CBN Governor, Sanusi Lamido Sanusi
Members of the Bankers’ Committee that meet bi-monthly to discuss the state of affairs in the industry recently converged at Calabar, for the third edition of their annual retreat. Chairman of the Bankers’ Committee and Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, argued in his presentation that although the fuel subsidy removal may lead to a slight increase in inflation in the short term, it would in the long run, strengthen the country’s forex reserves, writes Obinna Chima
Importance of the Retreat
The Governor of the CBN, together with the deputy governors of the CBN, Managing Director of the Nigeria Deposit Insurance Corporation, together with the CEOs of deposit money banks (DMBs), discount houses, and other financial institutions, conveyed the Third Annual Bankers’ Retreat in Calabar, from ninth to 11th December, 2011. And the participants included the governor of Cross River, minister of finance and coordinating minister for economy, minister of agriculture, minister of power as well as financial experts within and outside the country. This retreat is to provide a unique platform to allow the industry to collaborate on opportunities to stimulate sustainable growth of the economy. After two years of focused attention with operators, the Nigerian financial crisis is on the final lap of resolution. The collective decisions and actions of the Bankers’ Committee as a catalyst for economic development have resulted into tangible benefits. Advocacy for change is working; government has commenced the implementation of the ‘transformation agenda’ aimed at growing the economy and creating jobs. Lending to critical sectors of the economy is improving with significant increase to agriculture and a clear framework for de-risking agric lending.
Our reforms at the banking sector are on course and the banking sector is well positioned to support development of the economy. This year, in recognition of the challenges facing the global economy, the 2011 retreat was named – ‘Financial System Stability and its Implication for Economic Development.’ The focus was on the potential risk and impact of monetary and fiscal policies on the stability of the financial system, and the implication for Nigeria’s economic development aspiration.
We affirmed our commitment to a stable financial system in Nigeria and to contribute to the economic development and growth. We commend President Goodluck Jonathan for his transformation agenda and we associate with the objective of growing the Nigerian economy and creating jobs. The CBN has taken creative actions to address short, medium and long-term actions to address challenges facing the financial system, improving banks’ balance sheets and working with government towards fiscal
consolidation and structural changes.
The stabilisation of the Nigerian financial system will ensure that the financial system can more effectively contribute to the realisation of development of the country’s goals and objectives. To consolidate our successes and address issues that are remaining, the Bankers’ Committee will continue to play advocacy role as well as collaborate with the economic team, to implement the country’s economic agenda and create jobs.
Areas of Focus by the Committee
The areas of focus are the monetary and fiscal policies. The Bankers’ Committee urges improved fiscal prudence and rationality in government’s expenditure. We support the deregulation and liberalisation of the petroleum sector to stem leakages and ensure the availability of funds for infrastructural development for future generation. We advocate the establishment of the sovereign wealth fund and committed to its actualisation.
The CBN is focused on its primary mandate of price stability and has instituted a framework for enhanced monetary policy transparency and accountability. In the short-term, the CBN will continue to implement a tight monetary rate environment supported by price stability. Given the importance of monetary and fiscal policies and the potential impact on the economy, we emphasise that coordination and collaboration between fiscal and monetary policy is critical.
Financial inclusion and sustainability - the CBN is adopting a strategic approach with the development of a national strategy for financial inclusion to increase formal usage of financial services to 70 per cent, from the current level of about 30 per cent. Specific strategies include the implementation of the Know Your Customer (KYC) system to promote financial inclusion, develop data base for identity management system, improving financial literacy and using the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) to bring farmers into the banking system.
Financial regulation and supervision - the Bankers’ Committee will collaborate to entrench financial system regulation and supervisory framework that is responsive to the industry and regulation challenges. The goals of the financial system regulations and supervision includes improving governance, improving risk management, crisis management framework, avoiding build up of non-performing loans, encouraging lending to the agric sector, capacity building for the industry among regulators and operators, strengthening ethical practices and consumer protection and improving communication with key stakeholders.
