For Nigeria, The Worst is Over — Emefiele

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Good news does not travel as fast and far as bad. So it’s no surprise that news of Nigeria exiting the recession in which the economy had been mired since the second quarter of 2016 barely made the headlines. Contrariwise, the country’s descent into recession a little over a year ago had caused quite a storm. But Godwin Emefiele, Nigeria’s Central Bank governor, predicted that it would be short and the economy would easily ride it out.

Events have proved him right. Nigeria is expected to manage a modest but welcome growth of 0.8 percent this year. To achieve the feat, the monetary authorities have had to surmount mounting challenges in the foreign exchange market which disintegrated following the collapse in 2015, of global prices of oil, Nigeria’s major revenue and foreign currency earner. The apex bank also had to contend with inflation that jumped sharply from upper single digit in the halcyon years of high oil prices to a scary 18 percent late last year. The resulting disruptions in the economy were nightmare to both the monetary and fiscal authorities, even though, the central bank found itself more in the eye of the storm.

With the slight recovery in oil prices and the consequent boost in the country’s foreign exchange earnings, the central bank has been able to restore some liquidity in the foreign exchange market, thereby easing the economy-strangulating “scarcity of dollars”.

In this revealing discussion with our team of editors, Emefiele speaks on the bold moves that kept the Bank on top of the dire situation despite attacks from home and abroad. Along the way, he attempts some candid projections for what the future holds for Africa’s potential world-beating economy.

Godwin-Emefiele-2How did the CBN achieve the recent stability in the exchange rate of the naira?
The current stability of the naira exchange rate started early this year, following the increase in Central Bank of Nigeria’s interventions in the foreign exchange market. The major cause of instability was primarily demand pressure owing to acute shortage of foreign exchange in the market. The precursor to the contraction in supply was the drastic drop in the prices of oil and low proceeds from weak non-oil exports, while the demand pressure intensified to meet the high reliance on the importation of capital and consumable goods. It was against this backdrop that the CBN introduced a more flexible exchange rate management policy in June 2016.

The result was a rapid depreciation of the naira exchange rate, which unfortunately, had a pass-through effect on domestic prices. The CBN responded by increasing its interventions starting in February 2017. This dampened volatility and enabled the Bank to sustain the exclusion of the 41 items from the interbank segment of the market.

The new flexible exchange rate is helping to counter the effects of the 70 per cent drop in the price of crude oil, which contributes the largest share of our foreign external reserves; the slowdown of global growth and weak global demand worsened by geo-political tensions. It has also helped to counter the effect of the threat of capital reversal arising from continued normalization of monetary policy by the United States’ Federal Reserve.

The new regime operates as a unified inter-bank system with two main segments — the interbank and the autonomous segments. The participants in this market include the CBN, Financial Markets Dealers’ Quotation (FMDQ), foreign exchange primary dealers (FXPDs), non-FXPDs, corporate treasuries, and end-users. The CBN continues to intervene directly through the inter-bank and secondary intervention mechanisms, as well as trade via the FMDQ Thomas Reuters Trading and Reporting System.

Are there any other new initiatives in the policy mix?
Certainly. Other policies introduced under this regime are also quite effective. They include a new directive on invisibles such as Personal Travel Allowance (PTA), Business Travel Allowance (BTA), school fees and medical bills and provision of direct additional funding to banks to meet the needs of Nigerians. Also, we initiated an update of foreign exchange derivatives; increase in foreign exchange sales to Bureaux de Change (BDCs); and foreign exchange payments for small-scale importation. Additionally, we revised import and export documentation and timeline for processing form NXP (Nigeria Export Proceed). We also established investors and exporters FX window; and further liberalized the foreign exchange market.

The new exchange rate regime allows for more flexibility in exchange rate management by acknowledging the trade-off among the three primary prices (interest rate, inflation rate and exchange rate). The upward adjustment in interest rates is meant to create positive real interest rates, give strong signal on the commitment of the Bank to price stability, improve liquidity and deepen the foreign exchange market to ensure self-sustainability.

Why retain the exclusion order of 41 items from the market?
The flexible exchange rate regime reinforced the restriction of foreign exchange access to the 41 items earlier introduced. We decided to retain the exclusion order of 41 items from the market because it is meeting the objectives of diversifying the economy since the policy would stimulate local production and create employment. It will equally help to sustain the stability of the foreign exchange market and ensure efficient allocation of foreign exchange as well as protecting local industries that might have made extensive investments on backward integration to meet local demand. It is equally mitigating continued depletion of the foreign exchange reserves, in view of the continuing slide in crude oil prices.

