Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele has narrated how the apex bank navigated economic storm to take Nigeria out of the recession and heading to prosperity.
“Several economic and financial experts continually attempt to analyze and pre-empt the policy actions of the CBN. To the extent that these endeavours are based on rational expectations, we wholly welcome the effort.
“Notably, some of their conclusions are incongruent to ours. As I have always maintained, I am not surprised at this outcome since most of those analysts, unfortunately, rely on limited or utterly incorrect information.
“Let me reiterate that the CBN will always act in good faith, with the best available information and in cognizance of current economic conditions, to pursue price and financial system, stability, support job creation on a massive scale
and ensure a more inclusive growth in the economy.
The apex bank boss, who addressed the 2018 Bankers’ Annual Dinner in Lagos yesterday, November 30, said that after a wave of scathing criticism that trailed some of the CBN’s past policies, “many of these measures are today being widely applauded as brilliant and conscientious actions.”
Emefiele stressed that as policymakers, the apex bank’s perspectives are typically different from many talking heads, as its data, information sources and outlook remain superior.
“I therefore enjoin our critics to avoid being hasty in their condemnation of our policies. Some policies take time to bear fruit.”
The CBN boss went on explain the macroeconomic and geopolitical contexts in which the Central Bank and the nation have been operating, thus:
On the global scene, a number of recent developments have noticeably impacted outcomes and outlooks specially in emerging market economies including Nigerian. These include:
Rising global interest rate due to sustained tightening stance in advanced economies which consequently and unfortunately heightened fragilities, imbalances and vulnerabilities in emerging markets.
“The Fed fund rate was raised steadily to 2.25 percent in September 2018 with a promise for one more hike before the end of 2018 and three more in 2019.
“Similarly, the Bank of England raised its policy rate in August 2018 for the first time since 2008. Some emerging markets economies, including India, Indonesia, Mexico and Turkey have also raised interest rates in response to that shock;
ii. The consequent huge capital flow reversals in emerging markets that led to immense pressures on exchange rates, FX reserves, and sharp losses in the capital markets. Argentina, Brazil, South Africa, Turkey and Russia have already depreciated their currencies significantly due to this shock;
iii. Uneven fluctuations in the international prices of commodities including crude oil, gold, cocoa, etc.
After hitting $86 per barrel in October 2018, oil prices have dropped by over 30% as at November 25, 2018;
iv. Profound geopolitical and trade tensions (including between US and China, US and Iran, Russia and Western economies etc.) which are impacting the dynamics of global trade and consequently the flow of capital;
v. The rising incidence of protectionism, nationalism,
and anti-globalization especially in the western
vi. Uneven growth of the global economy
accompanied by a tepid short-term outlook.
What are the likely implications of these issues on Nigeria? And what steps can we take to avoid a repeat of the economic slowdown that occurred between 2016 and 2017? Given the structure of our economy, CBN’s attention is primary focused on three factors, including;
• One, rising trade tensions between the US and China could taper global growth, and by extension demand for commodities such as crude oil
• Second, how to ensure that Nigeria’s economy is insulated from the adverse consequences facing
emerging and frontier markets, due to rising rates in the United States.
• Third, what is the likely impact on the crude oil
market from the sharp rise in US oil production, which currently stands at 11.7m barrels per day and is likely to rise to over 14m barrels in 2 years?
As you may recall, Nigeria’s political-economy experienced significant challenges over the last few years revealing its structural deficiencies particularly with regards to its dependence on crude oil, as a major source of its revenue and foreign exchange, as well as over dependence of our people on imported items even when these goods could be produced locally. The 60 percent
decline in crude oil prices between 2015 and 2016
helped shape the trajectory of our economy, ultimately triggering the economic recession in Q1of 2016.
