Early in March, the Central Bank of Nigeria took a well deserved respite from the barrage of criticisms and institution-bashing it had been enduring since Nigeria’s currency, the naira, began a deep dive at the complex foreign exchange market; shortly before the entire economy slipped into recession in the second quarter of last year.
Moving deftly, the Bank embarked on a series of calculated moves that somewhat calmed the jitters in the market and restored some of the confidence hitherto reposed in it by the populace. It pumped about $180 million more than its customary weekly supply into the market, effectively pushing down the dollar’s cross-rate against the local currency. It also opened up extra windows for foreign exchange buyers in a tiered approach that caters to various sectors in the economy, cleverly double-crossing market speculators.
The interventions seemed to be the elixir the economy needed. The economy responded with palpable tremors of vitality that caused Bank Governor Godwin Emefiele to remark that the “worst is over”. Inflation rate dipped slightly from about 19 percent to 17.7 percent, the lowest in the preceding 15 months, while the country’s $1 billion Eurobond issue was widely oversubscribed. It spelt the return of investor confidence in the economy.
About the same period, Nigeria’s fiscal authorities were putting finishing touches on the Economic Growth and Recovery Plan, which in concert with the monetary policy impetus shows the potential of pulling Nigeria out of the woods.
In this exclusive interview with Emefiele, Nigeria’s monetary policy chief, the anxious populace and the international community are served the authentic story of how Nigeria’s economy is weathering the storm and importantly, the CBN’s bold initiatives to stabilize Nigeria’s foreign exchange market. Excerpts:
You had said last year that the worst of Nigeria’s economic recession is over. Do you still hold that view?
For clarity, the statement then was that the recession had reached a bottom and couldn’t be worse. The past year was very challenging for the country but it awoke our consciousness towards inherent economic challenges that had been largely overlooked. Recent activities from various economic quarters show a concerted effort towards bringing lasting solutions to the country’s challenges. It has precipitated a closer look at domestic economic networks with the view to enhancing such mechanisms to produce useful outcomes. More importantly, the recession has afforded us the opportunity to re-evaluate our underlying economic architecture to optimize processes and boost economic activities. It has highlighted the urgent need for structural reforms. The country has also witnessed intense commitment across the fiscal, monetary, trade and structural policies, in coordination with the private sector with the singular goal to set us on the path to sustainable development. Prompt policy responses, especially from the fiscal authorities, have served to complement various measures by the Central Bank of Nigeria to boost economic activities and guarantee economic growth. These have already begun to yield impressive outcomes across various segments where they have been implemented, especially in agriculture. As these measures are intensified and sustained, we can only look forward to very fruitful and interesting times ahead. Recent GDP growth figures, which showed a relatively small economic contraction during the last quarter of 2016, should be an indication that the worst is over and the economy can be expected to witness a recovery in the months ahead.
You were also quoted to have said that managing an economy in a recession is difficult, but that it also presents challenges that are surmountable. How true is this assertion given recent experiences?
That statement remains true after what we have been through in the last couple of months.Managing an economy during a recession certainly poses numerous challenges from several fronts. The highlight of a recession is usually a significant contraction in economic activities that is followed by widespread job and income losses. This would translate to a weakening of consumer spending that only serves to reinforce the recessionary cycle. In Nigeria’s case, the recession came at a time when the economy was already grappling with widespread inadequacy or outright non-availability of generally required (and domestically produced) goods and services. But recessions have always existed and there are numerous lessons to learn. As I said earlier, the current economic malaise has highlighted the need for deep-seated structural reforms to adequately position the economy to take advantage of emerging opportunities, while expanding the scope for Nigerians to pursue their aspirations in a conducive environment. Our experience has been painstaking but exciting; it has necessitated a redoubling of efforts among the various economy managers and gives sufficient reasons to be confident about the emerging future. We faced the challenge of stimulating economic growth without compromising our mandate of maintaining monetary and price stability. The Bank has implemented various development financing initiatives that have begun to yield quite impressive outcomes. Though it has been quite challenging, recent results show that we are making significant headways.
Why has the outlook for economic growth and inflation in the medium-term remained quite worrisome?