It is noteworthy that the investors and exporters (I&E) FX window established by the CBN has reduced pressure from the interbank segment and addressed speculative arbitrage in the market.

At the height of the exchange rate crisis in Nigeria, you said you were working towards a foreign exchange market that works for all. Can you give an update?
Currently, the naira exchange rate is more stable and relatively lower than it was in the second half of 2016. Although, the economy is just exiting recession, output growth rate is improving, exchange rate is relatively stable, while inflation is trending downward. Headline inflation (year-on-year) declined from 18.7 per cent in January 2017 to 16.10 percent in June 2017. It is also important to note that the premium in the market is narrowing, especially between the BDC (Bureau de Change) and NAFEX (Nigerian Autonomous Foreign Exchange Rate Fixing).

The Bank has been able to confront the challenges of multiple exchange rates, while also creating a special window for investors and exporters. Since the introduction of that window, liquidity in Nigeria’s foreign exchange market has improved tremendously. Between February and July 2017, the Bank pumped over US$8 billion into the market, to ensure adequate market liquidity. I am pleased to note that the recent appreciation of the naira, the relative stability in the market, as well as the movement towards convergence amongst the BDC, NAFEX and I&E rates are manifestations of the efficacy of our exchange rate policy. These developments have greatly reduced the activities of speculators and improved confidence in the foreign exchange market.

Early this year, you said the economy had overcome the worst phase of recession. Do you still hold that view?
Very much so. Developments in the real sector give me the confidence that the GDP contraction experienced in the last five quarters has bottomed-out. Real output number in Q2 2017 shows that the economy turned the corner, posting a modest 0.55 percent growth. As a measure of economic activities in the second quarter, the Purchasing Managers Index (PMI) for manufacturing activities showed steady improvement from 47.7 index points in March to 52.9 index points in June 2017. Similarly, the Non-Manufacturing PMI increased from 47.1 index points in March to 54.2 index points in June 2017. The improved inflow and steady supply of foreign exchange has enhanced manufacturers’ ability to import inputs for production activities.

The commitment of the Bank to sustain the current foreign exchange management policy is aimed at assuring the market that we would continue to make the policy environment conducive for business. As government begins the implementation of the capital component of the 2017 budget, and the planned settlement of contractors’ debt, economic activities would further be stimulated, thereby raising aggregate demand, output and employment. In other words, the expected fiscal stimulus, improvement in non-oil federal receipts; and improvements in economy-wide non-oil exports are expected to drive growth impetus for the rest of the year. I am also confident that the improvement in the security situation in the North-East has paved way for a gradual resumption of agricultural activities in that region. The relative peace we are witnessing in the Niger Delta and the revival of the oil industry in the region also give me confidence that the economy will continue to improve. Inflation rate in the last five months has been on the decline, falling to 16.10 per cent in June 2017 from 16.25 per cent in May, and 18.72 per cent in January 2017. These developments are expected to exert positive economy-wide effects, especially now that Nigeria has exited recession as I had predicted in May, this year. Sincerely, for Nigeria, the worst is over.

With the increase in rice production in Nigeria, many expect that this will have a positive impact on foreign exchange rate, given the huge amount spent importing the commodity. Why has this not happened?
As you are aware, the Anchor Borrowers’ Programme (ABP) which supports local production of strategic commodities was established as a unique solution to our large food import bill. It provides small-holder farmers with access to finance at affordable interest rates set at 9% per annum.

We have made significant progress in foreign exchange savings due to the successful reduction in the amount spent on rice import. Only a year ago, precisely in May 2016, we spent US$30 million in rice importation. However, as at May 2017, the amount spent on rice imports declined by 67% to US$9 million. We have also achieved considerable appreciation in the foreign exchange rate by about 30% year-to-date. The exchange rate at the BDC segment of the market appreciated from N490/US$ in December 2016 to N366/US$ as at June 30, 2017.

The CBN has, indeed, recorded some success stories since the commencement of the ABP. There has been a remarkable shift in favour of local rice consumption and financial institutions are now more inclined to lend to agriculture. It is also good that there has been an increase in the size of markets for locally produced commodities as well as a general increase in the awareness that farming can generate sustainable wealth.