Road to Recovery
The country’s overdependence on crude oil for FX revenue meant that shocks in the oil market were transmitted entirely to the economy via the FX markets as manufacturers and traders who required forex to purchase their inputs as well as goods, were faced with a depleting supply of foreign exchange in the country. The impact of this decline on our reserves was evident in the rise in the value of the US Dollar relative to the Naira; and a rise in the Consumer Price Index due to the increase in the cost of imported inputs and goods.
In a bid to contain rising inflation and to cushion the impact of the drop in FX supply on the Nigerian economy, the Bank took three bold steps;
First, The CBN tightened money supply in order contain inflation while improving yields in local bonds, which attracted the attention of foreign investors. Second, we analyzed our import bill and encouraged manufacturers to consider local options in sourcing their raw materials, by
restricting access to foreign exchange on 41 items.
Third, the Investors and Exporters FX(I&E) window
was introduced, which allowed investors and exporters to purchase and sell foreign exchange at the prevailing market rate.
The impact of these three measures led to an increase in foreign exchange inflows into the country; Transactions in the I&E FX window reached $24 billion ($6 billion net inflows) in 2017 and Nigeria’s foreign exchange reserves rose to over $48billion at the end of May 2018 from $23bn
in October 2016 Foreign Exchange Reserves ($billion)
16. With improved availability of foreign exchange, the
exchange rate at the I&E FX window has remained stable over the past 12 months and the parallel market exchange rate premium has narrowed significantly. At the BDC segment, we saw a significant appreciation of the Naira from over NGN525/US$ in February 2017 to about NGN361/US$ today. Rates at the I&E window also appreciated from nearly NGN382/US$ in May 2017
to just over NGN360/US$.
NGN – USD Convergence Across the Various Markets
17. GDP: After five quarters of uninterrupted GDP contraction (beginning from 1st Quarter of 2016), the economy exited from the recession during the second quarter of 2017. The recovery has been sustained for five consecutive quarters. Though the pace of GDP growth slowed from 1.95 percent in the first quarter of 2018 to 1.50 percent in the second quarter, short-term outlook continued to strengthen with average growth projections of about 1.9 percent for 2018.
The measures taken by the CBN also had an impact on inflation. Following a period of rising inflationary pressure which peaked at 18.7 percent in January 2017, the Nigerian economy witnessed Quarterly Growth in GDP Y-on-Y eighteen straight months of disinflation, as inflation
dropped to 11.1 percent in July 2018.
A slight uptick to 11.25 percent was, however, recorded in
October 2018 due to rising food prices.
19. Activities in the manufacturing sector also witnessed significant improvement between August 2016 and August 2018, as the Primary Manufacturing Index rose from a low of 42% in August 2016 to 57% in August 2018. This
development was attributed to sustained supply of
foreign exchange and stability of the naira.
We were also aware that in order to ensure sustainable growth, efforts must be made to address factors that constrained the growth of businesses in Nigeria. This led to the set-up of the enabling business committee PEBEC, chaired by His Excellency the Vice President. PEBEC was
mandated to unlock bureaucratic constraints to doing business in Nigeria. The CBN and PEBEC worked together to improve access to credit for underserved Nigerians, through the set-up of a National Collateral Registry and the passage of the Credit Bureau Act. As a result of these initiatives in addition to other reforms, Nigeria moved up by 24 points in the World Bank’s 2017 Doing Business Rankings. (145 from 167 in 2016)
The ongoing global tensions as well as the economic recession in 2016 provided us with some key lessons on some of the steps we need to take if we intend to improve the wealth base of the nation. Our understanding of the nature of Nigeria’s domestic imbalances indicates that two
key factors accentuated our vulnerability to global shocks. The first is the diminished total factor productivity in Nigeria due to a low and inadequate infrastructural base. The second is our overdependence on imports for both capital goods and domestic consumption.
