December 17, 2008

Nigeria’s economy still strong –Soludo

For the second time in two months, the Central Bank of Nigeria (CBN) has re-assured that the nation’s economy remains stable, just as it shall introduce a banking strengthening strategy next month, monitoring the operational performance of all commercial banks in the country.

The apex bank Governor, Professor Chukwuma Soludo, who gave the assurance in Abuja on Tuesday, said the nation’s economy shall continue to remain stable, because government had responded early and positively to all possible economic defects as bad indicators capable of having adverse effects on the country’s economy, arising from the World current economic recession.

Responding to the Senate invitation on the current state of the economy, Soludo declared that CBN’s investigators would monitor the monetary activities of the banks, to enable it measure their exposure to the capital market and undertake all necessary economic growth programmes to keep the banks strong.

He stressed that as a way of dancing out of a self-imposed economic gloom, there was the need to allow the current pricing portfolio appreciate at its own level against foreign currency, saying that any short or long term economic policy, running contrary to the gradual economic recovery, may be dangerous in the short and long run.

According to the CBN governor, the current economic policy, ensuing in the low exchange rate of the naira against international currency, was deliberate and carefully implemented to ensure an internal and external reserve balance for the economy.

He explained that the economics of the currency exchange rate was such that in a world where a nation was faced by the challenge of a balance of payment, especially at the external front as adjudged by the country’s experience in the latter part of the year, declining oil prices, which accounted for 95 per cent of the foreign exchange, the economy should be allowed to appreciate gradually.

“ 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,” he said.

Soludo disclosed that it was normal that the exchange rate should respond to several factors, including the current naira flexible exchange rate regime, as it were in most economies of the world, adding that the situation had always been determined by the demand and supply mechanism in the market.

He stressed that for an increasing supply of foreign exchange, the exchange rate would appreciate but when there was a declining supply and the demand in the economy, the exchange rate would depreciate.
The CBN governor warned that on no account should the nation embark on expending the foreign reserve despite the falling oil price, arguing that any attempt to do this or introduce any short medium fiscal policy similar to the then Structural Adjustment Programme, may end up in unemployment and low local production.

He disclosed that Algeria with the largest foreign exchange reserve in Africa with about 130 billion dollars, Malaysia, Thailand, Brazil, India, Russia Philippines and South Africa were diversifying their economies just like Nigeria in their attempt to avoid financial crisis.

“Nigeria happens to be one of such countries. Nigeria is not having a financial crisis but the global financial crisis impact on the Nigeria’s economy is through the declining oil price and therefore the declining squeeze affects the reserve.”, he observed.

Soludo re-iterated his confidence in the nation’s buoyant economy, saying that it went through a decline in 1981 when there was a high external debt relative to Gross Domestic Product (GDP) and the then government huge expenditure which was not the case presently.

“Now we don’t have it but then we had a fragile financial banking system that most of the banks owned by the government lacked depth, just too fragile. Today we have a stronger banking sector that grants credit that was larger than the federal government’s expenditure as at last September,” he said.

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