We’re working to stimulate Nigeria’s growth —Emefiele

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Godwin EmefieleThe last pen media session Godwin Emefiele, Governor, Central Bank of Nigeria (CBN) had in Abuja, Nigeria proves that like his counterparts the world over, he can’t keep out of media spotlight even though he would rather operate in the staid environment bankers traditionally favour. The global economy is suffering the effects of headwinds caused by such phenomena as volatile commodity prices and intractable socio-political upheavals and central bankers are under pressure to rescue the world as they once did at the end of the last decade. Sadly, all these are happening while the world is still wriggling out of the economic jam occasioned in 2007/08 by United States sub-prime mortgage market meltdown.

Being an oil-dependent economy beset by chronic problems of insurgencies, Nigeria is particularly vulnerable. Macro-economic fundamentals, especially foreign exchange rates and interest started tanking last year. The Emefiele-led CBN responded with tough monetary policy interventions, eliciting howls of displeasure from the populace and a barrage of stinging criticisms from analysts, home and abroad.

In the third quarter of the year, the CBN moderated its policy response. It introduced some measure of flexibility in its foreign exchange management paradigm by, allowing, for the first time ever, the market to determine the exchange rate of the naira, the local currency. The Bank also jacked up monetary policy rate (interest rate) to hold down inflation, which had galloped—within six months—from 10 per cent in March 2016 to 17.6 per cent in September.

The following are excerpts of an exclusive interview in which the apex bank chief reflects on the CBN’s measured responses to the challenges of monetary policy making in Nigeria’s peculiar macro environment. He uses the opportunity to touch on the synergy between CBN’s management and the fiscal authorities, Siamese twins that must in synchronize actions in restoring stability and growth to Nigeria’s beleaguered economy. He also pronounced an imminent end to the bothersome recession that has bogged down the economy and explains how the country will get out of it.

To set the records straight, Emefiele last month had a one-of-a kind ‘talkfest’ with the media where he did a scathing but honest review of the economy stretching back to the heyday of post administrations, and running up to where the country stands today.

Nigeria is in recession, the first in one or two decades. How did the country get there?

I must confess that what is happening in Nigeria today is as a result of global crisis. Global crisis in the sense that we have seen commodity prices dropping, we’ve seen geo-political tension, all around the world. Take, for instance, the political tension between Iran and Saudi Arabia trying to play their game as usual and of course the US Fed’s actions since 2009. Following the mortgage crisis of 2009 which started in the United States, there has been a couple of actions, which given the size of US economy in the world, has certain impact, both positive and negative on emerging and frontier markets, where Nigeria unfortunately stands.

But I think when you want to address the issue of how we got here, it is important for us to go back into history, to begin to remind ourselves that there was a time in this country when we survived only on revenues from agricultural produce: groundnut pyramid in the North; cocoa from the West and palm oil from the Midwest and eastern Nigeria.

At that time – I’m talking about the 50s and 60s and indeed up to early 90s – Nigeria was the largest producer and exporter of palm produce in the world. Unfortunately we abandoned this sector because we found oil. We let our guards down in the agricultural sector and this, for me, is a case of a country that unfortunately didn’t plan properly.

Of course, it is obvious our oil wealth was mismanaged and unfortunately our people bear the brunt of this and that’s where we are today.

Compare Nigeria’s situation with that of Norway. Norway is with a population of less than five million people. Norway produces agricultural produce particularly fish which it exports. The country also produces crude oil, to the extent that today Norway has one of the highest investments in the sovereign wealth funds. Norway indeed has $873 billion in its sovereign wealth funds. Notwithstanding having $873 billion in its sovereign wealth funds, Norway also takes very seriously the output from fish production, to the extent that the country survives on an annual basis, from revenue that it generates from the export of fish.

What does Norway do with revenue from crude?

It invests it, and at every point the country decides to use the funds from crude oil, it uses it for infrastructure purposes, that is a country that has planned for its people. …In Nigeria, we export wealth and jobs to those countries and import poverty to our country.