With regards to the inadequate infrastructural base, I am aware of ongoing efforts being made by the fiscal authorities in constructing critical roads networks such as the 2nd Niger Bridge, Lagos – Ibadan Highway, Abuja – Kano road network, and the rail lines between Port-Harcourt – Maiduguri, Itakpe – Ajaokuta and Lagos – Kano. These measures will go a long way in reducing the logistics cost of doing business in Nigeria, while opening up new markets for farmers, traders and manufacturers.
With regards to our overdependence of imports, the economic recession triggered mainly by the drop in crude oil prices, only strengthened the case for the need to move from a nation wholly dependent on consumption, to a nation that produces a large proportion of what it needs,
particularly in areas where the resources or inputs needed for production are widely available across the country. This thought process shaped our decision to impose the restriction on access to forex for 41 items that can be produced in Nigeria.
There has been considerable discourse particularly on whether the restriction on access to foreign exchange for 41 items is driving local production, with some nay-sayers stating that it has constrained productivity and growth in the economy. Based on our internal research
conducted at the Central Bank of Nigeria, there is
strong support that the recovery of our economy from the recession may have been much weaker or even negative, without the implementation of the restriction on 41 items. Our research supports the conclusion that the combination of the restriction on 41 items along with other measures imposed by the fiscal and monetary authorities has helped to promote the recovery. Any attempt to reverse the
course of this actions may have untold consequences on the growth trajectory of our economy particularly in our push to diversify and restructure our economy. In fact,
recommendations are being made to the CBN that the list of 41 items be expanded to include other additional items that can be locally produced.
Second, many entrepreneurs are taking advantage of this policy to venture into the domestic production of the restricted items with remarkable successes and great positive impact on employment. The dramatic decline in our import bill and the increase in domestic production of these items attest to the efficacy of this policy. Noticeable
declines were steadily recorded in our monthly food import bill from US$665.4 million in January 2015 to US$160.4 million as at October 2018; a cumulative fall of 75.9 percent and an implied savings of over US$21 billion on food imports alone over that period. Most evident were the 97.3 percent cumulative reduction in monthly rice import
bills, 99.6 percent in fish, 81.3 percent in milk, 63.7 percent in sugar, and 60.5 percent in wheat. We are glad with the accomplishments recorded so far.
Accordingly, this policy is expected to continue with vigor until the underlying imbalances within the Nigerian economy have been fully resolved;
Development finance: In continued recognition of
our role as an agent of development and aimed at ensuring self-sufficiency to reduce Nigeria’s excessive dependence on imports, the CBN invigorated its development finance activities. We have maintained a particular focus on supporting farmers, entrepreneurs as well as small and medium scale businesses, through our various intervention programs such as the Anchor
Borrowers Program, Nigeria Incentive-Based Risk
Sharing System for Agricultural Lending (NIRSAL)
and the National Collateral Registry. The CBN recently introduced the Real Sector Support fund; a facility meant to provide cheap funding at no more than 9 percent to new projects in the Agric and Manufacturing sectors; aimed at boosting output and creating jobs.
In the agriculture sector, the Anchor Borrower Programme (ABP) has ensured that Nigeria emerged from being a net importer of rice to becoming a major producer of rice, supplying key markets in neighboring countries. As at October 2018, a total number of 862,069 farmers cultivating about 835,239 hectares, across 16 different
commodities, have so far benefited from the Anchor Borrowers programme, which has generated 2,502,675 jobs across the country.
Anchor Borrowers Program
It is in light of the success of the Anchor Borrowers Program with regards to cultivation of rice and maize that the Monetary Policy Committee in its last meeting on the 21st of November 2018 recommended that the Anchor Borrowers program be applied to other areas such as palm oil, tomatoes and fisheries to mention a few.
