Emefiele: With Stable Exchange Rate in Nigeria, Businesses Can Plan

Godwin Emefiele
Godwin Emefiele

At the just concluded IMF/World Bank Spring Meetings in Washington DC, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, during an interactive session with some foreign investors and officials of leading investment banks, spoke glowingly about the outlook of the Nigerian economy and efforts by the central bank and the President Muhammadu Buhari-led federal government to ensure that the economy remains on the path of growth. Funke Olaode, Shola Oyeyipo and Martins Ifijeh who were there bring the excerpts:

Economic Growth

Three years ago, in this same Washington, with some of the problems facing us in Nigeria at that time, it was difficult for us to stand confidently to tell the people what we are doing. People did not believe us. They thought we were jokers and until we decided to do what they think is right. We were heading in a completely different direction, but I am happy today that the story is different and people are applauding what we have done in Nigeria. A couple of days ago, the International Monetary Fund (IMF) Article IV was released and unlike the IMF, we saw them applauding Nigeria’ policies and saying that we have done what they think is right and that what they can encourage us is to continue to do what is right to take our country even to greater heights. The Central Bank of Nigeria is doing a lot to drive economic growth and reduce inflation in Nigeria.

External Shocks

Between 2014 and 2018, the global economy witnessed several adverse shocks, three of which were significant in shaping the trajectory of the Nigerian economy. First, is that during this period of the shock, we saw rising geo-political tensions. I am sure some of you will remember that some of the geo-political tension we saw at this period included the United States led sanctions against Russia arising largely from the annexation of Crimea and it created tension between Russia and Ukraine.

Another aspect of tension that we saw or that we are still seeing till today is the US-Iran issues, and thirdly, the Brexit issues. Some of these are very serious geopolitical tension among different parts of the world. Secondly, we also saw almost about 60 per cent cut in crude oil prices which exposed the structural vulnerabilities of oil-dependent countries like our own. For instance, in July 2014, global crude oil prices began a sharp decline. The price of Bonny Light Crude oil flowing from as high and $150 per barrel sometimes in 2014, to as low as $31 per barrel sometime in January 2016. Thirdly, another shock that affected our economy had to do with the US Fed’s normalisation policy, where rates began to go up and it affected the reversal of flows from the emerging markets, including Nigeria. I think the next question we need to ask ourselves is what was the impact on the Nigerian economy? For Nigeria, the most important external factor was the drop in commodity prices. And the countries that are dependent on crude oil for over 60 per cent of government revenue and over 90 per cent of foreign exchange inflow meant that shocks in the oil market were transmitted entirely to the economy via the forex market as manufacturers and traders who require forex to purchase their input as well as goods were faced with depleting supply of oil revenue in the country.

We also saw that at that time, average inflows of foreign exchange into the country fell from as high as $3.4 billion to as low as $1.4 billion in September 2016 and indeed, at some points in 2017, it came down to as low as $500 million. A decline in foreign exchange earnings was further complicated by foreign capital flow reversal from emerging market due to the interest rate hike in the United States.

Effects of Headwinds

As a fallout of the headwinds caused by the negative oil price shocks and its attendant spill over effects on the domestic economy, the exchange rate at the parallel market fell from about N197 to a dollar, indeed to as low as N525 in January 2017. Inflation had risen from nine per cent in January 2016, to as high as 18.72 percent in January 2017. Our external reserves had dropped from about $31 billion in April 2015 to as low as $23 billion in October 2016.

As a result of these shocks, the Nigerian economy unfortunately went into recession in the first quarter of 2016. This indeed was a challenging period for us and it also called for a major reflection on the direction the country had to pursue as a nation. We began to ask ourselves at that time, should we continue on the path where our country’s progress is determined by a change in the price of crude oil, such that once there is a change, we begin to run around for help or when prices go up we begin to celebrate? Is that the kind of country we desire for ourselves or should we set a new course for our country where economic progress and job creation is determined by the productivity of Nigerians as opposed to an economy driven by consumption of imported items? Should we be importing everything that we eat and like the president normally says, or should we eat what we produce or produce what we eat as a country?

Emphasis on Domestic Production

After asking ourselves these questions, the predominant view at the central bank at that time was that as a country, we ought to place stronger emphasis on enabling the build-up of a productive base for the country that will support growth in the critical sectors of the economy.