However, there are still lots of grounds to cover. As at June 2017, we had disbursed N42.73 billion (US$140 million) to 28 of the 36 states of the federation and the Federal Capital Territory (FCT). We have thus financially included 191,683 small-holder farmers and cultivated over 226,407 hectares of land. This translates to the creation of 191,683 new jobs. The CBN has identified eight crops including rice, wheat, cotton, maize, soya bean, cassava, poultry and fish it is committed to funding and promoting. These are food items on the daily diet of over 150 million Nigerians. It is our hope that as we continue to forge ahead and grow local content in these and other areas, the need to spend foreign exchange to import food items will reduce and thus minimize the depletion of our scarce foreign reserves.

CBN is said to have disbursed about 120 billion naira to electricity distribution and generation companies, yet power supply has not improved. What is the next move?
The CBN ACT of 2007 empowers the Bank to carry out some developmental roles in the economy. A key priority of the present administration is the commitment to addressing the challenge of critical infrastructure gap in the country, particularly in providing uninterrupted power supply to key sectors of the economy. It is therefore a key Bank priority as well. The Bank’s developmental function and mandate of promoting real sector growth hinge on the success of the Power and Airline Intervention Fund (PAIF) and the Nigeria Electricity Market Stabilization Facility (NEMSF).

The sum of N300 billion was approved by the Monetary Policy Committee in 2010 for investment in debentures issued by the Bank of Industry (BoI) for power and airline projects. PAIF was designed as part of the quantitative easing measures to address the paucity of long-term loan to the power sector. CBN’s Nigeria Electricity Market Stabilization Facility provides refinancing for power projects to the tune of N213 billion. The facility is aimed at putting the Nigerian Electricity Supply Industry (NESI) on a route to economic viability and sustainability by facilitating the settlement of legacy gas debts and payment of outstanding obligations due to creditor market participants and service providers. The programme is essentially to complement the Federal Government’s developmental objectives of growing the economy and creating job opportunities for Nigerians. We can only hope that other non-finance challenges in the sector will be tackled with similar vigour to make the CBN’s effort meaningful.

Why does the Central Bank regularly intervene in the real sector, when many analysts think this is outside its primary functions?
The Central Bank of Nigeria is primarily a monetary authority with a mandate to ensure price and financial system stability, but we are also empowered to play some developmental roles. The CBN’s intervention in the real sector is aimed at discharging the developmental functions. The real sector is a strategic component of the economy because it produces and distributes tangible goods and services required to meet aggregate demand, in addition to being a major driver of employment in the economy.

The Bank’s intervention has never been by direct involvement in any production activity as we are prohibited from doing so by the enabling law. Rather, it has always been by way of incentivizing the flow of credit to targeted real economic activities at affordable rates through the existing development finance institutions. In other words, the objectives of CBN’s interventions include: providing an enabling environment for increased lending to priority sectors; and improving access to affordable credit to fast-track real sector development. It is also geared towards encouraging financial institutions to finance the real sector; incentivizing borrowers; improving job creation; and promoting the diversification of the country’s economic base.

The CBN has introduced several intervention funds, such as the Agricultural Credit Guarantee Scheme Fund (ACGSF), N200 billion SME Credit Guarantee Scheme, N200 billion SME Restructuring/Refinancing Fund (RRF), N300 billion Power and Airline Intervention Fund (PAIF); a non-oil N500 billion Export Stimulation Facility, N213 billion Nigerian Electricity Market Stabilization Facility and the Commercial Agricultural Credit Scheme (CACS). Thus, in a bid to improve some critical economic challenges, meet the financial requirements of Nigerian businesses and also provide basic services and protect the interest of the entire citizens, the CBN has to intervene by developing a financing framework and providing funds to support the real sector of the economy. It should be noted that achieving price and financial system stability are not ends in themselves. They are simply means towards the broader objective of economic growth and development. Therefore, CBN’s real sector interventions are aimed at facilitating the achievement of growth and development of the economy.

Given the current difficult economic situation in Nigeria, can the CBN keep meeting matured financial obligations to foreign investors and international partners?
In 2016, the Nigerian economy slipped into recession and witnessed severe weakening of the macroeconomic indicators including external reserves. However, we are lucky that the external sector continues to be resilient.