29. Our efforts at supporting small scale farmers and
SMEs is based on our awareness of the critical role they can play in supporting our economic recovery and growth, as well as in creating job opportunities for millions of Nigerians. So far, the CBN has through its MSME fund disbursed over N100Billion to the MSME sector, but we still feel a lot can be done. Under the auspices of the Bankers Committee, the sum of over N60 billion has so far
been set aside under the AGSMIES fund to fund Micro Small and Medium enterprise businesses in the Agriculture and Manufacturing sectors of our economy. The CBN recognizes that the greatest challenge confronting MSME’s and local farmers is access to credit, and that to unlock the growth potentials in our country; these groups must access funding seamlessly. In response to this challenge, the CBN will in due course take action that will directly bring Banking services to the rural communities through the licensing of a national
Micro Finance Bank, which will have a presence in all local governments in Nigeria, thereby supporting the channeling of credit to our rural communities. We will continue to explore ways, in partnering with the fiscal authorities, on how we can best provide farmers and SMES with the
support they need to expand their operations.
The other day when I visited an unnamed popular supermarket in Lagos, there was a big contrast between my visit to the shop 5 years ago, and my visit in November. What was apparent was the huge increase in the number of made in Nigerian processed goods that were being sold in this store; From locally produced rice to well packaged ready to use tomato stew, dried fruits and also cassava chips. As I walked round the shop I could see the huge potential of Nigerian entrepreneurs, as they
developed products which could compete with their
peers in other climes. I could also imagine the number of people who are being employed by these entrepreneurs to support production of these goods. For us to grow as a nation, we must continue to encourage these businesses as they do more than just provide goods, they help to
sustain the vitality of the communities in which they live and work.
Financial Inclusion – Cognizant of the fact that close to 40% of adult Nigerians do not have access to financial services, the bank implemented a series of steps that will help drive our efforts aimed at building a more financially inclusive society.
Some of these measures include the Agent Banking Guidelines and the Shared Agent Network Facility (SANEF), both of which are intended to deepen penetration of agent networks in underserved locations across the country. The recent launch of the policy on Payment Service Banks in October 2018, is an additional step aimed at leveraging on the distribution networks of nonbank entities, such as Fast-Moving Consumer
Goods companies, Fintechs, and Mobile Network Operators, in providing financial services to underserved
communities. With these schemes in place, we believe that over the next 2 years, over 80% of Nigerians will have access to financial services.
Credit Allocation: As part of its long-term strategy for strengthening the Nigerian economy, the Bank established initiatives to resolve the underlying challenges to long-term GDP growth, economic productivity, unemployment and poverty that had pervaded the economy over the past decades.
Hence, the CBN established the Credit Bureau and the National Collateral Registry to improve access to credit in the domestic economy. We believe these measures will help to instil a stronger credit culture and unlock access to finance for deserving Nigerians, including those who may not have fixed assets to provide to banks as collateral.
Furthermore, to spur bank lending to high-impact sector, the Bank, at its July 2018 MPC, pledged to refund CRR to banks under certain conditions.
Banks that bring proposal for funding of new projects or expansion of existing ones in agriculture and manufacturing sectors will, accordingly, qualify for CRR refund of up to 100 percent. It is our expectation that banks would use this opportunity to expand credits to the real sector.
Risk Based Supervision: The recent weakening of the Naira, following the shift to a more flexible foreign exchange mechanism, impacted somewhat on the balance sheets of domestic banks. To guarantee financial stability as Nigeria continues with flexible exchange rate system, the CBN took a number of steps, including:
Monitoring compliance of supervised institutions with the foreign exchange management framework issued in June 2016 through our riskbased supervision methodology, which also involved reviewing international trade and foreign exchange operations of local banks;
Monitoring the financial position and performance of supervised institutions; Assessment of the risk profile and governance management practices of banks
In the event of major deteriorations on any key risk
indicator, we engaged with the affected bank in order to mitigate concerns and shore-up their
As I have always emphasized, it is our collective duty to ensure that the potentials and prospects of the Nigerian economy is optimally realized. The ongoing economic recovery requires the joint efforts and wise counsel of everyone seated here, if we must make giant strides forward. The CBN is more determined now than ever to remain at the forefront of the effort to ensure that the rebound is not overturned.