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Nursing Nigeria’s economy back to health

Since the 2007/8 global financial crisis sparked off by the crash in the US sub-prime mortgage market, central banks worldwide have been thrust into the forefront in the battle to restore stability to the world’s financial and economic order. Ten years down the line, the Central Bank of Nigeria (CBN) is still doing the heavy lifting required to keep the country’s economy from the brink of total disaster in the face of dwindling government revenues.

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THE spectacular crash of oil prices, the nation’s more-or-less sole cash cow, from above the $100/barrel mark to below $30 mid-last year, so incapacitated government that the central bank not only had to employ unconventional monetary policy, but also stray into areas hitherto considered the exclusive preserve of fiscal policy to keep the economy ticking.
In spite of the Bank’s best efforts, Nigeria went into recession in the second quarter of last year, primarily due to the collapse of the strategic foreign exchange market.

Today, things are turning around. The CBN has gotten its acts together and come up with policies and interventions to return the foreign exchange market to the path of stability.

Along the way, the Bank has been implementing a series of interventions in the economy in line with its mandate of promoting the growth and development of the national economy.

The following discourse traces the origins of the current recession, and thereafter lists the regimen of policies and interventions the apex bank has mobilized to nurse the economy back to health and sustainable development:

How Nigeria’s central bank works for the economy
THE Nigerian economy slipped into recession in 2016 following protracted low commodity prices, oil production shut-ins, capital flow reversals and insurgency in the northeastern part of the country. Pressure on consumer prices intensified as the naira, the local currency, weakened against international currencies in the face of surging demand for foreign exchange. Even with the best policy wedge deployed by the CBN, the year 2016 closed with above recent-average-inflation rate of about 18.0 per cent on the all-item index. The combination of high inflation and economic contraction, no doubt, made the year a very challenging one for monetary policy-making.

Tackling stagflation
Economists in time past never thought of the possibility of the country suffering stagflation, because historical experience suggested that high unemployment was typically associated with low inflation in line with the Phillips curve thesis of the trade-off between unemployment and inflation. However, the experiences of some developing countries including Nigeria today point clearly to the contrary. Headline inflation rate accelerated from 9.6 per cent in January 2016 to 18.6 per cent in December 2016 while output growth turned negative in Q1, 2016 from -0.36, with the negative growth deepening to -2.06 in Q2, 2016 and -2.24 per cent in Q3, 2016. It is important to bear in mind that the current situation is not amenable to simplistic analyses and quick fixes. The domestic economic challenges which include a chronically import-dependent consumption culture, lack of competitiveness of many sectors of the economy and yawning infrastructural gap, have combined with an unfavourable external environment to complicate the macroeconomic policy environment.

Stagflation can be tough for policymakers as policy initiatives to tame inflation can be counter-productive for employment and economic growth and vice versa. Overcoming the current stagflation requires several hands on the deck and quite critically, effective coordination of fiscal and monetary policies. The importance of the role of the CBN in facilitating credit flows to the real sector is further underscored by the need to complement the financing efforts of government.

Supporting “priority” sectors
CBN interventions in the real sector are intended to enhance private sector contribution to the growth process, mobilize savings, fund good business initiatives and facilitate production and trade as well as other commercial activities that boost the economy. These initiatives are expected to among other things, stimulate real sector development by providing enabling policy environment to increase lending to priority sectors and improve access to affordable long-term funds.
The CBN has over the years identified key priority sectors and developed interventions tailored to support and promote their growth. Some of the interventions include: Commercial Agricultural Credit Scheme (CACS), Agricultural Credit Guarantee Scheme Fund (ACGSF), Agricultural Credit Support Scheme (ACSS), Entrepreneurship Development activities, Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), Youth Entrepreneurship Development Programme (YEDP), Export Rediscounting and Refinancing Facility (RRF), Export Stimulation Facility (ESF), and Intervention in the Textile Sector

Given the thrust of the 2017 budget and the accompanying sectoral policies, output growth is expected to resume in the short to medium term. The need to commit to non-oil driven economy will go a long way in stimulating aggregate demand and restoring confidence in the economy. It is hoped that the fiscal authorities will consider using the Public Private Partnership (PPP) model in its infrastructure development programme as a means of cushioning any possible shocks to budgeted revenue as there is no certainty that the moderate rise in oil prices following the agreement between OPEC and non- OPEC oil producers to cut production will be sustainable. Nonetheless, the agreement to cut production by almost 1.2 million barrels per day caused a moderate rise in oil price to above $50 per barrel as at January 2017. It is also hoped that the implementation of the 2017 budget will spur economic activities and provide room for output expansion.