As a result of this paradigm shift, we decided to institute several measures as part of our efforts to enable the Nigerian economy recovers from recession. In the area of monetary policy, we decided to embark on an era of tightening, which culminated in the increase in the Monetary Policy Rate from 12 per cent to 14 per cent in June 2016, until it was recently lowered to 13.5 per cent. This decision was expected to weigh in on inflationary pressures that will result from the exchange-rate-pass-through to domestic prices and ensure that inflation expectations are well-anchored. It was also expected to set off capital-inflows to the country, which would improve reserves.

Another policy decision we took was to say, what should we do to conserve foreign exchange? We introduced demand management policy because at that time, having adjusted the exchange rate; normally in economy, they tell you it is the combination of demand and supply that will determine price. But having adjusted price from N197 and it was still going, we said let us look at demand management. And in the course of demand management, we took some difficult, tough and bold decisions that had to do with the items we are importing into the country and in some of the sessions, I said: “If you say you don’t have reserves, what are people importing into the country? I said give me the list of items that we are importing into the country that we can produce and this was what gave rise to the issue of the 41 items.  We felt there was a need for us to reduce the size of our import bill by making sure that those items we can produce are produced locally. So, we reduced access to foreign exchange for the importation of some of these items.

Exchange Rate Stability

In the area of supervision, the weakening of the naira naturally resulted in weak balance sheet for Nigerian banks and an increase in their non-performing loans (NPLs). Having introduced the demand management, we took a number of other policies that we felt should help to boost the supply of foreign exchange into the country but of course, the most potent of this was the establishment of an importers and exporters window. That window was introduced in April 2017 and it was a strategy to further liberalise the market with the introduction of these windows. This step was designed to increase transparency in the market because the market players at that time, particularly our friends-investor community – who had a lot of doubts about the level of transparency in the market. And we felt there is the need to establish a market where you will not find the hand of the CBN; people should be free to bring in foreign exchange into the country and take them out at will, but that the CBN, in line with the foreign exchange management policy, can only come in at some points to intervene, either by supplying dollars into the market or buying dollar from the market to keep the price at the level that we think is within acceptable thresholds.

Development Finance

In the area of development finance, we increased our lending to the agricultural and manufacturing sectors through targeted interventions to micro, small and medium scale enterprises (MSMEs), making sure that small holder farmers have access to finance because that was the issue at that time. I am sure some you are aware of the Anchor Borrower’s Programme which was designed for poor farmers or people who live in the rural communities and want to do farming, but do not have the seed capital for it. We needed to put in place a mechanism for them to access finance, and I am sure that the introduction of the Anchor Borrower’s Programme has resulted in improving the wealth in our rural communities today. We have seen increase and astronomical rise in the agricultural output in Nigeria; in rice production, in tomatoes, even in fish, sugar, maize and other items. At that time, the import bill was about N1.3 trillion annually, but luckily, as a result of these policies that we introduced, the import bill has reduced quite drastically. What were the results of these measures that we put in place? Yes, we admitted that it was a very painful period; but there was the need for our people to understand that the pain will be for a very short period and that in the long run, our people will benefit from it.

Exiting Recession

Consequently, after about five consecutive quarters of uninterrupted Gross Domestic Product contractions beginning from the first quarters of 2016, eventually, Nigeria was able to exit recession in second quarter of 2017.  The recovery has been sustained for seven consecutive quarters and the pace of quarterly GDP growth has improved from 0.5 per cent during the second quarter of 2017, to 2.38 per cent during the fourth quarter of 2018. Admittedly, we would say that the growth rate looks fragile if compared with the traditional growth number that Nigeria normally displays, averaging at that time between five – six per cent and in some cases seven per cent, but we are happy that at least for seven consecutive quarters we have shown positive growth numbers for Nigeria.

Nigeria as a Growing Market

At IMF here, it was admitted that growth has been weak from the last quarter of 2018 and will remain weak up till around the end of the first half of 2019, but that by the third quarter of 2019, growth will begin to accelerate again. It was also admitted that the growth we see will be coming from emerging markets and countries like India, China, and Brazil. In Africa, Nigeria was mentioned as a country that will contribute to improvement to global growth in 2019. I felt very delighted that Nigeria was mentioned. What does that mean to me? It means that we are doing something right and that all we needed to do is that with a lot of tenacity we can even do better and one feels encouraged that you are on the right path and we can continue to do what we do.

