THE Central Bank of Nigeria, on Monday, disagreed with the International Monetary Fund on the latter’s verdict that the naira was overvalued.
The CBN Governor, Mr. Lamido Sanusi, said that the apex bank would not devalue the naira as recommended by the IMF, noting that the recommendation was “internally inconsistent.”
Sanusi said in an interview with CNBC Africa, published on the CBN website, that the recommendation, if accepted, would trigger higher inflation in the economy.
He said, “I have had this debate with the IMF, the recommendations they made are internally inconsistent. If we devalue the currency or we depreciate the currency, it adds to inflation.
“If we have a volatile exchange rate, it affects inflationary expectations. The question is: can we sustain this rate? And in a time of rising oil prices and stable revenues, we think we can. In fact, the depletion of reserves has ended. We have had gradual accretion in the last three months.”
The IMF had said last week that the naira was overvalued and that more exchange rate flexibility would be needed to prevent the CBN from running down the foreign currency reserves.
It also said that the CBN might need to further increase the benchmark interest rate to curb inflation, following the increase in public spending.
But the CBN governor said, “We made a distinction between a temporary depletion in reserves and what is permanent and sustainable, and our view was that we had run down reserves because we had special power projects.
“(We also felt that) we had run down reserves because we had to invest money to replace oil wells that had been bombed and production centres that had been attacked during the Niger Delta crisis. We had (also) run down reserves to support the naira at the time it had speculative attack.
“Now, that has gone. If you look at the demand profile, if you look at the exchange rate, we’ve been at N150. We have always been at N150 ± 3 per cent, and stability in the exchange rate is central to our price stability objective.
“We totally disagree that the central bank should just devalue based on these short-term shocks, which are a reflection of a global crisis, especially since it was driven by liquidity. And we know that, that liquidity was necessary for the banking system.”
On whether the apex bank would pursue a regime of inflation targeting, Sanusi said, “All talk of inflation targeting in the Central Bank of Nigeria is prohibited so long as I am Governor. I don’t think that a developing country like Nigeria can pursue that. There are a lot of structural problems.
“First of all, there is a question of the serious limitation of monetary policy. A lot of the components of inflation in Nigeria are structural. We are an import dependent economy; we import inflation through imports of food and energy.
“We do have a large component of our CPI being in agriculture, which is affected by the weather; and I think an excessive, exaggerated belief in the power of the central bank to control inflation leads to policies that get to high rates of interest. Sometimes, it creates unemployment and creates bad loans for the banks.
“We will continue to pursue implicitly a target of single digit inflation, but we will do this along with efforts to promote growth and development.”
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