Diversifying the economy
Globally, oil continues to be a vital source of energy and is expected to remain so for decades to come even in the light of significant progress in the development of alternative energy sources. Nevertheless, energy prices are highly volatile on account of shocks ranging from fluctuations in global oil production levels to economic and financial crises; industry strikes and even wars. As such, volatility in the oil market influences the economies of most countries in one way or another; oil importers, exporters or neither. This is particularly true of Nigeria where oil accounts for over 90 per cent of exports, 97 per cent of the government’s foreign exchange earnings and is the single largest import item. Nigeria’s rapid economic growth since independence can be attributed principally to its oil wealth. Nigeria embarked on a resource-based growth strategy where receipts from oil were expected to develop the other sectors and stimulate further economic growth. Unfortunately, things have not turned out as envisaged.

In the short run, oil dependency resulted in rapid but fluctuating economic growth, causing economic stagnation and non-inclusive growth in the long run. Poverty levels continue to be high and inequality seems to be worsening, as the country’s high propensity to import remains high. Unsurprisingly, government expenditure is almost totally dependent on oil proceeds. In fact, the national budget is traditionally financed and predicated on oil prices/sales. This dependency started during the 1970s oil boom which lulled the country into neglecting its strong agricultural and light manufacturing bases. The so-called resource caused significant degradation of the non-oil sectors, basic infrastructure and service delivery.
Furthermore, manufacturing capacity utilization plummeted to less than 50 per cent in the light of cheap consumer imports and high domestic production costs partly due to rising fuel costs and unstable electricity supply. Domestic manufacturers cannot compete with imports, crippling a once flourishing sector that employed many youths.

Recovering from oil shocks
Given the significant relationships among oil prices, government revenue and imports, it is not surprising that the country’s foreign reserves, exchange rate and government expenditure have all been negatively affected, raising immense concern about the economy, locally and internationally. The call to return to agriculture has become louder as policy shifts to import substitution to reduce pressure on the Naira and rebuild the country’s dwindling reserves. Apparently, the resource-based growth strategy has not been successful for the country. Furthermore, as former oil-importing countries discover oil deposits and alternative energy sources become more popular, the need for Nigeria to look for more dependable sources of earning government revenue and foreign exchange becomes more imperative, hence the emphasis on the diversification of the economy.

Synergizing monetary and fiscal policies
Diversification entails transforming from an economy dependent on a single commodity, in this case, oil, to an economy based on one that explores and produces a variety of commodities.

Investment in the private sector and export-oriented trade strategies will have to be implemented. Monetary policy will essentially ensure that funds for investment are not priced too high and the financial system is stable. Economists believe that to achieve sustainable economic growth, diversification and industrialization are necessary.

The use of technology in all spheres of the economy must be encouraged, especially in the areas of agriculture and the extractive industries. This leads to the next critical area of human capital development: education. An educated people are an empowered people capable of innovation and advancement. More has to be done to facilitate basic education for all. Development of local technical expertise in Information and Communications Technology (ICT) must be championed to avoid reliance on third party expatriates. To create employment, it goes without saying that the critical infrastructure (physical, social, financial and ICT) must be put in place to encourage investment in productive ventures that leverage on technology.

Synergy between the fiscal and monetary authorities would foster the appropriate macroeconomic environment to encourage sustained investment in the employment-generating agricultural sector. Nigeria has begun to reap benefits from the CBN-led ‘Anchor Borrowers Programme (ABP) which has greatly transformed the local rice market.