Banking industry infrastructure transformation- the industry recognises the importance
and contributions of the payment system to the economy. We are committed to the modernisation of payment infrastructure within a short-term framework, to provide world class structures and channels for commercial activities. We are committed to the ‘cash-less’ programme to increase the availability and density of alternative to cash system for payment. We are commencing the initial pilot scheme in Lagos. We are committed to bring Nigeria’s payment infrastructure to global standards by 2015.
Economic Policy Framework - we have determined the results and outcome of the goals we intend to achieve. We will on an ongoing basis, monitor the process of implementation as well as the impact of our actions on Nigeria’s economic development. The sub-committee on economic development and sustainability would coordinate execution of the programme and provide feedback to the CBN and banks’ chief executives.
Agric Sector Lending
Basically, what we have done over the last one year was to do a study and try to understand why banks have not been lending to agriculture in their balance sheets because the whole idea is to encourage banks to use their money, rather than to rely on funds by government. And part of that study resulted into what we have as NIRSAL. We found out that first of all, we need to unlock agricultural financing. We gave example of the tomato farmer who is losing 40 per cent of his output because there is no alternative to storage as against processing. So, there has to be investment in giving him the right seeds and also link him up with a processor, from there to the market. So, that role is being carried out by the ministry of agriculture in collaboration with the states ministries.
Now, for the banks, once the infrastructural facilities are there and the comfort is there, what they need is a form of comfort that will allow banks invest in the sector. So, we have designed risk-sharing products along different points in the value-chain. For example, if a bank lends to a primary producer – in this case, a tomato farmer, up to a loss level of 12.5 per cent of the portfolio, he will share the risk with the bank on an 80-20 basis. If you move up the value chain, into processing for example or if you lend to a large farmer, then it would be 50-50 basis. When you now move beyond that to processing or agro-business, the farm takes 30 and the bank takes 70 per cent. This model is what has worked in other parts of the world. The scheme is self sustaining. But in addition to providing guarantees, we have a programme for providing technical assistance, not just to the borrowers, but also to the lenders. This is because part of the problem of lending to agric is that the bankers themselves don’t have the capability for taking agric risk and the farmers don’t have the benefits to communicate effectively with the banks.
We are also supporting insurance and we are engaging with the agric ministry on the policy. So, the whole idea is recognition that lending to agriculture requires more than preaching to banks or ordering banks to lend. It requires everybody coming to a room- the regulators, the banks, the ministry of agriculture, the ministry of finance, the power ministry, the operators (farmers) themselves, the seed companies and the fertiliser companies. If we all come together in a particular part of the country and pick a particular crop, we can de-risk the value chain.
Fuel Subsidy Removal and inflation
Our estimate is that in the short-term, there would be a slight increase in inflation. Inflation is now at 10.5 per cent, we think it will go up to 12 or 13 per cent if the subsidy is removed. We think a lot of the concerns about inflation are a bit exaggerated. A lot of our transportation and significant part of production is driven by diesel, which has been deregulated for a long time. Kerosene has also been deregulated for a very long time. PMS is something that goes to vehicle of a lot of people and the subsidised price of N65 per litre is not available to everyone. So, when the numbers actually come out, people will find out that the inflation fears are exaggerated. We are estimating an increase of up to 200 basis points. But what happens in the medium to long term?
The liberalisation and deregulation of the sector is to get private sector investors into the sector, you will get players who import at competitive prices and not rent seeking and investors whose profits will be dependent on their business model and not on rent seeking. It will also reduce the amount that is spent on importing petroleum products that do not get into the country, but are smuggled across the borders because of the cheap fuel in the country. All the fuel that is consumed in Benin Republic, Cameroun, you find out that they are from Nigeria. So, the point I am making is that while these concerns are genuine, a lot of the concerns are exaggerated because the actual amount of petrol that comes into Nigeria and is consumed by Nigerians, is in my view, less.
So removal of subsidy will have a lot of medium to long-term benefits. Forex reserves will improve because we spend so much money importing petroleum products. If our reserves don’t go up, then everybody believes that the naira is going to be weaker and we will have pressure on the currency. So, the savings from fuel subsidy will increase reserves, reduce the pressure on the currency and improve our ability to contain inflation. We may even have enough reserves to strengthen the naira.