By Omoh Gabriel
The Central Bank of Nigeria CBN has said that the desire of the federal government to earn more volume of naira is responsible for the falling value of the currency saying it is difficult to justify exchange rate depreciation where prices were high and the country was an import dependent economy. The only argument for it was that government wants more money. This has resulted in general rise in prices of goods and services across the country the apex bank is contending with.
In his submissions at the discussion of the monetary policy meeting in January, Sanusi Lamido Sanusi ‚Äústressed that the greatest threat to inflation was the anticipated liquidity pressure and that a lot of what was done and achieved by the MPC relied on credibility of the authorities.
‚ÄúHe argued that if the Bank had made a commitment to exchange rate stability, there was a
cost in moving away from that position. Consequently, if the Committee felt that the observed inflation
level was not sustainable, then they must find an intelligent way to adjust.
‚ÄúHe emphasised that it was difficult to justify exchange rate depreciation where prices were high and the country was an import dependent economy. The only argument for it was that government wants more money. Since part of the objectives of monetary policy was exchange rate stability, it was better to prevent the depreciation of the naira, rather than give government more money and for it to have less to spend in real terms.
‚ÄúHe went further to argue that the demand for foreign exchange was actually driven by banking system
liquidity and that the only way to keep the naira exchange rate within an acceptable band, with the
influx of liquidity anticipated from AMCON, election and all that, was to tighten monetary policy.
He also observed that the uncertainty surrounding the elections was a big issue as foreign investors were waiting to see what would happen after elections, while the local investors were thinking of where to take their money to if problems emerge as a result of the outcome of the elections. He, therefore, asserted that the immediate reasons for monetary policy tightening were to preserve the external reserves level and ensure exchange rate stability.
According to the CBN Sanusi pointed to clear indications that a moderation in inflation was almost an aberration. Continuing, he alluded to the global increase in energy and food prices and Nigeria‚Äôs vulnerability as an import dependent nation that also imported oil. He argued that if oil prices
went up, that would translate to more subsidies to the Nigerian National Petroleum Corporation (NNPC) for imported petroleum products.
Sanusi ‚Äúreminded members that he voted for a hold on monetary policy action at the last MPC meeting, but observed that the situation was quite different, given an inflation rate of 11.8 per cent in December, 2010. He observed that the MPC did quantitative easing to save our ailing economy and that the justification for further monetary accommodation gets weaker, even as the capital market was recovering and oil prices were rising‚Äù.
According to the CBN ‚ÄúThe overall fiscal operations of the Federal Government for the period (January to November, 2010) resulted in a deficit of N 1, 529.33 billion. The deficit was financed through DMO borrowing from the domestic market N 893.79 billion, FGN Share of Excess Crude Account N 199.54 billion, Privatisation Proceeds N6.36 billion, World Bank Loan N75.03 billion and Loans from Special Accounts N 337.56 billion
‚ÄúNet aggregate credit to the economy grew by 13.4 per cent, on an annualized basis, in December, 2010, compared to 59.6 per cent recorded in December, 2009. This was driven mainly by the substantial credit to the Government which grew by 67.83 per cent, while credit to the private sector fell by 4.92 per cent (annualized) in December 2010 as against the benchmark of 31.54 per cent for 2010″.