Intervening in the “Production” sectors
Agriculture remains an important sector in the Nigerian economy despite its neglect over the years. The sector’s importance is buttressed by the crucial role it can play in addressing the challenges of unemployment, rural-urban migration, ailing cottage industries, and excessive dependence on oil and poor living standard. Timely and affordable credit is necessary for growth of the agricultural sector. In the past 10 years, Deposit Money Banks’ (DMBs’) lending to agriculture as a percentage of total lending in the economy has been below 5 per cent. The CBN, however, is changing the narrative with specific interventions/schemes.

Funds flow to farmers
The Commercial Agricultural Credit Scheme (CACS) was established in 2009 as a game changer to agricultural financing in Nigeria and its effect can be seen in the increase in DMBs’ lending to agriculture since its establishment. It features an all-inclusive interest rate of 9.0 per cent with favourable tenor and moratorium. As at October 2015, N318.145billion had been released for 399 projects.

Other schemes and programmes such as the Agricultural Credit Guarantee Scheme (ACGS), Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), Agricultural Credit Support Scheme (ACSS) and the Anchor Borrowers’ Programme (ABP) have increased DMBs’ confidence in agricultural lending by reducing their risk exposures.

The latest, the Anchor Borrowers’ Programme, has changed the fortunes of Nigerian farmers. Established to collaborate with anchor companies involved in the production and processing of key agricultural commodities, the Programme is helping local farmers to increase production and supply of feedstock to processors, reduce importation and conserve external reserves. Anchor firms boast track records and experience with out-growers involved in production. A coalition of anchor firms, the CBN, NIRSAL and State Governments organize the out-growers and ensure that they comply with contractual terms, thereby reducing the incidence of side-selling while financing institutions serve as veritable channels for delivering credit to the out-growers.

The achievements recorded in the sector are thanks to the collective efforts of the Federal Government, the different Farmers’ Associations and regulators within the Central Bank of Nigeria, the Bank of Agriculture, and the Federal Ministry of Agriculture etc. Such coordination by stakeholders in other sectors of the economy would help to reset the country on the path of development and growth. To ease the burden on the Central Bank of Nigeria, Federal and State Governments must create more public institutions as well as encourage private participation in the provision of development finance to the critical sectors of the economy. In the interim, the CBN has earmarked other interventions to support and promote key priority sectors: They include Youth Entrepreneurship Development Programme (YEDP); Export Rediscounting and Refinancing Facility (RRF); Export Stimulation Facility (ESF) and Intervention in the Textile Sector.

Making finance work for Nigeria
The Nigerian financial sector is one of the largest in Sub-Saharan Africa, with a wide range of banking and non-bank financial intermediaries. Regrettably, Nigeria’s financial system has neither been effective in supporting the real sector’s growth, nor has it robustly positioned itself to drive economic growth and development. The sector’s depth remains shallow with the Broad Money to real output (M2/GDP) ratio — an index showing the degree of monetization in a given economy — estimated at 20.23 per cent in 2014, the last time such was measured, against the roughly 37 per cent recorded in 2009. Similarly, domestic credit to the private sector as a ratio of GDP stood at 14.22 in 2015, according to the World Bank. This is a slight decline from the 14.75 recorded in 2014.

The sub-optimal impact of the financial intermediaries in the real sector, however, has to be viewed from the growing non-performing credits, now substantially above the prudential minimum. Of course, this outcome can be directly attributed to several factors, such as excessive credit concentration in shock-prone industries, exchange rate effects, inadequate monitoring and sometimes, outright fraud on the side of obligors. Recognizing these challenges, there had been deliberate efforts to reposition the Nigerian financial sector to serve as effective agent for macroeconomic growth and stabilization.
Fulfilling the CBN’s mandate of promoting a sound financial system requires an enabling efficient financial intermediation which contributes to high levels of output, employment, efficient income distribution, which invariably raise the living standards. In other words, the Bank through financial intermediation influences the savings-investment process, thus accelerating economic growth and poverty reduction. It is important to note that a key condition for effective banking intermediation is that the sector should first be sound and stable. The Central Bank over the years has been ensuring a sound and stable banking system through effective surveillance and enforcement of macro-prudential guidelines. Through interest rate and banking credit channels of monetary policy transmission, banks continue to make credit available to the private sector to stimulate the economy and promote economic development.

