Wading through Turbulent Waters

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Obinna Chima examines the first three years of Mr. Godwin Ifeanyi Emefiele as the governor of the Central Bank of Nigeria

The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Ifeanyi Emefiele on June 3, 2017, marked three years in the saddle of leadership at the Bank.
Indeed, the last three years has not been rosy for Emefiele and his team at the central bank as they have had to contend with headwinds that saw the economy plunged into a recession.

The sharp fall in crude oil prices since June 2014, when the CBN Governor took over, led to significant revenue shortfall in Nigeria. The multiplier effect of this as well as the frequent shut-ins and shut-down of trunklines at various oil terminals also worsened the situation for Nigeria’s ailing and mono-product economy and resulted in high inflation, exacerbated foreign exchange (forex) crisis, decline in consumer confidence, among others.

To pursue their objectives, all central banks are empowered to manage their country’s currency and money supply, with a view to delivering specified macroeconomic objectives.
Therefore, in pursuance of this mandate, the Board of the CBN, through the Monetary Policy Committee (MPC) and Committee of Governors, monitors three key prices: the interest rate, the inflation rate and the exchange rate.

Shortly before he assumed the position of Governor in June 2014, the monthly forex inflows into the CBN was about US$3.6 billion. To make matters worse, in the aftermath of the sharp drop in oil price, made worse by falling production volumes in Nigeria, the monthly forex inflows into the Bank dropped precipitously to less than US$700 million per month. Yet, the demand for forex from the market continued to be about US$4.8billion monthly.

Given this situation, the CBN dealt with the supply side of the problem by allowing commensurate depreciation of the currency several times.
Having done this, and bearing in mind the devastating effects of significant depreciations on inflation, purchasing power, government debt service, financial system stability, fuels and energy prices, it focused its attention on the demand side of the market.

In order to address these identified pressures, the CBN had to revisit its foreign exchange policy with a view to positioning it to respond adequately to changing market conditions.
Since June 2014, monetary policy has had to address steadily rising prices and increased demand for foreign exchange.

Focus on Local Production
Worried by the country’s huge import bill as well as the attendant effect on the external reserves, the CBN under Emefiele, in 2015, excluded importers of 41 goods and services from accessing forex at the interbank market.
The move was indeed targeted at encouraging local production of the affected items.
The CBN hinged its reason for the policy on the need to among other things, conserve forex, and ensure stability of the forex market, efficient and transparent utilisation of forex as well for optimum benefit to be derived from goods and services imported into the country.

War against Currency Speculators
As part of its forex management policy, the CBN MPC in November 2014 shifted the band of the official exchange rate from N155/$1 to N168/$1.
Although the move by the CBN MPC ensured temporary stability in the forex market, currency speculators did not lie low as they continued to carry on their nefarious activities. The unabated onslaught of speculators and its resultant pressure on the naira impelled the CBN to carry out another round of currency depreciation with the sole objective of restoring calm in the forex. This once more led to the devaluation of the naira to N197/$1 in February 2015 and also the closure of the RDAS/WDAS forex market, leaving the interbank market as the only official market.

The increasing demand pressure on the forex coupled with the low accretion to the country’s reserves due to weakening global oil price prompted the CBN to redesign a new framework for the management of foreign exchange in a period of declining supply.
Unveiling the new guidelines in June 2016, the Emefiele disclosed that the general operational principle of this new exchange rate framework is that forex currency will be traded in the inter-bank foreign exchange market through the platform of the Financial Markets Derivative Quotation (FMDQ).

Other highlights of the new framework included that the Exchange Rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book and that the CBN would participate in the Market through periodic interventions to either buy or sell FX as the need arises.

A novel aspect of the framework was the introduction of non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System, which according to the Bank would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market.

However, in spite of these measures, the activities of speculators and some noticeable failures in the market mechanism led to further depreciation of the naira. Particularly of concern to the Bank, and indeed the economy, was the fact that the currency speculators held sway in market, just as they colluded with currency traffickers in an attempt to force the CBN’s hand. This resulted to intense pressure on the forex market as the naira weakened to an all-time low of around N525/$1 before the central bank started releasing its arsenals to confront them.

Aggressive Market Intervention
Determined to calm the pressure in the forex market, the CBN under Emefiele in February 2017, emerged with a new policy aimed at increasing the availability of forex in the market and ease the difficulties encountered by Nigerians, particularly retail end-users, in obtaining funds for foreign exchange transactions for Personal and Business Travel, Medical needs, and School fees, all of which fall under the invisibles category. It also directed that all retail transactions are to be settled at a rate not exceeding 20 per cent above the inter-bank market rate.

