CBN has capacity to sustain forex intervention, says Adedipe

The Central Bank of Nigeria (CBN) has the capacity to sustain ongoing foreign exchange (forex) interventions despite the pressure on the foreign exchange reserves, Chief Consultant of Biodun Adedipe Associates Limited, ‘Biodun Adedipe has said.
Speaking on Thursday at the Finance Correspondents Association of Nigeria (FICAN) Half-Year Economic Review held in Lagos, he disclosed that on the 30-day moving average, the reserves have risen from $29.07 billion at end of 2015 to $30.36 billion in July 11.
Adedipe said the liquid portion of the reserves stood at $29.62 billion, which translates to 12.31 months of imports cover.
He said the exchange rate has gradually depreciated and been devalued to N168 to dollar at the end of 2014; N197 to dollar at end of 2015; N305 to dollar at the end of 2016 and N305.85 to dollar as at July 19, 2017.
Adedipe, who spoke on the theme: ‘Nigerian Economy: First Half 2017 and Outlook’ said the required international benchmark was for external reserves to be able to sustain at least, six months of the import bill adding that Nigeria is still doing great with its reserves covering over 12 months import cover.
The economist, said Nigeria’s total import figure for the first half of this year was N2.2 trillion ($7.218 billion), with an average monthly figure of $2.406 billion.
He explained that due to recession, the current import figure was a decline from $14.171 billion or monthly average of $4.724 billion in the first quarter of 2015. He said that foreign trade had picked up since the first quarter of last year, with imports declining.
Adedipe described as aberration calls on the CBN to freely float the naira, adding that no country in the world adopts such approach to exchange rate management. He said the ongoing spike in naira exchange rate occurred after the CBN was pressured by several stakeholders to adopt flexible exchange rate system and freely float the Naira.
“That of course, was a huge aberration, as there is no country that freely floats its currency (even the US) – the job of the central bank is to defend and protect its currency by intervening in the markets as necessary. The voices are coming from too many experts that know nothing other than to echo what the Breton Woods institutions have said,” Adedipe stated.
Speaking on the interest rate, he said the Monetary Policy Rate (MPR), which is the benchmark rate was raised to 14 per cent per annum in July 2016 from 12 per cent per annum. He said that changes in the MPR have not sufficiently impacted bank deposit/lending rates as well as changes in banking credit volumes.
“The most volatile interest rate variant is the inter-bank rate, which is more of a reflection of the liquidity in the banking system (Federal allocations) rather than of changes in the MPR. The deposit and prime lending rates moved in adverse directions, respectively with deposits becoming cheaper to the banks and borrowing more expensive to borrowing customers. But actual lending rates were much higher – mostly at 29 per cent and above,” he said.
According to Adedipe, maintaining the MPR at 14 per cent on the argument of inflation risk, stabilizing the exchange value of the naira and bond prices is more counter-productive to domestic productive activities than to investment in financial instruments.
“It only extenuates government’s cost of borrowing and makes government’s debt instruments very attractive to astute investors. This long spell of fixed MPR is also gradually making the rate to lose its strategic relevance as a signal rate,” he said.
Adedipe also supported Federal Government’s plans to reflate the economy through borrowing. He said such borrowed funds should not be used to fund recurrent expenditure, but should be used to fund infrastructure and projects that can generate enough resources to repay the loans.
“When an economy is seeking to get out of recession, the typical response is for the government to embark on massive spending, which is referred to as fiscal stimulus. Often times, the government may lack the volume required and will therefore, have to borrow beyond the normal range for an economy that is either in boom or the recovery mode”.
“No professional economist will argue against borrowing to stimulate a recessed economy. But the question will always be to spend on what? If the answer is infrastructure, my take is to go ahead and borrow as much as you can,” Adedipe advised.