Improving credit flows
To enhance access to credit by consumers and the private sector, the Bank in partnership with the International Finance Corporation (IFC) established the National Collateral Registry (NCR) to deepen credit delivery to the Micro, Small and Medium Enterprises and drive financial inclusion. The registry allows financial institutions to register their secured interest in movable assets used as collateral for loans. Furthermore, it stimulates responsible lending to MSMEs, facilitate access to credit secured with movable assets; and perfects security interests in movable assets, facilitates realization of security interests in movable assets. The System test of the Collateral Registry was completed in November, 2015. 68 financial institutions registered on the NCR.

The Financial Inclusion Strategy aims to reduce the percentage of financially excluded adults to 20 per cent by the year 2020 from 57.3 per cent recorded in 2010. The Strategy touches on savings, payments, credit, insurance, pensions, etc, It also promotes financial channels and enablers, such as ATMs, POSs, as well as expansion of bank branches, consumer protection, and women-focused initiatives.

In 2016, 5-year (2016-2020) targets were set for DMBs for the number of financially excluded population to be reached through their products, services and access points across the country. Banks have submitted implementation plans on how these targets will be achieved. Taking further the Digital Financial Inclusion Project, which was co-funded by the Federal Ministry of Finance, the CBN and the Bill & Melinda Gates Foundation are helping to make the dream of financial inclusion a reality. It is reducing the leakages associated with cash transactions, creating job opportunities and increasing national output.

Addressing security issues
The CBN through the Bankers’ Committee and in collaboration with all banks in Nigeria on February 14, 2014 launched a centralized biometric identification system for the banking industry tagged Bank Verification Number (BVN). It is aimed at using biometric information as a means of identifying and verifying all individual account holders in Nigerian banks, consequently, authenticating customer identity. This is meant to instil confidence in parties in financial transactions, thus lowering credit risk and sundry financial frauds.

A significant policy challenge faced by the monetary authority is striking a balance between stability and reform in the financial sector. However, achieving a balance rests not just with the Central Bank alone but all stakeholders. To this end, there is need to imbibe best-practice, sound corporate governance, self-regulation and adherence to prudential requirements. The full implementation of the Treasury Single Account is expected to nudge banks towards greater business independence, by forcing them to revert to the good old traditional means of credit creation and maturity transformation.

For market reform
The CBN Act of 2007 charged the Bank to “maintain external reserves to safeguard the international value of the legal tender currency”. For this reason, the central bank compiles the balance of payments to ascertain the economy’s net external position as well as keep an eye on the foreign exchange market. It is for the same reason that the Bank concerns itself with achieving the international standard of six months of imports cover of its foreign exchange reserves.

The naira is quoted in terms of the US dollar as the country’s trade is mostly dollar-denominated. This dollar predominance is anchored on the role of the US dollar as the dominant currency for settling international financial obligations.
There are many operators in the Nigerian foreign exchange market ranging from the CBN as the regulatory authority to the authorized dealers, who are the DMBs. The BDCs form a sizeable number of licensed foreign exchange dealers alongside the DMBs. Other officially recognized operators are the autonomous earners of foreign exchange outside the official circle. At the bottom of the ladder is a large army of parallel market dealers who for a long time before the 2006 reforms dictated the direction of exchange rate movement in the market, playing the role of market makers.

The Central Bank alongside the DMBs operates at the interbank market, with the current foreign exchange rate at N305/US$, while the BDCs and other parallel market operators’ rate stands at N500/US$. This leaves a huge premium of about N195/US$ or 65 per cent, which encourages round-tripping (arbitrage) and market instability. To narrow the premium between these two markets, the Bank is taking proactive steps to reduce the divergent liquidity positions of these markets.
There are evidence in the literature that volatility of the exchange rate can increase the flow of foreign exchange to the BDC segment by admitting the BDCs into the official foreign exchange market. This is based on the simple economic principle which states that an increase in the number of market participants tends to reduce the volatility of that market.

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