In January 2014 the country had forex reserves which stood at $40.6 billion at that time when crude price was about $110 per barrel. Sometime around September 2013, the country was generating from crude oil exports on a monthly basis average of about $3.2billion. By June 2014 when I took over as CBN Governor, reserve had dropped to $37billion and crude price was about $108 per barrel. At that time receipts from FX crude sale had dropped to just about $1.7billion monthly. Soon after that we saw the crisis all over again and between that August and September 2014, up to this time which is about two years, we have seen consistent drop in the prices of crude to the extent that by March 2015 precisely, our reserves had dropped to $31billion. At that time crude price had dropped to about $48 per barrel and the country’s receipt from exports of crude had dropped to about $1.3 billion, the demand for foreign exchange for import had remained high. That is the situation we find ourselves today.

 How can the country get out of recession?

In a time of recession you need to spend to achieve growth. However, you have to be very careful so that excessive spending does not result in skyrocketing inflation. You can imagine that as at December 2015 the rate of inflation was just about 9 per cent but below 10 per cent in January and now, in fact as at March 2016 and now it has moved from 10 per cent to 17.6 per cent and that is the reason the CBN considered its mandate of price stability as core. That was why at the last MPC meeting, members tried to weigh the balance between growth and inflation and noted that if we allow inflation to grow at the rate that is so astronomical and uncontrollable, could be a problem. And that is why we decided to alter the rate. But the primary motive why we altered the rate in an upward direction was to attract foreign direct investment (FDI) inflow. We did that to achieve the higher yield.

Also in the short run, we can sell assets. You will recall that as at April 2015, I had an interview with Financial Times of London during which even before this government came on board, I advised that there was need for the government to scale down or sell off some of its investments in oil and gas, particularly in the NNPC and NLNG as at that time when the price of oil was above $50-$55 per barrel. We actually commissioned some consultants that conducted the study and at the end of that study we were told if we sell 10per cent to 15per cent of our holding in the oil and gas sector we could realise up to $40 billion. Unfortunately, the markets have become soft. If we chose to do that now, we could still get $10-$15 billion or maybe $20 billion. If we have that kind of liquidity, it will be easy for us to really stimulate the spending and also to turn the economy around. That proposal is still on the table because I have also heard that some of our colleagues in the Federal Executive Council have talked about it. If we take that option, I am optimistic we will be able to stimulate the economy and earn foreign currency that we can really use to stimulate the economy.

Don’t forget, even in the US, when the economic crisis started, the US government stimulated the economy with about $900billion and subsequently injected $85billion monthly for an extended period of time. In Japan and Europe with low rate of inflation, in fact they have negative interest rate, anytime they want to stimulate the economy by liquidity, if you push the inflation it will not affect prices. We are trying to fight inflation to remain at a point where it will not be too high and become injurious to our people.

How would you describe the current status of the naira?

Naira as our local currency has witnessed an unprecedented decline in value partly as a result of the global decline in the price of crude oil which affects not just the value of the naira but also, currencies of most emerging market economies. The primary mandate of CBN is price stability, which entails stability in all price spectrums: the foreign exchange rate, interest rate and inflation rate. However, given our dwindling foreign reserve, the ability of CBN to continually defend the naira at any cost has been substantially muffled, leading to the Bank’s decision at the May 2016 Monetary Policy Committee (MPC) meeting to introduce some flexibility in the foreign exchange market. Members, at the meeting, tried to weigh the balance between growth and inflation and noted that if we allow inflation to grow at the rate that is so astronomical and uncontrollable, could be a problem. And that is why we decided to alter the rate. But the primary motive why we altered the rate in an upward direction was to attract foreign direct investment (FDI) inflow.

The new policy is expected to improve liquidity and stabilize the foreign exchange market. However, following the liberalization of the market, the average naira exchange rate weakened at the inter-bank segment of the foreign exchange market but the weakness was attributable to the normal market reaction to a new regulatory reform.

Inflation has surged since the beginning of the year. Given expert consensus that it is driven by instability in the market, apart from increase in Monetary Policy Rate (MPR), what is the CBN doing to bring it down?

The drivers of the inflation surge are mostly out of control of the CBN because they are more or less structural in nature. The Bank together with the fiscal authorities have put in place a lot of intervention programmes that are aimed at stimulating growth which in the long run will affect the inflation rate positively. We found ourselves at a crossroads, a policy dilemma crossroads, where the economy is hit by contracting output and runaway inflation at the same time, this phenomenon is referred to as “stagflation”.

Under normal circumstance, economy has to be robust in order for inflation to fester, given the improved purchasing power and heightened demand for goods and services by consumers. In a time of recession you need to spend to achieve growth. On the other hand, you have to be very careful so that excessive spending does not result in skyrocketing inflation.

