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Savings strategy key to price stability – CBN

By on May 15, 2014

The Central Bank of Nigeria has said that an efficient national savings strategy is important to creating price stability that will drive sustainable national growth and reduce the pressure on prices in the country.

The Acting Governor, CBN, Dr. Sarah Alade, stated this in Abuja on Tuesday when she briefed members of the National Conference Committee on Economy, Trade and Investment.

Stating that the CBN had the mandate to deliver price stability to achieve sustainable growth, she said a critical factor to achieving price stability was an efficient national savings strategy.

Alade said, “There is a minimum national savings and investment requirement that guarantees price stability and sustainable growth. The cost of managing liquidity has been on the increase because of low national savings, particularly the absence of fiscal buffers.

“The CBN increases rates to control money supply and inflation; this leads to increased portfolio capital inflows, which by extension builds up external reserves.”

Outlining other concerns of the central bank to the committee, Alade stated  that the liquidity created by the activities of government and lack of national savings culture had impacted on interest rate levels, efforts to build external reserves and realisation of the price stability objective.

“The lack of national savings from crude oil exports erodes national fiscal buffers and exposes the country to major devastating shocks,” she added.

The CBN boss reiterated the need for Nigeria to have reserves, either in the form of Excess Crude Account or Sovereign Wealth Fund for effective monetary policy and economic growth.

She said though the country had money in reserve, it could not be compared to what it was making from oil.

Alade said, “We still have about $37bn in reserve but we can have more than that at a time when oil is doing well. We can save more than what we have saved and that is why we are saying that we should cultivate the habit,

“It should be part of our constitution that a certain percentage of whatever we earn must be saved so that we can build up again the Excess Crude Account. China today has more than $3tn in reserves and other oil producing countries have savings, while some of them don’t even put the oil money as part of their budgets.

“They only use it when they have shortages, but we rely solely on that and we don’t even make any attempt to save.”

According to the CBN acting governor, when a country saves, it gives investors the confidence that it can defend its currency and meet its debt obligations.

She said the consequence of not saving for the future was a rise in interest rate.

According to her, if the interest rate is not as high as it is presently, people will be able to borrow at cheaper rates and grow the economy better.

The CBN boss said though the country had stable exchange rate, low inflation of about 7.8 and a robust growth at about seven per cent of Gross Domestic Product, it could do better.

She pointed out that the country could easily grow at double digits rather than just having an attractive investment climate and robust external reserves.

Explaining the process of fiscal operations and need for savings, she said, “Banking system liquidity exhibits a pattern that reflects liquidity cycle linked to government fiscal operations and maturing securities.

“Fiscal operations associated with FAAC produce devastating shocks to macro-economic management.

“FAAC-induced shocks are disruptive to interest rate determination, exchange rate stability and control of inflation.”

 

 

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