Godwin Emefiele: Rising Shale Oil Portends Risk to Nigeria’s Economy

Godwin Emefiele
Godwin Emefiele

• Says CBN’s policies targeted at the vulnerable
• Sanwo-Olu vows to ‘fight’ power providers in Lagos until supply improves
• Dangote: How do you have economic growth without power?
• Obaigbena urges CBN to intervene in education sector

Obinna Chima

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, yesterday warned that rising volatility in the crude oil market occasioned by the rapid increase in the supply of shale oil by the United States, which has seen its production rise from nine million barrels per day in 2017 to over 12 million barrels per day today, portends great risk to Nigeria’s growth trajectory.

Emefiele, said this at a roundtable session titled: “Going for Growth,” with private sector operators in Lagos.

The event was for private sector operators to express their views and also provide inputs into the roadmap to be unveiled by the CBN Governor for the next five years, in the coming days.

He stressed the need to take actions that would wean the economy from excessive reliance on crude earnings for survival.

“This means that we must strengthen our efforts over the coming years to stimulate growth and create jobs in critical sectors of our economy that will help insulate our economy from shocks in the global economy.

“In doing this, the CBN has recently been caught in a syndrome which we term “The Dilemma of Monetary Policy in Nigeria.”

“Typically, for a nation to be seen prosperous, any citizen of that country will expect the following macro-economic indices to prevail: That is, a low interest rate regime, a stable exchange rate regime and robust reserve position, a low inflationary environment, and lastly, an environment of full employment.

“In fact, I love these and would have less stress in monetary policy if all these are possible. But the question we should ask ourselves at this session is, in the Nigeria of today, are these all possible at the same time?

“Indeed, we are fully cognisant of the diversity of opinions of even some of you in this audience regarding our actions on monetary policy.”

He maintained that the bank would continue to defend the naira, saying that the CBN Act demands that the Bank “defend” the Naira using the foreign exchange reserves.

“In effect, the CBN would be disobeying the law establishing it, if it sits idly by and allow the Naira to be determined wholly by the so-called market forces.

“Second, those who call for floating of the currency betray their willful ignorance of the effects of significant depreciation, however short-lived, on inflation.

“Several empirical analyses have shown that the pass-through of changes in the exchange rate on consumer prices is almost one-to-one. “This implies that for every percentage point depreciation in the Naira, there is almost the same rise in inflation.

“I have also heard a lot of people suggest that all they want is for the CBN to reduce interest rates. In fact, for us at the CBN, achieving a low interest rate regime will give us a great sense of accomplishment.

“Indeed, given our determination to stimulate economic growth, it is obvious that we would want to pursue a policy of moderating interest rates. “Yet, in an environment where inflation recently was a high as 18.72 percent, it would be counter-productive to reduce interest rates because any attempt to ease interest rates under a high inflationary environment will no doubt retard growth.

“While we are delighted that we have been able to fight inflation down to very low double digits, we believe it is still too high for the Nigerian economy. Our goal is to moderate it down to single digits.

“More also, we need to keep in mind that Nigeria’s high interest regime reflects not only the cost of capital, but also the cost of doing business in the country.

“A typical branch of Nigerian bank provides its own security with sometimes permanent police presence, its own electricity supply with several generators, diesel tanks and inverters and its own broad band internet services.

“For banks whose main source of income is from interest earnings, these deficiencies become costs which it must necessarily pass on to borrowers. So regardless of what we do at the CBN, it is important that we realise other aspects of our business environment that promote and sustain high interest rates.

Speaking further, the CBN Governor who just last week assumed office for the second term of five years, said the policies of the apex bank in the past five years have been focused on protecting the purchasing power of the poor and vulnerable persons in the country.

The meeting had in attendance the Governor of Lagos State, Mr. Babajide Sanwo-Olu; captains of industry led by President of the Dangote Group, Alhaji Aliko Dangote; founder of Zenith Bank Plc, Mr. Jim Ovia; the Chairman, ANAP Foundation, Atedo Peterside and CEOs of banks and other leading private sector organisations.

According to Emefiele, the apex bank is very comfortable staying on the side of the weak, vulnerable, and poor masses and protecting their purchasing power.

He argued the central bank’s development finance initiatives and foreign exchange intervention are targeted at supporting vulnerable persons in the society.

“Sadly, while most people in this room may be spared the brutal consequences of inflation, the majority of Nigerian masses and fixed income earners are not.

“The poor masses are the ones that bear the brunt of losing purchasing power of the meagre salaries they receive, ever so infrequently.

