Economic Confidential, February 2009

MONETARY

Special Fund: N200bn to be allocated to Agriculture- CBN

...Warns Against High Demands for Forex

The Central Bank of Nigeria has disclosed that a Special Fund of about N200bn would be allocated to the agricultural sector to boost food production while warning against the high demand for Foreign Exchange [FOREX] as a result of the current financial meltdown will spend doom for the Nigerian economy.

The Governor of CBN, Professor Chukwuma Soludo stated this while presenting a paper on the challenges of ensuring appropriate inflation rate, exchange rate and interest rate regimes in Nigeria in Abuja.

While frowning at the paradox existing in both the agricultural sector and the manufacturing sector he said the agricultural sector which contributed about 53 per cent to the Gross Domestic Product[GDP] is getting a paltry 16.52 per cent of the loans disbursed by banks while the manufacturing which contributes less to the GDP is receiving about 94.07 per cent

The Governor also has faulted the inflation and the Gross Domestic Products [GDP] rates in the 2009 budget. X-raying the inflation rates and the GDP rate in the 2009 budget, the apex bank boss said these rates, 8.2 per cent inflation rate and the GDP growth rate were not in conformity with economic realities. By passing the Appropriation Bill for 2009, Soludo said the Senate had given the federal government  express permission to go aborrowing to achieve the desired level of inflation in 2009

‘’You have taken a decision that the price has to go up, since inflation is rising over time, you have to vote for credit to curtail it’ Soludo told the members of the National Assembly present at the gathering

Soludo also warned that the high demand for Foreign Exchange [FOREX] as a result of the current financial meltdown will spend doom for the Nigerian economy. This is coming on the heels of the massive depreciation of the Naira witnessed in the country mid December, when it depreciated by approximately 14.5 per cent to N134.00 per US Dollar at the interbank segment

Warning against unbridled high demand for FOREX, Prof. Soludo disclosed that the demand for FOREX in Nigeria increased recently due to demand by foreign investors in the stock market who are exiting as a result of the global meltdown.

Other reasons, the CBN governor said, are high level of imports due to declining price of goods abroad because of recession and drop in freight costs and foreign banks and institutions recalling existing loan facilities in the wake of global credit crunch

Highlighting the consequence of high demand for FOREX, apex bank boss said if the external reserves are allowed to run down completely, the exchange rate would then adjust in a most drastic form which other countries like Ghana and Zimbabwe had experienced

‘With cheaper import prices, it would be cheaper to import everything than produce them in Nigeria , and imports would wipe out our domestic industries, thereby increasing unemployment

To avoid the consequence of 1982 oil price shock when there were abandoned projects all over Nigeria, massive retrenchment of civil servants and unemployment,, austerity measures include queing up for essential commodities and massive impor bans, Prof Soludo said timely adjustment was needed in defence of local jobs

‘Recall that 2009 budget is a deficit budget even with zero capital spending at $45 per barrel, imagine the scenario at $34 or less without exchange rate adjustment’ Prof Soludo said

‘’The exchange rate regime will continue to be akey shock absorber for the economy---to keep internal and external balance’ he stated further

Disclosing that no central bank has the magic to control inflation, interest and exchange rates at the same time, the CBN governor said what the country needed at this point of time is stable and low inflation rate, adiversified productive base which would enhance the supply of foreign exchange and fiscal prudence by the three tiers of government

‘The policy maker desirous of bringing sanity to the economic system will deploy the instrument available to it, such as pursuing an interest rate policy that will significantly moderate inflation , encourage domestic savings, encourage capital inflows and mitigate capital outflows’ he stated