Let’s note that economic challenges are not peculiar to Nigeria. Even so, current trends in our macroeconomic indicators show signs of moderate recovery. For instance, there is a gradual, but consistent decline in inflationary pressures in the domestic economy, stabilization in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investment inflows. In particular, the Investor and Exporters’ (I & E) currency window for investors and exporters has been largely transparent and instrumental in boosting the supply of foreign exchange in the market. There has been an increase in net flows resulting in an improvement in accretion to gross external reserves, which stood at about $30.87 billion at end-July 2017, which is more than 10 months of import cover. The recent improvement seen in oil prices combined with the relative peace in the Niger Delta is also expected to boost crude oil production and revenue for the government. All these are good developments.

It is our firm belief that with appropriate macroeconomic policies, the objectives of the Economic Recovery and Growth Plan (ERGP) can be realized. As the ERGP indicates, the government is focused on increasing revenue mobilization and plugging revenue leakages and inefficiencies in government spending. We are pleased with the current trend in accretion to external reserves. I want to use this medium to assure foreign investors and development partners that we would meet our matured financial obligations.

Banks’ inability to extend credit to priority sectors of the economy has been identified as being responsible for continuous liquidity surfeit in the system. What is the Central Bank doing to address this?
The disconnect between the banking sector that is obviously awash with liquidity, on the one hand, and the real productive sector of the economy that is starved of funds, on the other, is one of the misalignments that have constituted a perennial binding constraint to efforts at ensuring optimum liquidity for the growth of the domestic economy.

This development continues to undermine monetary policy-making in several respects. The signaling role of the policy rate remains distorted as persistence of liquidity surfeit in the banking system has consistently placed the money market rates below the policy rate. Particularly now that the economy needs to be reflated by channeling affordable credits to the growth engines of the economy, monetary policy is forced into mopping such excess funds to preserve the credibility of monetary policy and avert the attendant possibility of market- demand pressure in the foreign exchange market. This is in addition to heightened inflation risks emanating from the constrained productive capacity of the economy as manufacturers are known to pass high cost of production to consumers by way of higher prices.

Be that as it may, banks’ refusal to lend to the real sector which is partly caused by a strict prudential regulation of the financial system, has mainly been attributed to the resurgence of rising trends in non-performing loans (NPLs), due to high exposure to the ailing oil, power and energy sectors. We also have heightened business risks associated with a slowing economy to blame. This makes banks to prefer building liquidity buffers in anticipation of opportunities for investment in gilt-edged government securities and related investments.

The Central Bank is responding through restrictions on Deposit Money Banks’(DMBs) access to the Standing Deposit Facility window, as well as a continuous review of the Cash Reserve Requirements (CRR) of the banking system. The conduct of Open Market Operations has also remained a veritable tool for mopping excessive liquidity in the sector.
It is hoped that the key pillars of the on-going Economic Recovery and Growth Plan will go a long way to de-risk the real sector by improving competiveness and reduce costs of doing business through infrastructure provision.

Experts say that the divergent monetary policies around the world and challenges linked to China’s economic rebalancing present central banks with some opportunities as well as threats. Where does Nigeria stand on this?
Monetary policy normalization by the Federal Reserve Bank of the US diverges from the current easy monetary policy stance in Europe and Japan. This has the potential of disrupting the global financial market. Historically, the economic policy stance in the advanced economies has always converged. Recent post- crisis economic challenges led to the adoption of unconventional monetary policy with the attendant quirks and innovations.

The current output performance of the US economy, rising inflation and historically low unemployment numbers have led to the gradual hike in interest rate from its zero lower bound. Conversely, in Europe and Japan, consumer demand remained weak, keeping prices lower for longer than normal or expected. This caused a turn to quantitative easing in these jurisdictions. The Chinese economy, which had seen an average growth rate of more than eight per cent over the years, began to slow down due partly to global economic challenges affecting its export-led growth model. In response, China has resorted to a more inward-looking approach by taking advantage of its huge domestic market.

The consequence of this could be a strengthening US dollar. Rising interest rate in the US could potentially result in capital flow reversals. This could exert more pressure on our exchange rate with strong pass-through to domestic prices. Growth slowdown in China could be strong for the oil market. China remains an important market for Nigeria’s crude oil and a slowdown in economic activities in the country would impact negatively on the demand for our oil. In view of the foregoing, the Central Bank of Nigeria and fiscal authorities would deploy appropriate monetary and fiscal policies, respectively, to manage the spillover effects of divergent monetary policies in the advanced economies and from China’s rebalancing programme.

