14 December 2008
editorial
Lagos — The appearance of the Minister of Finance, Dr. Shamsudeen Usman; Special Adviser to the President on Economic Matters, Dr. Taminu Yakubu; and Central Bank Governor, Professor Chukwuma Soludo before the Senate tomorrow typifies the growing concern over the fall of the Naira. The Senate had last Thursday invited them to come and explain the continuous fall of the naira against other international currencies.
A shortfall in supply and increased demand of United States' dollars in the official and inter-bank markets has seen the naira decline from N117 to the dollar to about N132 in the last two weeks.
While there is now unanimity over the cause of the depreciation of the naira, government's official position on it is not clear enough. Capital inflows into Nigeria has dried up and threat to the country's foreign reserves by tumbling crude oil prices has shaken confidence in what naturally should be the fallback point. Oil prices have now plunged by about 70 percent since striking record highs above 147 dollars in July as a spreading global economic slowdown weighs on demand.
Worse still, investors continue to divest from the country as they seek safety amid the global credit crunch. In the last three months investors have withdrawn about $15 billion from the country.
Early reaction from the finance minister was to play the ball into the court of the Central Bank of Nigeria (CBN). "The exchange rate is really a question of the market and it is being managed by the central bank, we have no particular concern about it," he was quoted to have told the media.
And in his strong initial reaction, Soludo, who attributed the depreciation to speculation, said, "There is absolutely no cause to panic. We have all it takes to meet the demand of the market. And for those who are speculating on the naira, we would make them incur huge losses.
"The market will stabilize," he assured. "We will intervene heavily in the market and there would be adequate supply of foreign exchange because we will be active in the market."
After an initial rally on this promise, the naira resumed its downward slide, trading at N132.56 to the dollar at the official window last week. In a renewed attempt to stabilize the market, Soludo announced measures to curtail the bank's demand for foreign exchange. Effective from today, the percentage of shareholders' funds banks could use in foreign exchange trading has been reduced from 20 to 10. He also said that the bank would deploy some of the foreign reserves to restore stability to the naira, noting that one of the reasons for accumulating foreign reserves was to protect the national currency from the vagaries of the foreign exchange rate.
But low crude oil price means that the foreign reserves may not be a very reliable source. It fell two weeks ago to $57.31 billion, the lowest level for nine months.
Although as the custodian of monetary policy, the CBN's eagerness to stabilize the exchange rate is understandable, the public is confused about media reports in which a finance ministry source is happy about the extra naira that could accrue to the budget from the depreciation of the local currency. Experts suggest that with a weaker naira, government may even have enough of it to finance the 2009 budget deficit. Equally curious is the fact that the exchange rate at which government computed its revenue is not stated in the 2009 budget.
This seeming contradiction has gone to fuel the speculation in the market. It is our belief that with both Soludo and Usman at the Senate tomorrow, official government position on the exchange value of the naira will be known. We, however, want the authorities to carefully consider the advantages and disadvantages of a weaker naira. While it would be said that many currencies are depreciating because of the ongoing global economic crises, and that the fall of the naira could be in tune with the dictates of market forces, Nigeria's economy is highly import-dependent. It will suffer high prices of imported goods and services, including petroleum products, and add to the burden on the citizenry. Besides, Nigeria is grossly incapable of taking meaningful advantage of possible demand for its exports because besides crude oil, it does not export much.
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