As a result of all these policies we have introduced, like I said earlier, inflation that had risen to 18.72 per cent in January 2017 currently stands at 11.3 percent. In the area of exchange rate, since the establishment of investors and exporters windows in 2017, we have recorded close to $35 billion in autonomous inflows throw this window alone and as a result, exchange rate pressures eased considerably across all markets as the rate converged today at about N360 to a dollar and distortive premium almost today eliminated.

At some point, the rate at which the exchange rate was stable, people started to ask why? I asked them if they saw my hand anywhere. That is because the market players had developed confidence in the market; hence the rate is hovering between N357 to N361 to a dollar. Now, businesses can plan, people can then determine the price of their products and then know what they should be importing.

Our reserves had declined to $33 billion, but with the implementation of all the tools mentioned above, it was sometime in 2018 around $48, billion and now we are able to provide dollars to those going out of the country. Today, our reserve stands at about $45 billion dollars which we are happy about, and we feel with the confidence Nigeria currently enjoys, the reserves will go up before the close of this year.

The government’s Anchor Borrowers programme ensures that Nigeria emerges from being a net importer of foods such as rice, to becoming a major exporter of rice; supplying key markets in neighbouring countries. For instance, the data from the Thailand Exporters Association indicates that in 2012, about 1.2 million metric tonnes of rice was exported to Nigeria, however, in 2016 which is the first one year of the implementation of our anchor borrowers scheme, rice import to Nigeria had dropped to less than 1000 metric tonnes. Activities in the manufacturing sector also witnessed a significant improvement between august 2016 and as the Manufacturing Purchasing Managers’ Index grew in 23 consecutive months, from 42 points in August 2016, to about 57 points in February 2019. This development was attributed to the sustained supply of foreign exchange and the stability of the naira.

We are aware that in order to ensure sustainable growth, efforts must be made to address factors that constrained growth of our economy. The CBN is improving access to credit for underserved Nigerians through the set-up of national collateral registry and the passage of the credit bureau act. And under this initiative, small and medium businesses are able to provide valuable assets such as equipment and livestock as collateral in other to access capital from institutions which play an emphasis on assets. And as a result of these initiatives in addition to other reforms by government, Nigeria moved up 24 points in 2017. Close to 70 per cent of Nigerians do not have access to financial services, hence the CBN introduced a series of steps to have a financially inclusive society, which includes the agent banking guidance and shared network facility, both of which are meant to deal deepen penetration of agent method in underserved locations across Nigeria. The recent launch on the Payment Service Bank in October 2018, was an additional step in leveraging on the agent networks of non-entities such as fast moving consumer goods, mobile network operators, etc to underserved communities. We are happy because I remember about 18 months ago, Bill Gates mentioned that the level of financial inclusion in Nigeria was 48 per cent and they were concerned that Nigeria was not making progress. We went to work to ensure we meet 2020 target of 80 per cent. As a result of the actions we have taken, our level of financial inclusion as at last week has improved from 48 per cent to 64 per cent in the space of 18 months. I feel more confident that by 2020, we should certainly hit 80 per cent mark we had set for ourselves.  In doing this, it is important to look at how we faired as a country during the period of this crisis relative to some other emerging markets. Nigeria has managed to keep real GDP growth positive and has managed double-digit recession in contrast to other economies with similar challenges.  Following the conduct of elections in February, between January and now, we have seen close to $5 billion that has returned into the country. Normally, what you find during elections is that you will continue to find a lot of outflows from the country, but this time, as a result of the actions we have taken, we saw that during the period of the election, rather than funds flowing out, it flowed in, and we felt so happy.

What we are saying is that a lot of work has been done, a lot of work still needs to be done but in the midst of this, we are saying Nigeria is open to business and investors. We will continue to work tirelessly to boost the economy of the country. Notwithstanding the impact of the recession, Nigeria’s economy still remained the biggest economy in Africa. By the size of our GDP with a very well diversified economy across different sectors such as manufacturing, the central bank and the federal government are open to foreign investors. Investors should be assured that their investments in Nigeria will be duly protected by the authorities as they also have various advantages they can provide for our economy, human capital and technological know-how.