Nigeria is regarded as a leader in electronic banking services in Africa which has deepened financial inclusion. How can the country sustain this momentum?
In Africa, Nigeria has been at the forefront of advancements in banking services especially with regards to electronic banking. The developments in the electronic banking services have seen the value of electronic transactions rising over the years. For example, the value of cheques transactions declined by 22.1 per cent between 2012 and 2016, while Mobile Money, Point of Sales (POS) and Nigeria Inter-bank Settlement System (NIBSS), Instant Payment (NIP) transactions have grown by 2,302.1, 1,466.2 and 879.6 per cent, respectively, over the same period. Similarly, we have recorded growth in the value of transactions through the internet/web, Automated Teller Machine (ATM) and the Nigeria Electronic Fund Transfer (NEFT) by 319.3, 151.0 and 6.1 per cent, respectively between 2012 and 2016.

In order to improve and sustain the momentum of electronic banking in Nigeria, the Central Bank of Nigeria is poised to implement strategies which include; granting licenses to new service providers of a new payment platform known as Instant Electronic Fund Transfer (EFT); establishment of Nigeria Central Switch that will provide interconnectivity and interoperability amongst approved EFT switch initiatives, banks, Mobile Money Operators (MMOs) and other Payment Service Providers in Nigeria; improving technological infrastructure for electronic banking in the rural areas and consistently liaising with the Bankers Committee to introduce new incentives that will enable customers to adopt e-platforms for banking transactions.

The Bank will continue to engage the informal sector and the rural areas through improved awareness for opportunities in the e-banking system; develop systems that will curtail fraud through electronic banking platforms as well as sustain initiative for financial inclusion among students in the primary, secondary and tertiary institutions. In addition, the Bank will in collaboration with major stakeholders develop alternative electronic payment systems focusing on rural banking needs, and improve the security systems around the mobile money and internet-based banking system.

In what areas of the Nigerian financial sector do you think opportunities exist for foreign investors?
Nigeria is arguably the largest economy in Africa. It also has the largest population in Africa of over 180 million people, a majority of whom are young. The country is endowed with fertile agricultural land that spans different vegetation belts and can support various agricultural activities. All these portend great potential and opportunity for investment in the financial sector.

In its budding stage, the nascent state of the banking sub-sector provides opportunities for external services providers, including outsourcing to third parties such as cash movement, security at banks, ATM card management and payroll services. Similarly, the Nigerian financial sector has shown great resilience over the years since its recovery from the downturn of 2009. Market indicators have shown remarkable improvement as the Nigeria All Share Index and Market Capitalization have continued to trend upwards reflecting growing confidence in the market and the Nigerian economy. The development has continued to offer great opportunities for investors to enjoy significant returns from their equity investment. The market intermediaries, especially issuing houses and stock broking firms, are mostly dominated by local players. A recent change in the law has allowed the provision for foreign participants to enter the market. An increasing number of companies now use market facilities to strengthen their capital structure for modernization and expansion of operations.

An estimated 60% of Nigeria’s poor live in rural areas and majority of them are women. The financial system provides services to 35% of the economically active, whilst 65% are left out. Microfinance Banks (MFBs) have a huge potential in predominantly rural areas and women’s trading groups and societies. There are also opportunities in Fund management services. Fund Management entails the management of the cash flow of business institutions. Currently, there are very few management companies providing such services. Opportunities exist for capacity development and skills for local firms in portfolio management, asset diversification, hedging and other services in the industry.

Risk management services are another promising area for investors. Lastly, since the 2004 reforms to the pensions acts, pension assets have grown annually. The industry has 26 Pension Fund Administrators (PFAs) and four Custodians regulated by National Pension Commission (PENCOM). As pension funds grow, a window of investment opportunity opens for more PFAs to be registered in the country. Also, the growing housing needs in the country offer unique opportunities for investments in the mortgage financing sub-sector.

How would you describe the current status of the Nigerian economy to a global audience?
As I said in just a moment ago, Nigeria is the most populous African nation in the world with a population estimated at 180 million. Clearly, this is indicative of a large domestic market. It has the biggest economy in Africa with a GDP of US$405.10 billion as at 2016.

The importance of Nigeria as a global destination for capital flows is reinforced by its vast potential and investment opportunities. This cuts across mining, manufacturing, agriculture and financial services markets.


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November 2017