You can imagine that as at December 2015 the rate of inflation was just about 9 per cent but below 10 per cent in January and now, in fact as at March 2016 and now it has moved from 10 per cent to 17.6 per cent, and that is the reason the CBN considered its mandate of price stability as core. That is why at the last MPC meeting, members tried to weigh the balance between growth and inflation and noted that if we allow inflation to grow at the rate that is so astronomical and uncontrollable, that could be a problem.

However, given our current peculiarity, the economy is contracting due to low global oil price, and weakened domestic currency. The deregulation of the downstream sector of the petroleum industry has also contributed to the inflationary pressure. We are hoping that as harvest season commences, and the revenue base of the country improves, inflation will moderate.

Since the flexibility was introduced into the forex management policy, the naira has depreciated significantly against the dollar even as many experts believe this is the true rate of naira. Is this in the long-run interest of the country?

As I earlier mentioned, the introduction of flexibility in the forex management policy is definitely in the long-term interest of the country, as it is designed to improve liquidity and stabilize the foreign exchange market. The initial weakness (depreciation) was traced to the normal market reaction to a new regulatory reform and this should be stabilizing in the medium run. The depreciation of the naira, especially, in the parallel market is due to the activities of speculators; people who are operating in the parallel/free funds market, which by Nigeria’s foreign exchange laws is an illegal market. That market is very shallow and we often stress that the rate in that market should not be used as a barometer for determining the value of our currency.

And secondly, refusal of some commercial banks to release forex to interested customers, by claiming constraints from the Central Bank’s directive. However, since we have deregulated the market and that decision has not been reversed, it is disingenuous on the part of the commercial banks to use the CBN as an excuse not to carry out their duties.  I therefore, use this medium to once again appeal to the deposit money banks, to collaborate with the Central Bank’s efforts towards reviving the economy and reinstating prosperity in the land. I should also mention that as part of the direct efforts in this direction, all international money transfer operators have been directed to sell forex directly to bureaux de change operators, in order to improve supply to that segment of the foreign exchange market, and subsequently ease up pressure on the naira.

Many are concerned over the state of the independence of the CBN following what they term presidential interference in monetary policy. Is the independence of the CBN at stake?

Global best practice entails all central banks worldwide to be autonomous and free from unnecessary interference from political authorities. Nigeria is not an exception from this practice because the CBN Act 2007 empowers the Bank to be independent, and our political leaders, to a very large extent, are quite understanding and respectable of the independence of the Bank. However, since it is also impossible to operate in a vacuum, collaboration with the fiscal authority is an intricate part of how we feel we can achieve prosperity for our people. I  must say that both the monetary and fiscal authorities are working together and that is why you could see a situation where today even where we have revenue shortage or deficit, the monetary authority is trying to bridge the gap.

So the CBN independence is not at sake. What we are witnessing now is a mutual collaboration between the Monetary and Fiscal authorities for the country and the economy to move forward.

 When do you expect recession to be over in Nigeria?

We are already in the valley, the only direction is to go up the hill and the government is doing everything possible to ensure that we move up the hill. I am optimistic that based on the actions being taken by government, based on the pronouncements of President Buhari that we must think out of the box, the monetary and fiscal authorities are working together and I’m optimistic that the fourth quarter results will show evidence that we have started to move in the direction of the hill, and out of recession. And I repeat the worst is over. The Nigerian economy is on the path of recovery and growth. So please if you are a bystander or sideliner you are losing. Join the train now before it leaves the station.

The sacking of Skye Bank management stirred fears of banking crisis. Should the public be concerned about the health of the financial sector?

Nigerians should be rest assured that the Nigerian banking system remains safe and sound. The Central Bank has always reiterated its commitment to ensure that no Nigerian bank fails. That particular case represents one of the measures put in place to prevent bank failure. Issues emanating from our banks are always resolved before they become systemic and we are ready to apply whatever appropriate sanction for infractions by those in charge of banking institutions in Nigeria to safeguard the financial institutions.

CBN has disbursed about N120 billion to electricity distribution and generation companies towards improving power supply as part of its intervention in the real sector. Yet, power supply has not improved. What is CBN’s next move?

