Abdul-Rahman Abubakar & Turaki A. Hassan
17 December 2008
The recent crash of the Naira against the United States Dollar was a deliberate economic strategy aimed at ensuring stability of the country's economy and of its foreign reserve, Governor of the Central Bank of Nigeria (CBN) Professor Chukwuma Soludo said yesterday.
Speaking at the Senate on the state of the naira, Soludo said as a result of the unprecedented fall in the price of oil and high demand for foreign exchange, the currency depreciated in accordance with the law of demand and supply.
He said, "Generally, the exchange rate responds to several factors. If there is a declining supply and the demand is still up there or rising, you have depreciation. There are quite a number of factors that could lead to the demand in foreign exchange, including the liquidity condition in the economy induced by money supply, government spending, the net capital flows, the level of foreign reserves and the rate at which it grows, domestic productivity and that will actually increase your exports and import."
Soludo said the CBN was aware of the trend and has adopted a flexible exchange rate to enable the naira appreciate gradually in compliance with global economic realities. He said, "I want to submit to the Senate, Mr. President, that this was carefully thought through and deliberately implemented in order ensure that we maintain an internal and external balance for the economy."
According to the CBN governor, "The exchange rate, under a flexible exchange rate regime, is the variables that do the adjustment. But it is simply that the global trading regime has altered and therefore the variables that you allow to adjust is the exchange rate and Nigeria happens to be one of such variables. Nigeria is not having a financial crisis but the global financial crisis impacts on the Nigeria economy through the declining oil prices and therefore the squeeze in the reserves."
He said contrary to calls by some Nigerians that the CBN should fix the exchange rate to make the naira stronger, "The economics of exchange rate is such that in a world where you face any fracture on your balance of payment, especially though the external sector, since we experience much of that in the later part of this year, declining oil prices which account for 95 percent of our foreign exchange. Every country that experiences that, you have two options: you either allow the prices to adjust by way of exchange rate or quantities would adjust."
Prof. Soludo said any attempt at fixing an exchange rate for the naira in the face of declining oil prices would lead to pressure on the foreign reserve which presently stands at about $57 billion.
He said, "The global shock that we have experienced like 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 will not happen."
Soludo also said, "Look around the world today, you see declining commodity prices, declining trade, and therefore declining foreign exchange earnings by the most stable countries in the world. Whether or not they are experiencing financial crisis, there are many countries in the world 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 earnings. Therefore their earnings of foreign exchange are declining. In almost all of these countries today, with little or no exception, the exchange rate under a flexible exchange rate regime is the variables that do the adjustment."
He said, "If the naira becomes too strong against the dollar Nigeria would become expensive to live in and investors would run from the country. China for instance is under pressure for many years from other countries to raise the value of its currency but it has refused because it is of immense trade benefit to the country."
He said the CBN has taken measures to stop capital flight and actions of speculators that has contributed to the high demand for the currency, adding that the demand for foreign exchange has reduced from 1 billion dollars in recent weeks to 72 million dollars, leading to an appreciation of N1.50 against the dollar.
Prof. Soludo also disclosed that part of the reason for the crash of naira was to fund the deficit in the 2009 budget with about $500 million "but that was not the main reason."
He said the situation is not peculiar to Nigeria because "I have with me here a table of countries, even here in Africa, with the largest level of reserves such as Algeria. Algeria has the largest level of reserves in Africa. As at 2007 it had about 110 billion dollars.
As at September this year it had 130 billion dollars, but its exchange rate has also depreciated. and you take them all from the emerging markets, most of them whether it is Malaysia, Thailand or Brazil, India, Russia, Indonesia, Philippines, South Africa all down the line with even higher level of diversified export structure, most of these countries are not having any financial crisis."
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