed in Business by on December 3, 2011

New minimum wage may increase pressure on naira –Experts
Written by  Okechukwu Nnodim

CBN Governor, Mallam Lamido Sanusi

The implementation of the new minimum wage may warrant further devaluation of the naira by the Central Bank of Nigeria, Okechukwu Nnodim writes

The naira may be devalued further by the Central Bank of Nigeria if the slide in global oil price persists and the various states in the federation all implement the new minimum wage, analysts have said.

The Monetary Policy Committee of the CBN had on November 21, 2011, devalued the local currency, shifting the mid-point of its official exchange rate from N150 to one United States dollar to N155. The bank also maintained the plus or minus three per cent band above or below the dollar.

The MPC, however, did not increase the Monetary Policy Rate as it had done in all of its sittings since the beginning of the year, a development which analysts had anticipated.

Reacting to the outcome of the meetings, financial experts noted that the committee might reconvene if the fall in oil prices continue.

The MPC in an emergency meeting on October 10, raised interest rate by 275 basis points to 12 per cent from 9.25 per cent, making it the sixth time it had  increased MPR since the beginning of the year.

The committee, experts say, was cautious in its last meeting, knowing that once the new minimum wage is implemented, most state governments would be short of funds and would call for intervention by the Federal Government.

The 36 governors under the aegis of the Nigeria Governors’ Forum, after a meeting in Abuja on July 15, bowed to pressure from labour unions, and agreed to pay the N18,000 minimum wage to employees in their various states.

Analysts noted that the current price of crude might not be enough to sustain the economy, adding that the development might force the apex bank to further devalue the local currency.

Meanwhile, the regulatory bank on its official website, noted that crude oil price (Bonny Light) as at November 24, 2011, stood at $111 per barrel. The current amount showed a decrease of $8 when compared to the amount which the crude was sold in July.

The bank, however, did not state the amount for which the commodity was sold in the three months after July, but noted the country’s domestic production as at July was 2.34 million barrels per day. It also stated that Nigeria’s export for the month under review was 1.89mbd.

A former Acting Head, Economics Department, University of Lagos, who currently is a Research Professor, Kayode Familoni said, “Nigeria’s export volume has dropped marginally when you compare exports in July to that in May; and when you consider this together with the unstable prices of crude oil globally, you will understand that the naira might be depreciated further if care is not taken.”

He, however, noted that further depreciation of the naira might not mean well for the ordinary citizen, stressing that the development might  lead to inflation if undertaken in haste.

Familoni said, “The CBN must be meticulous in depreciating the naira, because if not done wisely, it may warrant inflation and suffering for the common man.”

Analysts at Meristem Securities Limited in their November 22, 2011, report noted that the economic realities globally might necessitate further devaluing of the naira.

They explained that the decrease in oil prices might impact negatively on the country’s foreign reserves, adding that this would warrant some reactions from the CBN.

“As global and local investors in the Nigerian market re-align their investment policy to come to terms with the new exchange rate regime, we make recourse to earlier comments by the CBN on its stance of not defending the naira at all costs, and view the policy action of depreciating the naira as being long in the brew,” they said.

“We have always held the opinion that the implementation of the minimum wage might likely engender naira depreciation because both federal and state governments will agitate for more funds from the federal purse to meet expenditure. Hence, in the face of probable decline in crude oil prices based on slowing global demand, the likelihood of further depreciation in naira lurks as government rallies to meet expenditure.

“We remain concerned on the currency outlook, the possibility of further re-adjustments, and the  effect further upward re-adjustments would have on foreign investments into the country.”

Also, analysts at FBN Capital Limited said they acknowledged the MPC’s indications of a tighter fiscal stance such as the adjustment of the oil price assumption in the 2012 draft budget from $75 per barrel to $70 per barrel.

“By contrast, the meeting of October 10 had cited an inadequate fiscal stance as the reason why monetary policy had to bear the full weight of the necessary economic adjustment,” the analysts added.

Meanwhile, analysts at Meristem noted that the committee’s resolve not to increase the benchmark interest rate was a welcome development, based on some economic issues before the government.

“Expectedly, the MPC left the MPR untouched at 12 per cent since past hikes were primarily outlined to address inflationary tendencies, stemming from the removal of subsidy and minimum wage implementation, which are yet to materialise,” the firm said.

“The committee’s stance of not reacting to first round effects of the proposed subsidy removal underscores our view that until the effects of these two factors can be quantified, any rate adjustment will be premature and unjustified.”

Analysts at FBN Capital noted that there was no marked consensus in the market ahead of the meeting.

“Our call was for the rate to be on hold. This was the first gathering of the committee since the extraordinary meeting on October 10, hiked MPR by 275 basis points and doubled the cash reserve ratio to eight per cent,” the analysts said.

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