The outlook is challenging partly because the economic fundamentals that triggered the recession have not changed significantly. Deep-seated structural transformation is required to set the Nigerian economy on the path of sustainable development even during periods of adverse conditions. It would be right to say that economic managers seem to have found sufficient amoury to confront the challenges headlong. The CBN has been an integral part of current efforts to revive the Nigerian economy and has experienced the challenges, first hand. Yes, there will be more challenges ahead because the solutions that we seek are not short-term. They need to be prescriptions that reform the underlying causes while paving the way for greater efficiency. That is where the challenge lies. While human nature would usually look for quick fixes to solve immediate difficulties, it must be understood that a lot of sacrifice is required. But a diligent application of policy prescriptions that are currently being implemented and fine-tuned should bring the Nigerian economy back to sound and sustainable footing. In addition, the current measures targeted at recovery and growth will take time for substantial effects to become visible. Beyond the short-term quick fix measures, long- term strategies are required to stimulate structural change in the economy. And this essentially requires considerable fiscal outlay particularly in things such as infrastructure that have the potential to galvanise other sectors. This should provide a massive push to current recovery efforts, but the downside risk always lies in sustaining the implementation of these measures. And that is where the challenges for economic growth lies. Fortunately, the current administration has displayed an indubitable appetite to challenge and correct fiscal recklessness while ensuring adequate delivery of required outcomes. On our part, the application of economic recovery prescriptions would, no doubt, lead to a rise in money supply and this poses challenges for monetary policy and the control of inflation. Depending on how one looks at it, the challenges actually provide impetus for economic managers to do the needful.
To what extent would you say that external factors have negatively impacted the Nigerian economy?
The global economy has been dominated by downside risks to growth including the slump in commodity prices, rising geo-political tensions, slow growth/economic restructuring in China and heightened threats to financial markets, in the aftermath of the global financial crises. Developments in the international oil market also intensified these risks especially for oil-exporting countries such as ours, in the wake of recent episode of falling crude oil prices. The Nigerian economy was hugely impacted by the crash in international crude oil prices, which made a significant negative impact on government revenues and revealed deep-seated problems. Hitherto, windfall receipts from higher-than-budgeted crude oil prices had been largely used to finance recurrent spending of government.
To mitigate the adverse effects of these developments, the Bank had implemented several interventions to bolster the economy, especially in the aftermath of the global financial crises, but consistently warned that foreign exchange receipts should be saved or mostly channeled into capital projects. The new administration came with the realization that fiscal finances were inadequate to meet the humungous challenges that we face as a country. So, the crash in crude oil prices has been the major external factor challenge, translating to multiple other challenges for a country where the government is the major driver of the economy.
From the perspective of the CBN, implementation of development financing initiatives in response to the impact of adverse international developments, especially the global financial crises, created a challenge for the price stability mandate. With over N600billion used to keep our banks solvent and another N1 trillion pumped in to revive comatose sectors to galvanise the real sector activities, it naturally translated to increased money supply and persistent rise in prices. The Bank had to choose between supporting economic growth and keeping inflation within the single digit target. While both objectives are mutually inclusive, the natural course was to expand the scope for beneficial opportunities to the Nigerian people while keeping an eye on inflation.
In summary, external developments over the last few years have had huge impact on government revenues, availability of foreign exchange, value of the Naira and by extension, economic growth and inflation.
How best can fiscal and other sector initiatives as well as interventions towards resolving growth challenges be engineered?
This is a very thoughtful question that provides ample room to discuss the approach to solving Nigeria’s current challenges. It has become increasingly obvious that the better way to resolve current challenges is through sufficient coordination among authorities from across the different spectrums of governance in Nigeria. This can be seen simply when you consider that all efforts are geared towards the same economy. There is no way that the authorities will work at cross-purpose and expect to get results that come out positively for the entire economy. Coordination is key. While individual authorities work to evolve strategies to solve challenges in their various jurisdictions, it is of utmost importance to ensure that such strategies are adequately synchronized to present an orderly response.
Coordination among agencies and departments of government is critical. Added to this is an essential need to appropriately harness the efforts of the State, market mechanism and civil society for efficient delivery of anticipated outcomes. This is the point where the state as a major spender in the economy sets the tone, the private sector drives the processes and civil society is actively engaged to deliver the expected results.
The cashless policy has been extended to all states. What is the expectation of the CBN given lessons learnt from the pilot phase of the policy?