Following the clearing of a backlog of matured letters of credit at the inception of the current flexible exchange rate system, the CBN promised and indeed began to provide foreign exchange to all commercial banks to meet the needs of both personal travel allowances (PTA) and business travel allowances (BTA) for onward sale to customers.

In order to further ease the burden of travellers and ensure that transactions are settled at much more competitive exchange rates, the CBN also directed all banks to open FX retail outlets at major airports as soon as logistics permitted them to.
In a bid to further increase the availability of foreign exchange to all end-users, the CBN equally reduced the tenor of its forward sales from the hitherto maximum cycle of 180 days to not more than 60 days from the date of transaction.

Between February and May 2017, the CBN has intervened in the wholesale and retail segments of the forex market with about $5 billion, just as it has re-admitted operators in the Bureau de Change (BDC) segment, which receive $20,000 each for onward sale to low-end users.
Currently, the naira trades around N363-370/$ at various parallel market, which shows it is gradually driving towards achieving convergence between the BDC, parallel market as well as rates for retail invisibles.

Development Financing
In terms of development financing, the Bank has continued to act as a financial catalyst in specific sectors of the economy particularly agriculture, in its determination to create jobs on a mass scale, improve local food production, and conserve scarce foreign reserves.

The Bank’s interventions in this regard include: the Commercial Agricultural Credit Scheme (CACS); Agricultural Credit Support Scheme (ACSS); Agricultural Credit Guarantee Scheme Fund (ACGSF); the N213 Billion Nigerian Electricity Market Stabilisation Facility (NEMSF); the N300 Billion Real Sector Support Fund (RSSF); the Youth Entrepreneurship Development Programme (YEDP), the Micro, Small and Medium Enterprises Development Fund (MSMEDF) and the Anchor Borrowers’ Programme (ABP), which has been widely commended as a masterstroke in the unlocking of agricultural potentials in Nigeria.
The Anchor Borrowers’ Programme (ABP) launched in November 2015 has created economic linkages between over 600,000 smallholder farmers and reputable large-scale processors with a view to increasing agricultural output and significantly improving capacity utilisation of integrated mills.

Under the programme, the sum of N40 billion has been set aside from the N 220 billion Micro, Small and Medium Enterprises Development Fund for farmers at a single-digit interest rate of 9 per cent.
As at March 31, 2017 a total sum of N 33.34 billion had been released through twelve (12) Participating Financial Institutions in respect of 146,557 farmers across twenty-one (21) States cultivating over 180,018 hectares of land.

Also worthy of note is the National Collateral Registry (NCR) designed as part of efforts to boost the flow of credit to Micro Small and Medium Enterprises (MSMEs) in the country. The Collateral Registry is a financial infrastructure that allows MSMEs to leverage the greatest part of their assets (movables such as crops, vehicles and machinery) as collaterals for loans for growth. Domiciled in the Central Bank of Nigeria (CBN), the National Collateral Registry is a collaborative project between the CBN and the International Finance Corporation.

State of the Banks
Although the CBN has maintained that Nigerian banks have enough buffers to withstand shocks, in the face of the headwinds in the economy, the industry’s non-performing loans (NPLs) climbed to 14 per cent at the end of 2016, far above the five per cent threshold set by the regulator.
However, Moody’s Investors Service recently maintained its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages in the country will gradually ease.

Moody’s stated that with oil prices and economic activity gradually recovering in Nigeria, it expects banks’ dollar liquidity pressures to gradually ease.
But Fitch Ratings believes that significant financial risks persist in the industry. Fitch in its assessment of the banks’ 2016 earnings pointed out that the healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.

Restoring Investor Confidence
The Chairman of United Bank for Africa, Mr. Tony Elumelu, praised the CBN Governor for restoring credibility, transparency and confidence in the forex market.
Elumelu, who is also the Chairman of Heirs Holdings, pointed out that recent policy initiatives of the central bank under the watch of Emefiele had restored predictability, improved market confidence and significantly added a boost to the value of the national currency, fuelling optimism that the economy would soon rebound from recession.

He therefore, urged Nigerians to cooperate with the bank as it moves to consolidate its policies which are aimed at strengthening the naira in the days ahead.
On his part, the President of the Dangote Group, Alhaji Aliko Dangote in assessing Emefiele’s performance, said the intervention of the CBN under Emefiele saved the economy.

Dangote specifically highlighted the central bank’s intervention in the agriculture and real sectors of the economy, noting that they have been impactful.
Nonetheless, the CBN under Emefiele must continue to work in harmony with the fiscal authorities to steer the economy on a better road, thereby unleashing the potential of the economy, especially its large youth population. It must also ensure that it wins the war over the dreaded enemy of inflation in order to promote small businesses and entrepreneurial spirit in the country.