Godwin Emefiele
I welcome you to this very important event which has been scheduled to allow the organised private sector, not only to air their views but also to provide some inputs into our roadmap to be unveiled in due course for achieving greater growth and job creation in Nigeria.
Given the quality of the important personalities here today, which cuts across the different strata of the Nigerian Economy, I believe that the Central Bank of Nigeria will be able to obtain valuable insights that will shape policy decisions, as we work to support the continued growth and development of the Nigerian economy.
Our goal in participating in this roundtable session is to generate valuable insights from key stakeholders on the role monetary policy authorities could play in formulating and implementing policy measures that will support improved economic growth, as well as the creation of jobs in Nigeria both in the near and long run.
This session is particularly important in light of the challenges that confronted us as a nation, following the massive drop in crude oil prices between 2015 to 2017. The crisis brought to the fore, the challenge an economy could face when it relies on a single commodity for most of its foreign exchange earnings and government revenue. The crisis also underscored the need for measures that will drive productivity in key sectors of the Nigerian economy such as agriculture and core manufacturing. Productivity growth in these sectors are badly needed to insulate our economy from volatilities in the crude oil market and help in creating jobs on a mass scale, given our large and growing population.
In setting the context at today’s session, you will observe that the CBN took a number of actions in the last 5 years to support the growth of the economy and these have helped in achieving the macroeconomic stability we see today with inflation trending down to 11.37 percent from 18.72 in January 2017; exchange rate stability at current levels with considerable convergence and reserves build up to current level of over $45 billion compared to $23 billion in October 2016. Although we had hoped to achieve a lower level of interest rate, this became impossible given the normalisation of monetary policy in the United States and the over 60 percent drop in crude oil prices between 2014 and 2016.
You will agree with me that the consequences of these unfortunate occurrences was a heightened inflationary pressure on the economy and Monetary policy had no option but to embark on a regime of tightening so as to rein inflation. We also deployed measures aimed at supporting improved productivity of the Nigerian economy, by restricting access to foreign exchange on 43 items that could be produced in the country and also strengthened our intervention programs which helped in restarting the flow of credit to critical sectors of the economy.
As part of our interventions, we introduced the Anchor Borrowers Program(ABP); a program that helped to improve access to credit to Small Holder Farmers. Through our intervention programs such as Commercial Agricultural Credit Scheme and the Real Sector Support Fund, we have enabled large agro processors and manufacturers expand their operations, thereby supporting our efforts at improving domestic production of goods.
Whereas these results are reassuring, I think it is fair to state that our task at building a stronger economy is far from complete; with the pace of GDP growth remaining very fragile and badly lagging behind population growth rate of 2.7 percent. Indeed, we are yet to see a substantial increase in credit to the private sector by our financial institutions.
Our domestic industries particularly high employment generating sectors like textile and garment sectors have 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.
Furthermore, the rising volatility which we see today in the crude oil market occasioned by the rapid increase in the supply of shale oil by the United States, and which has seen its production rise from 9 million barrels per day in 2017 to over 12 million barrels per day today, portends great risk to Nigeria’s growth trajectory if we do not take actions that would wean us 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 to prosperous, any citizen of that country will expect the following macroeconomic indices to prevail: i.e. 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 cognizant of the diversity of opinions of even some of you in this audience regarding our actions on Monetary policy. Put succinctly, we have watched some so-called economic and financial analysts through TVs and others through the newspapers say that “to grow the economy and create jobs, the CBN must allow exchange rate to free float, and also allow inflation to rise; while at the same time allowing interest rates to come down.” We have also curiously observed that these analysts have often reached different conclusions from those of the CBN. Again I am not surprised at these views because most have done so with shockingly limited or out rightly incorrect information.
For example, we have watched some armchair analysts demand that the CBN stop “defending” the naira and simply allow market forces to determine the exchange rate. These analysts simply call for the Naira to be floated. To these analysts, let me remind them that the CBN Act demands that we “defend” the Naira using the foreign exchange reserves. In setting out the 5 principal mandates of the CBN, Section 2, Subsection C of the CBN Act 2007 reads and I quote “…maintain external reserves to safeguard the international value of the legal tender currency”. 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 wilful 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.
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 pas-through from exchange rate depreciation being proposed by the naysayers.
What better economic benefit would a young civil servant receive from us than knowing that when she returns to the market every month, she is sure of buying just about the same amount/ quantity of food and other goods she bought the previous month? For me, I’m very comfortable staying on the side of the weak, vulnerable, and poor masses and protecting their purchasing power, because as far as I am concerned, this idea of allowing a free float is both elitist and wrong. My final point on this is that academic thinking and institutional positions on this matter is now shifting in our favour.
For nearly a decade, a brilliant Harvard Professor of Economics kept publishing several papers showing that fully flexible exchange rates do not always lead to optimal economic outcomes. In a December 2017 article titled “The Elusive Benefits of Flexible Exchange Rates”, she concludes the following:
“There is no denying that flexible exchange rates provide valuable monetary-policy independence. But, in a dollar denominated global trade environment, the ability of a floating currency regime to support full employment is severely limited.”
Less than one year after Professor Gita Gopinath published this particular piece, the IMF hired her as their prestigious first female Chief Economist and Director of Research. Indeed, even the IMF now supports some form of interventionist managed float especially for countries that are grappling with difficulties. For instance, at the height of the struggles, Argentina faced with stabilizing its currency, the IMF extended a loan package of about US$57 billion to them, and approved a daily auction of about US$60 million by the Central Bank to defend the Argentine Peso.
The IMF supported this and in fact included this in their press releases for Argentina. So, to these group of arm Chair Experts in Nigeria, I ask: “How could you ever think you are more Catholic than the Pope”.
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.
With the foregoing, ladies and gentlemen, herein lies the DILEMMA OF POLICY MAKING IN NIGERIA. Indeed, I do understand why some may genuinely reach different set of conclusions and proffer different set of advice even when they have substantially correct information. Policymakers must therefore act with certain principles that ground and guide them especially in sometimes rapidly changing global environment. For example, not many people can claim to have foreseen the trade tensions between the USA and China, difficulties with Brexit, policy uncertainty and rapid spread of protectionist tendencies that the world now grapples with.
Ladies and Gentlemen, as leaders and policymakers, we must strengthen our resolve over the coming years to stimulate growth and job creation by putting in place unconventional policies that would help insulate our economy from shocks in the global economy. It is in an attempt to stimulate such discuss that we decided to participate in this session today. I will therefore encourage participants to highlight important building blocks that will lead to greater economic growth in our beloved country. We are eager to listen to your ideas and views on how we can help improve productivity and investments by companies operating in Nigeria; reduce our dependence on imported goods that can be produced in Nigeria; and increase our exports of non-oil goods and services.
Distinguished participants, in closing, I would like to welcome you once again to this roundtable session., I look forward to very robust discussions and comprehensive recommendations that will form part of our roadmap to be unveiled in the coming days with the aim of actualizing our collective intent of ensuring that the monetary policy authorities implement measures that will help drive the growth of the Nigerian economy.
Emefiele, gave the speech at a roundtable session held in Lagos on June 8, 2019