The cashless Nigeria project was introduced in January 2012 to minimise the use of cash for transactions, in line with global best practice. The pilot has run for a sufficiently extended period and was implemented at various times beginning with Lagos and then to Rivers, Anambra, Abia, Kano, Ogun and the FCT. No doubt, there have been several lessons learnt; the experience has been quite beneficial both to the Nigerian public and for us as implementers. In the least, it has highlighted the need to adopt modern financial technology to the Nigerian payment system. There is now increased enlightenment and knowledge about the cashless policy even though there remains resistance from some fronts. But that is an inevitable occurrence whenever a new system or initiative is introduced. However, there is sufficient evidence to extend this scheme across the entire country. This extension to other states had been planned to commence sometime in 2014 but was postponed many times. Recently, we issued a circular based on decisions of the latest Bankers Committee meeting (on 8th February 2017), to implement the policy across the remaining 30 states. Starting on 1st May 2017, it shall be implemented in Bauchi, Bayelsa, Delta, Enugu, Gombe, Imo, Kaduna, Ondo, Osun and Plateau, and will be extended to other states on a rolling basis.
We realise that a major determinant of the success of the cashless policy is adequate awareness by citizens as well as staff of financial institutions that implement the policy. That is why we outlined these issues as critical areas that need to be addressed as we roll out across the nation. It is very important for Nigeria to key into these financial innovations. In fact, there have been a lot of advancements when it comes to the payment system. You may have already noticed the proliferation of payment codes by banks where you can transfer money, buy recharge cards for your phones or pay utility bills. Mobile and internet banking are now common and widely used. Nigerians have definitely experienced the benefits of faster means of payments. We expect that with sufficient enlightenment and committed implementation, Nigeria should move into the league of nations that have significantly reduced the use of cash.
There is as an uptick in banks’ non-performing loans which stand at 11 per cent of total loans against the regulatory limit of five per cent. Are Nigerian banks healthy?
The issue of rising NPLs can be intricately traced to the structure of the Nigerian economy and practices of banks to favour sectors that seem to present minimal risks to their loan operations. Deposit money banks in Nigeria are hugely exposed to the oil and gas sector. So, the challenges in the oil sector led to delayed payments and consequent inability of oil and gas operators to services debts. This is just one side of the story but it is largely responsible for large NPLs among Nigerian banks.
Of course, current foreign exchange market challenges also affected the banks but we are tackling those issues decisively. I recall that in the third quarter of last year, we granted a one-off forbearance to banks to write-off loans that had been fully provided for without them having to wait for the mandatory one year. We did this based on our assessment of the tight macroeconomic environment and how it had contributed to rising NPLs. That was our own way of providing some support to DMBs, but I can assure you that our banks possess sufficient buffers to withstand these shocks in spite of the current headwinds. In addition, the CBN conducts stress tests on DMBs periodically, to ascertain the health status of the banks. There is, therefore, no cause for panic.
To what extent has there been coordination between the monetary and fiscal authorities towards pulling Nigeria out of recession?
I would say that coordination has improved remarkably. We had resolved in 2014 to improve and strengthen our coordination with fiscal authorities, in view of the challenges that had started to constrain economic performance. These have snowballed into the current crises that we face on all fronts today and there has been very active engagement between both authorities to proffer lasting solutions, especially in recent times. The CBN has always encouraged and organized such fora for interactions and coordination. In the most recent case, we organized the latest annual Fiscal Liquidity Assessment Committee (FLAC) retreat in October, 2016, where ‘Fiscal Policy Under Uncertainty: Implications for Macroeconomic Stability’ was extensively discussed.
We were integrally part of another major policy discourse that was organized by the Federal Ministry of National Planning and Budget in 2016, where representatives from across the broad spectrum of the Nigerian economy – Government, Academia, Organised Private Sector (OPS), etc were in attendance. The CBN was appropriately represented and the outcome of that forum is the recently released Economic Growth and Recovery Plan (EGRP) 2017 – 2020. That was quite a commendable effort by the National Planning Ministry and it is gladdening to see that the strategy document provides a heart-lifting blueprint towards our anticipated destination. Notwithstanding, the Bank has various platforms for regular and frequent interactions with stakeholders from other spheres of the economy.
Nigeria’s foreign reserves ought to be significantly higher than they are given current higher oil prices and enhanced output due to relative peace in the Niger Delta. There has been only a marginal accretion with attendant pressure on the Naira. What is happening?
