Soludo: Naira Depreciation, Deliberate Policy

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- to Stabilise Economy

By Sufuyan Ojeifo,


Governor of Central Bank of Nigeria (CBN), Professor Chukwuma Soludo, said yesterday that the depreciation of the naira against the US dollar was a deliberate policy by the apex  bank to stabilise the foreign exchange market and the national economy.

Soludo said this when he briefed the Senate in the Committee of the Whole on the development in the global financial sector and the concomitant slide in the value of the naira to all time high of N140 to US$1 in the black market last wek.


The development had been a subject of a motion moved by Senator Felix Kolawole Bajomo and 22 other senators in which they had urged the Senate to summon members of the nation’s economic team to brief it (Senate) on the issue.

Other members of the team, namely Finance Minister, Dr. Shamsudeen Usman and Director General of the Budget Office, Dr. Bright Okogu, were present at the Senate briefing.


Soludo, who was engaged by the Senate because the issue of naira depreciation falls under the purview of the CBN, said that the depreciaition was deliberately done in order to maintain an internal and external balance for the economy.

According to him, “I want to submit to the Senate, Mr. President that this was carefully thought through and deliberately implemented in order to ensure that we maintain an internal and external balance for the economy.


“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 since we experience much of it 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.


“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.”

Soludo explained: “Generally, the exchange rate responds to several factors,” adding that, “currently, we operate a flexible exchange rate regime as most economies of the world.


“This is actually determined by the demand and supply in the market. 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.


“There is 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 their foreign reserves and the rates at which it grows, domestic productivities and that will actually increase your exports and import.”


He said that “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 that 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. Look around the world today, because of our declining commodity prices, declining trade, and therefore declining foreign exchange earning by most stable country 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 earning. Therefore their earnings of foreign exchange decline.”

Soludo further said, “As at 2007, Algeria 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 market, 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 diversify 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 and Nigeria happens to be one of such countries.”

He, however, said that Nigeria was not having a financial crisis, but that the global financial crisis was impacting negatively on the country.


According to him, “Nigeria is not having a financial crisis but the global financial crisis impact on the Nigeria economy through the declining oil and therefore the declining squeeze of the reserves.


“There is as we operate a flexible exchange rate like I said, that is the variable that is expected to do the adjustment. If you recall, Mr. President, Distinguish Senators, this is not the first time that Nigeria is experiencing this.


“The most significant shock occurred late 1981 through early 1982 and the differences 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, relative to government expenditure. Now we don’t have it.


“Then we had fragile financial banking system that most of the banks owned by the government lack depth, just too fragile to take up the flaks 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.”


He also explained why the CBN decided to ration the foreign exchange to the Bureau De Change.


According to him, “If you check the numbers as well, you look at the volume.  We work with the volume rather than the number.


“Now at the point when we started making foreign exchange available to the Bureau de Change (BDCs) and giving them 300 or whatever the quantity we decided to make available, if you recall the number of BDCs then operational, far less than 100 of them were actually operational.


“Today, you have more than 1,000 of them.  I just got a pile of certificates to sign again.  We would sign them.  If 5,000 BDCs decide to operate, we have to think in terms of quantity and how do we determine that?


“We have to make a decision about accretion.  At what level do you want to accumulate or decumulate your reserves?  When you take that decision that is what determines what quantity is available for you to sell at any point in time.”

He added: “That quantity is not done arbitrarily and unless you want to fritter away the reserves the next day, we can actually decide and put in $10 billion in one week and you can crash the rate at N50 to the dollar.


“But then what happens the day after?  What happens the month after and the year after?  You cannot sustain it.  That is the fundamental point to go with this.”

He maintained that what the CBN generally did was to do an analysis of the accretion level to the reserves, what quantity the bank thought it should be and what quantity therefore would be available for each bid of auction.


Soludo added: “When we saw the persistent demand, we first of all took a deliberate action to first of all clear the market and to allow the market to stabilise on a form.  That is the decision that was taken and we can see that has actually worked out in my view excellently well.


“We have met the demand in the market and that is why the demand pressure has now come done significantly from over $1 billion to $72 million as of today.  We have met that demand and I think the market is now stabilizing.” –thisdayonline




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