Daily Independent (Lagos)
Adetutu Folasade-Koyi
16 December 2008
Central Bank of Nigeria (CBN) Governor, Chukwuma Soludo, explained to Senators on Tuesday that the devaluation of the Naira is deliberate and gave an assurance that the economy is robust enough to withstand the fall of the currency.
He spoke in Abuja in response to the invitation the Senate sent out to the managers of the economy, who include Finance Minister, Shamsuddeen Usman, and Presidential Economic Adviser, Tanimu Yakubu Kurfi.
Soludo said the CBN operates a flexible foreign exchange (forex) regime controlled by market forces, and insisted that the financial system is not in any danger but is only reacting to the global financial crisis.
He recalled how everything was carefully thought through and "deliberately implemented" to maintain the internal and external balance of the economy.
His words: "The economics of exchange rate is such that in a world where you face any fracture on your balance of payment, especially through the external sector, especially in our experience in much of the latter part of this year, declining oil prices which account for 95 per cent of our foreign exchange.
"Every country which experiences that has two options: you either allow the prices to adjust by way of exchange rate or quantities would adjust. The quantity that will adjust would either mean that you cut down on domestic consumption, domestic investment, and government spending in order to retain pressure on the external sector or you allow the price to do the readjusting."
According to Soludo, generally, the exchange rate responds to several factors, and Nigeria operates a flexible forex rate as most economies of the world, dictated by market demand and supply.
"If you have an increasing supply of foreign exchange, the exchange rate appreciates. If there is a declining supply and the demand is still up there or rising, you have depreciation."
He said factors that can lead to forex demand include liquidity in the economy induced by money supply, government spending net capital flows, level of foreign reserves and rates at which they grow, domestic productivity, and increase in exports and imports.
"In the global shock that we have experienced, as we did mention in our last presentation before this House, the major channel of effect on Nigeria would be the declining oil price and, therefore, what could put pressure on the foreign reserve and the exchange rate and if care is not taken, it could go via the fiscal sector, down to the financial sector if not managed. But we hope that that would not happen.
"Look around the world today, because of our declining commodity prices, there is declining trade, and, therefore, declining foreign exchange earning by most stable countries.
"Whether or not they are experiencing financial crisis, there are many countries that do not have financial crisis and are not experiencing financial crisis, including Nigeria.
"However, these countries as well are experiencing declining commodity prices and, therefore, declining export and foreign exchange earnings.
"In almost all of these countries today, with little or no exception, the exchange rate under a flexible exchange rate regime is the variable that does the adjustment.
"I have with me here a table of countries with the largest level of reserves, including Algeria, which has the largest reserves in Africa.
"As at 2007, it had about $110 billion and as at September this year it had $130 billion, but its exchange rate has also depreciated.
"If you take them all from the emerging markets, most of them, whether it is Malaysia, Thailand, Brazil, India Russia, Indonesia, Philippines, or South Africa, all down the line with even higher levels of diversified export structure, most of these countries are not having any financial crisis.
"But it is simply that the global trading regime has altered and therefore the variables that you allow to adjust is the exchange rate. Nigeria happens to be one of such countries.
"The most significant shock in Nigeria occurred in late 1981 through early 1982 and the difference between then and now in terms of the economy is about three four key areas.
"The first is that then we had high external debt relative to GDP (Gross Domestic Product), relative to government expenditure. Now we don't have it. Then we had a fragile financial banking system that most of the banks owned by the government lacked depth, just too fragile to take up the flak between then and now.
"Today we have a stronger banking sector that grants credit. The total credit granted as at the end of September to the private sector was indeed larger than the Federal Government expenditure."
Soludo said the CBN would soon restructure the market so that it would not allow Bureaux de Change (BDCs) to speculate and trade on forex, a practice which drives up price.
"If people are setting up BDCs exclusively to trade in foreign exchange, it is not sustainable. The market sooner than later will undergo restructuring.
"Most BDCs walk in to buy and sell foreign exchange. I can see where the explosion of the market is coming from. They shouldn't operate through statutory allocations from the CBN. It doesn't work like that elsewhere in the world.
"Something happened dramatically from the seasonal plummeting of the foreign exchange. If we fail to meet the demand in the market, then the demand would continue to rise, and the rise will continue ad infinitum. We needed to clear the market but at an appropriate price."
Senate President, David Mark, urged the CBN to enlighten Nigerians on effort being made to stabilise the Naira.
"There is need to let Nigerians know what is happening because at the moment, speculators are one step ahead of government. I don't think that's very good for the government. Banks declare profit, the industries are closing down, yet the value of shares come down," he said.
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