I don’t think it would be appropriate to say that the foreign exchange reserves should be significantly higher at the moment. The international price of crude oil a couple of years ago was over USD100 per barrel. It crashed to about USD30 sometime last year. You may be referring to the gradual recovery in international crude oil prices but remember that it is coming from a very low base. Even at that, prices still hover around the USD50 per barrel. We are largely dependent on crude oil receipts since such revenues constitute about 90 per cent of the country’s foreign exchange earnings and 70 per cent of government revenues. Remember also that the CBN’s foreign exchange market interventions are made from these reserves and you know how challenging that has been for us. Yes, the restiveness in Niger Delta has calmed down, but we are still producing below capacity. Importantly, however, the price is still substantially lower than it was, while the uses to which such revenues are put keep increasing. I think that economy managers should actually be commended considering how well we have maneuvered through the crises. Yes, it has come with some discomfort to citizens but you do not get out of problem while feeling comfortable. Moreso, our reserves have not fallen too badly. It currently stands at a little above USD30 billion as at end of February 2017. This is very impressive considering the pressures that we have faced in recent times. We may attribute this to our diligent efforts to ensure that we are not consumed by the crises but remain in a good position to support the international value of the Naira. As the economy improves and we are able to generate more foreign exchange from non-oil sources, we expect to see an improvement to foreign reserves accretion.
What is responsible for the current appreciation of Naira?
An obvious response to this would be that recent operations of the CBN to offset outstanding genuine demands have had significant impact on the USD/Naira exchange rate. We have made strategic interventions in the foreign exchange market to drastically reduce the backlog of demands from corporate entities and individuals. The Bank, however, recognizes that a lot of work needs to be done to tighten administrative processes in the foreign exchange market. This will ensure that genuine requests are made for foreign exchange and block the loopholes that unscrupulous people usually look for to create artificial scarcity and present fictitious demands for forex.
The liberalized regime that largely runs on the FMDQ trading platform has brought some respite for foreign exchange management but, like any new system, requires constant adjustments and fine-tuning to deliver on the anticipated outcomes. A great deal of monitoring is also required to checkmate the activities of forex market operators. These are clearly within the view of the authorities. Already, we have further licensed Travelex to sell forex to BDCs at specified maximum amounts and will continuously follow through with policies aimed at creating a foreign exchange system that works well for all Nigerians.
The gap between the official and parallel market exchange rates remain high. What is your outlook for the exchange rate in the next one year?
The parallel market is not recognized in official statistics but is proxied by the BDC segment. Be that as it may, the premium between those rates in Nigeria is actually based on the West African Monetary Zone (WAMZ) benchmark of 3 percent. Recent upheavals in the foreign exchange market have made it practically impossible to maintain that standard, as is reflected by the significant differentials in rates at both markets. This challenge is essentially a reflection of the current state of the Nigerian economy, with widespread reliance on imported goods and services coupled with the difficulty we have in raising foreign exchange from sources other than oil. This puts immense pressure on the CBN to supply foreign exchange as the custodian of crude oil receipts, on behalf of the federal government, which remains the main earner of foreign exchange. The dearth of foreign exchange inflows from other sectors should, hopefully, be addressed when ongoing efforts across all fronts begin to yield appropriate outcomes and create an economic rebound in due time.
How would you rate the interventions of the CBN, especially, the Anchor Borrowers’ Programme (ABP) aimed at resolving the growth challenges in the Nigerian economy?
The ABP is one initiative that I am immensely proud of as Governor of the Central Bank of Nigeria. It emerged essentially from the realization that Nigeria needs to return to agriculture as a major revenue earner for the economy and it was created to complement other agricultural programmes. The programme was inaugurated by Mr. President in November 2015 and the first phase saw the participation of five states in the North-West region of the country. ABP started with rice farming to cut the huge import bill for the commodity that constituted a massive drain to foreign exchange reserves. The need was further supported by a report from a global economic consultancy which showed that rice prices had been on the increase.
Under this scheme, thousands of farmers have been registered and commenced farming with much-needed inputs supplied to them. It is not surprising that a recent report from the Rice Farmers’ Association indicated that the country is in line to produce about 30 million metric tonnes of rice this year. Note that our annual rice requirement is a little over 10 million metric tonnes. This means with adequate standardization, Nigerian rice farmers should begin to export rice soon. There have been increasing demands for the programme to be extended to other states and more products have been included. We are reaching out to other sector-specific agencies such as the Bank of Agriculture (BOA) to entrench the programme and create a sustainable platform for it. Ultimately, we have targets of using the ABP to increase agricultural lending as a part of total bank lending from 3.72 per cent in 2014 to 7 per cent by 2019. We want to see increased capacity utilization from the current level of less than 50 per cent to about 80 per cent while empowering at least 600,000 farmers in the rice, oil palm, wheat, cotton, fish, sorghum, maize, millet, tomatoes, etc, value chains. In addition, the CBN seeks to create at least one million direct and indirect jobs through the ABP by 2021. Indeed, it gives me much satisfaction knowing that this programme is helping to fulfill our dream of a better Nigeria for all Nigerians.