The CBN set aside N213 billion as Nigeria Electricity Market Stabilization Facility (NEMSF), part of which is the N120 billion you mentioned. The purpose of this facility is to help stakeholders in the power sector to settle the legacy gas debt and revenue shortfall during the interim rule period, thereby, boosting power supply and returning market to transitional stability. The Bank set up a special purpose vehicle (SPV) NESI Stabilization Strategy Limited to manage the facility. In terms of performance, the facility was able to bring the much needed stability to the transitional electricity market, such that, there were assurances that stakeholder’s obligations will be met.

Shortly after the sector seemed to have experienced some level of improvement, challenges such as vandalism of gas facilities, non-implementation of the MYTO 2015 due to court cases/rulings as well as decisions of some recalcitrant DISCOs crippled the sector again. These challenges have little or nothing to do with financing, as such; the Bank neither has the mandate nor the capacity to resolve these issues. However, the Bank is improving its monitoring systems to ensure that gains are not lost. The Bank is also encouraging new power projects by deploying its Power and Airline Intervention Fund to increase power generation capacity.

With the present economic challenges, what assurances are you giving that Nigeria will keep meeting matured financial obligations to foreign investors and international partners?

The current economic challenges are not peculiar to Nigeria alone. In fact, the global economy is passing through stress. Although, the external sector of our economy has weakened, it has not gotten to such a precarious extent, such that we will not be able to meet our obligations. For instance, the external reserves have declined by about $3 billion in 2016, the current foreign reserves  of about $25 billion is sufficient enough to cover over seven  months of imports. This is still above the international benchmark of six months. Also high returns on domestic assets and the recent reforms have continued to attract foreign investment despite the challenges.

An assessment of the fundamentals of the Nigerian economy is a pointer that the current challenges will not last. Output gap in Nigeria remained very high and the country remained the largest market in Africa. In addition, security challenges which had dealt a blow to the country’s oil output are being resolved, while the Federal Government is working to ensure full implementation of the 2016 budget. Therefore, the long-term economic viability of the country remains strong, as such foreign investors and international partners do not face any repayment risk in Nigeria.

Despite efforts being made at various levels to combat money laundering, it still persists. What efforts is the CBN making to ensure that the financial system is not used to launder illicit funds?

Central Bank of Nigeria, as well as the Federal Government are concerned about money laundering. We believe that having a robust framework to combat the malaise is the key to achieving economic prosperity for our people, as avenues for frittering away the commonwealth would be restricted, even, if not eliminated altogether. Both the Money Laundering Prohibition (MPL) Act 2011 (as amended) and Terrorism Prevention Act 2011 (as amended in 2013) both are indications of our resolve to combating money laundering and terrorism. These Acts exposed us to global instruments and helped expand our knowledge base in financial crime and terrorism prevention.

To this end, we have taken every necessary step to ensure compliance with some of the recommendations of the Financial Action Task Force (FATF), a feat that led to the country being removed from the FATF list of countries with strategic AML deficiencies. Even though, we recognize that there is still a lot of work to do, we are not resting on our oars. Nigeria is a member of the Inter-Governmental Action Group against Money Laundering in West Africa, known as (GIABA), a regional task force that was established by the Economic Community of West African States (ECOWAS) Authority of Heads of State and Government in the year 2000. As a regulator, we collaborate with anti-graft agencies like the Economic and Financial Crime Commission (EFCC), the Independent Corrupt Practices Commission and other Related Offences (ICPC), the Nigeria Police Force, Nigerian Extractive Industries Transparency Initiatives (NEITI), and others.  Finally, the introduction of the Bank Verification Number (BVN) which has been highly instrumental in our cashless policy in terms of capturing bank customers’ data and mitigates fraud.

Many have debated the currency swap with China often oblivious of the benefits. For the record, what does the country stand to benefit from the currency arrangement? Is the CBN still going on with that?

Well, the immediate benefit of this agreement when fully implemented is direct accretion to our reserve, hence a stronger position for the Bank to strengthen the naira exchange rate. To answer your question about whether the agreement still holds: First, there are supposed to be two types of currency swap agreement with the Republic of China, one is with the People’s Bank of China, which is the Central Bank of the country; the other one is with the Industrial Commercial Bank of China (ICBC). The first agreement would have provided us with access to Yuan, with which we can do transactions directly with the country and other economies that accept Renminbi, but the currency will be domiciled with them, meaning that, this particular one looks like some sort of line of credit, but in Yuan. The second one, which is with the ICBC is US dollar denominated swap that would come to us directly. All in all, discussions are still ongoing around these swaps and Nigerians will be duly informed as discussions progress.


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November 2016