“Indeed, given the current resistance to pay increased minimum wage of N30,000, one wonders how the fixed income earner would survive the consequences of inflationary pressure arising from the pass-through from exchange rate depreciation being proposed by the naysayers,” he told his audience.

Emefiele said the task of building a stronger economy was far from complete; with the pace of Gross Domestic Product (GDP) growth still very fragile and badly lagging behind population growth rate of 2.7 per cent. He reiterated the fact that the level of credit to the private sector by financial institutions was still very low.

According to the CBN Governor, domestic industries particularly high employment generating sectors like textile and garment sectors have continued to deal with rampant smuggling and dumping of materials through our borders.

“These challenges no doubt call for action by the monetary and fiscal policies through the implementation of policies; the spirit and letter of which must be respected by all,” he added.

Governor Sanwo-Olu in his remarks, pledged to continue to “fight power providers in the state,” until there is increased power supply to households and firms.

The governor emphasised that making Lagos a 21st century economy requires improved power supply to drive businesses and households.

He pledged to modernise essential services in the state and strive for maximum efficiency in the public sector institutions.

“We are going to do this so that we can become increasingly competitive and innovative. It is important to unleash the potential of the state so as to attract foreign direct investments (FDIs) to the state,” Sanwo-Olu.

He urged the Central Bank of Nigeria to remain vigilant so as to safeguard the economy from external shocks.

According to Sanwo-Olu, there was need for policymakers in the country to positively take advantage of ongoing US-China trade war as well as the Brexit to reposition the economy.

Aliko Dangote on his part, described consumer credit as a vital tool for fighting corruption in the country.

To this end, Dangote urged the CBN and commercial banks in the country to work towards developing consumer credit products so as to encourage low income earners.

“We need to work very hard on consumer lending. It is even going to help the government in fighting corruption especially for the low income earners. If somebody has a paid job and there is consume credit, you can take such credit to buy household equipment and pay for four years.

“We must also do mortgage. It will also help in terms of fighting corruption,” he explained.

He, however, said the biggest challenge in the country was implementation.

“How do you have economic growth without power? Without power there can’t be growth. Egypt electricity increased by 10 gigawatts, which is equivalent to 10,000 megawatts, in 18 months.

“But in Nigeria we have been struggling for 18 years without adding 1,000 megawatts and we have spent about three times the amount Egypt spent. Why? So, I think we all need to be concerned about that. I keep saying that when you look at the contributions to the GDP, the government is only about 17 per cent and 80 per cent is private sector,” he added.

Owing to this, he advised private sector operators to remain committed to contributing to the growth of the economy.

“It is only the private sector that can partner with government to create this. It is not difficult but we must drive the process. No foreigner can invest unless we the locals invest in our country.”

He pointed out that smuggling was causing a lot of harm to businesses in the country, citing Nigeria’s porous border as a challenge.

Dangote said there was need to focus on import-substitution.

Jim Ovia, in his contribution, stated that to engender growth, there is need to get all the fundamentals in the economy right.

“No matter the economic theory we propound, if the fundamentals are not right, it definitely cannot work. If we have the fundamentals right, the common man does not want to know whether interest rate is high or low,” Ovia declared.

The Zenith Bank Chairman also supported Dangote’s call for consumer lending, saying the reason why the initiative has not blossomed in the country was because of inadequate Know-Your-Customer.

Atedo Peterside in his remarks, noted that monetary policy has its limits.

He advised the CBN to ensure that the issue of multiple exchange rate is addressed.

He also said there was need to implement policies that would ensure that inflation gradually drops to about five per cent.

Peterside called for friendly policies that would encourage fledgling entrepreneurs, saying, “when Aliko Dangote and I were in our 30s, we were allowed to grow, but today we are killing the youths.”

He also urged governments in the country to address the issue of multiple taxation.

Herbert Wigwe, the Chief Executive Officer, Access Bank Plc, also said there was need for a conducive environment for businesses to thrive. He called for stability of government policies to enable investors plan long term. He faulted a situation where policies are suddenly changed in the middle of business decisions.

Nduka Obaigbena, the Chairman of THISDAY and ARISE News Network, advised the central bank to extend its development finance intervention to the education sector so as to enhance the quality of graduates that are churned out annually.

This, he said would have a multiplier effect on productivity in the country.

Obaigbena added: “We spend lots of money on school fees and our educational institutions are getting worse.

“What the central bank can do is to consider a framework for student loans, where proper salaries are paid to cutting edge professors so that we can get the quality we need in education.

“And then, you structure the school fees in a payment system that can last 30 years or more. So, it is that intervention in education that can begin to build the next world class innovators and students for Nigeria.”