â€¢External reserves now $34bn as CBN predicts organic convergence of exchange rates
By Obinna Chima
Following the intense weakening of Nigeriaâ€™s macroeconomic environment, resulting in the deterioration of asset quality and rise in non-performing loans (NPLs) in the banking industry, the International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) to consider asking the countryâ€™s lenders to recapitalise.
The Senior Resident Representative and Mission Chief for Nigeria, African Department, IMF, Mr. Amine Mati, gave this advice while presenting a paper titled: â€œCoherent Set of Policies for Greater Exchange Rate Flexibility,â€ at the 2017 Chartered Institute of Bankers of Nigeriaâ€™s (CIBN) investiture, which took place in Lagos at the weekend.
Against the backdrop of low oil prices, dwindling oil revenue, foreign exchange scarcity and a crippling recession, the last two years saw significant deterioration in the countryâ€™s macroeconomic indicators, which exposed the banks to risks.
Owing to this, the banking sectorâ€™s NPLs climbed to as high as 15 per cent.
Mati stressed the need for the banks to remain strong so that they would be able to play their roles in the economy.
He explained: â€œWe believe the banking sector should be strong to support the economy. So it is important we recapitalise the banks to make sure that they are very strong.
â€œThe regulators should try to make sure that the banks operate in line with international standards to be able to withstand any shocks.â€
He, however, endorsed the CBNâ€™s tight monetary policy stance, saying it had helped in gradually easing inflationary pressure and brought about exchange rate stability.
But he urged the central bank to continue in its pursuit of a unified exchange rate, just as he acknowledged efforts that had been made by the CBN in eliminating pressure in the forex market.
He noted that the country exited the recession in the second quarter of the year, driven by improvements in the oil and agriculture sectors.
On the fiscal side, Mati said the drop in the countryâ€™s oil revenue, which according to him accounts for 70 per cent of its earnings, led to an increase in the fiscal deficit.
â€œAs a consequence, Nigeriaâ€™s vulnerability increased,â€ he explained.
Mati acknowledged, nonetheless, that the move by the Nigerian government to substitute its domestic debts with foreign loans, would give banks the opportunity to lend to the private sector.
According to him, â€œPrivate sector credit has remained low because of the attractive treasury bill yields.
â€œIf government borrows less domestically, there would be more space for banks to channel credit to the private sector. There is need to increase tax revenue, even though it takes time to achieve that.
â€œIn terms of structural reforms, improving infrastructure and power would be essential to improve productivity of businesses, especially small and medium scale enterprises (SMEs).â€
Mati also stressed the need for structural reforms in the economy to achieve sustainable growth.
He said: â€œThere are significant headwinds that Nigeria has faced and there are some important steps that had been taken in terms of monetary and fiscal policies.
â€œBut more needs to be done, especially in terms of structural reforms to spur growth as quickly as possible, following the challenges that the country faces.
â€œThe good news is that there is the Economic Recovery and Growth Plan (ERGP).
â€œBut a lot of people tell me that Nigeria has lots of plans, but implementation is sometimes difficult. So Nigeria must ensure it implements the ERGP,â€ he added.
Also, speaking to journalists at the end of the event, the Deputy Governor, Financial System Stability, Dr. Joseph Nnanna, who was one of the fellowship awardees of the CIBN, said the countryâ€™s external reserves had increased to $34 billion, from $33 billion reported last month.
Nnanna assured Nigerians that the stability in the forex exchange market would be sustained, saying that the much-desired exchange rate convergence would take place organically, with the interplay of demand and supply.
The CBN deputy governor explained: â€œThe IMF always talks about the need to have a single rate. The single rate can happen organically or inorganically.
â€œFor us at the CBN, we believe organic convergence is the way to go. Inorganic convergence which is forced, will always produce arbitrage and that is what we donâ€™t want.
â€œWe have brought the exchange rate from almost N500 to a dollar; today it has come down through the continuation of heterogenous policies.
â€œWe didnâ€™t force it down, it came down organically or naturally and that is the way it is expected to be.
â€œWe have achieved stability and the stability is here to stay. Sustainability is already evident as the external reserves are growing. As I speak, it is $34 billion.â€
He added: â€œWhen we had volatility, the reserves went as low as $20 billion. But let me say one thing, Nigeria can make do with a reserves level of $20 billion.
â€œBut it was the press who gave the impression that if the reserves fell below $20 billion, there would be problem. No, there would be no problem. All we need to manage the economy properly are reserves that can cover at least three months of imports.â€
Nnanna described the Investorsâ€™ and Exportersâ€™ (I & E) window as â€œa mighty successâ€, saying it has â€œperformed beyond our expectationsâ€.
â€œWithin a few months of the windowâ€™s introduction, we have seen a volume of over $10 billion. It is a huge success and I believe other countries can copy that from us.
â€œThe convergence is happening slowly. As such, you can give credit to the policy makers that made that to happen,â€ he added.
Some other honorary awardees at the event included the Executive Governor, Central Bank of Liberia, Mr. Milton Alvin Weeks; Managing Director/Chief Executive of Fidelity Bank Plc, Mr. Nnamdi Okonkwo; Managing Director/Chief Executive, Infrastructure Bank Plc, Mr. Kunle Oyinloye; CEO, Citibank Nigeria, Mr. Akin Dawodu; former CEO, Keystone Bank, Mr. Philip Ikeazor; Chief Consultant, B. Adedipe Associates, Dr. Abiodun Adedipe; and Director, Other Financial Institutions, CBN, Mrs. Tokunbo Martins, among others.