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By OMOH GABRIEL, Business Editor
LAGOS – THE Central Bank of Nigeria, CBN, said, weekend, that the desire of the Federal Government to earn more volume of naira was responsible for the falling value of the currency.

The apex bank said it was difficult to justify exchange rate depreciation where prices were high and the country was an import dependent economy.

While noting that the only argument for it was that government wanted more money, the Central Bank said this has resulted in general rise in prices of goods and services across the country which it was  contending with.

Central Bank Governor, Sanusi Lamido Sanusi, in his submissions at the discussion of the monetary policy meeting in January, had stressed that the greatest threat to inflation was the anticipated liquidity pressure, noting that a lot of what was done and achieved by the MPC relied on credibility of the authorities.

Sanusi 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.

He 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 wanted more money.

Monetary policy objectives

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.

The CBN governor further argued 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 the elections, while 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.

Vanguard gathered that Sanusi pointed to clear indications that a moderation in inflation was almost an aberration. He reportedly 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 reminded 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.

Quantitative easing to save economy

He also observed that the MPC did quantitative easing to save the nation’s ailing economy and that the justification for further monetary accommodation got weaker, even as the capital market was recovering and oil prices were rising.

The CBN report said: “The overall fiscal operations of the Federal Government for the period (January to November, 2010) resulted in a deficit of N1, 529.33 billion. The deficit was financed through DMO borrowing from the domestic market of N 893.79 billion; FGN Share of Excess Crude Account N199.54 billion; Privatisation proceeds N6.36 billion; World Bank Loan N75.03 billion; and Loans from Special Accounts N 337.56 billion.

“Net 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.”


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