By Godwin Emefiele
Good morning ladies and gentlemen. I am delighted to be here this morning and I am, particularly thankful to the conveners of The Nigeria – Canada Investment Summit for providing a platform, that can lead to deepen the existing trade and investment ties between Nigeria and Canada. Given Nigeria’s large untapped market size, investors that are willing to invest in areas that can enhance the productivity of our economy, such as in the agriculture, manufacturing and solid mineral sectors, are bound to reap significant gains.
I have been requested to speak on the topic “Nigeria’s Macroeconomic Outlook – What the Canadian Investor Needs to Know.” Nigeria as some of you are aware presents a wide array of investment opportunities for investors seeking good returns relative to other emerging economies. With over 185 million people, Nigeria is Africa’s most populous country as well as its largest economy, followed by South Africa and Egypt. Nigeria also accounts for 47 percent of West Africa’s population and over 65 percent of the GDP of ECOWAS. Nigeria therefore serves as a significant gateway for investors seeking to enter the West African market.
As a nation, Nigeria is blessed with abundant natural resources. It is the world’s 6th largest producer of crude oil, Africa’s largest oil exporter, and it has the largest natural gas reserves on the continent. In terms of solid minerals, Nigeria has over 34 minerals that can be produced in large commercial quantities, such as Iron Ore, Coal, Lead/Zinc, Bitumen, Gold, Limestone and Barite. We are aware of some Canadian companies that are already harnessing or seeking to harness the opportunities in the solid mineral sector as well as the oil and gas sector.
With 70% of our export earnings coming from the oil and gas sector, there is a tendency to view Nigeria as an oil economy. However, this is not the case, as the oil sector constitutes less than 8% of our GDP. Rather the Agricultural sector is the more dominant sector, constituting over 20% of Nigeria’s GDP. It is also a sector filled with immense opportunities as Nigeria has over 39 Million hectares of uncultivated, agricultural land. These opportunities if well harnessed can provide immense value to investors willing to invest in the processing aspect of our agricultural value chain.
With its growing population, investment opportunities are also rife in key sectors of the economy such as ICT, Manufacturing, Solid Mineral and the Service Sectors.
We all recall the events of 2016 in which the resilience of the Nigerian economy was challenged and its vulnerabilities to the oil sector once more revealed. At that time the economy was hit by three major external shocks that shook the fabrics of its existence. They include: Over 70 percent drop in the price of crude oil, which contributes the largest share of our Foreign Exchange Reserves and Federal Government Revenues; Geopolitical tensions along critical trading routes in the world including: the United States’-led sanctions on Russia for its role in precipitating the conflict in Ukraine, Britain’s desire to pull out from the European Union, rising trade tensions between the United States and China, middle-east tensions, faceoff between the United States and Iran, etc. which bore enormous ramifications for global trade and capital flows. The third shock was the end of Quantitative Easing and Normalization of Monetary Policy by the United States’ Federal Reserve Bank which raised the global interest rates, precipitating capital flow reversals in Emerging Market Economies including Nigeria.
As fallouts of these developments, Nigerian economy experienced significant impulses over that period that revealed its structural deficiencies, especially with respect to an undue dependence on oil and the inordinate size of imports. At that time, real GDP contracted for five consecutive quarters, effectively plunging the economy into recession. Headline inflation which was at 9.55 per cent in December 2015 rose consistently, climaxing at 18.72 per cent in January 2017. External Reserve positions depleted from about US$42 billion in 2014 to about US$23 billion at end-December 2016, while domestic currency depreciated continuously, deteriorating from about N185/US$1 in January 2016 to about N525/US$1 in February 2017. Unemployment rose from 6.4 per cent as at Q4 2014 to about 14.23 per cent in Q4 2016. Capital market indices plummeted significantly and all macroeconomic indices were heading south.
These shocks drew attention to the neglect of our domestic non-oil sector ; particularly the agric sector, as well as the fractured financial markets. They underline the need to diversify the economy and to promote indigenous productivity, local talents, and exports. Today, the effects of these global developments continue to impact economic and financial conditions in many emerging market economies like Nigeria.
Regardless of these shocks, Nigeria remains a rich and high-yield destination for investments, with continually improving social and macroeconomic conditions, and a resilient financial sector; supported by brightening outlook and strengthening prospects. A key focus of the monetary and fiscal authorities was on putting in place measures that could reduce our dependence on the oil sector, whilst supporting the growth of other critical sectors of the economy such as agriculture, and the manufacturing sectors.
Brief on the Domestic Economy
Ladies and gentlemen, following series of policy measures put in place by the monetary and fiscal authorities, the economy recorded positive outcomes and began to recover in 2017. Principal among these measures are the appropriate tighten of monetary policy stance , the introduction of the Investors-Exporters (I&E) Window in April 2017, which allowed investors to bring in foreign exchange at the prevailing market rate, and also allowed investors to repatriate 100% of their profits from the same window. This measure aided improved investor confidence in the Nigerian market and supported inflows of over $55bn into the Nigerian market between 2017 and 2019. We also implemented various intervention programmes aimed at supporting growth in the real sector, as well as restricted access to forex supply on 43 items that could be produced locally. These measures have aided improved productivity of our manufacturing sector, as the CBN PMI index has remained in positive territory for 31 months following the 2016 recession. Through our Anchor Borrowers Program through which small holder farmers had access to finance for their agric inputs, we have exponentially grown our agric outputs and indeed , Manufacturers have served as credible off takers of the produce from our rural farmers, supporting improved productivity in the agriculture sector as well as the domestication of the supply chain of several manufacturing firms.
In other to improve the effectiveness of monetary policy interventions, we have intensified our efforts at building a more financially inclusive society through an intensive financial inclusion drive. This has led to the deployment of super agent networks as well as payment service banks in various parts of the country, supported by fintechs, banks and telecommunication firms. This measures are helping to provide financial services to underserved areas in the country and in reducing our financial exclusion rates. Others measures we have embarked upon include improving access to credit through adjustments to the loan/deposit ratio of banks, and in developing a credit assessment portal, which will improve access to credit for people with good credit standing, while penalizing delinquent borrowers. We have also recently automated our NXP portal which will reduce the time it takes to process critical export documents from 2 weeks to less than 30 minutes. This measure will significantly improve efficiency for firms primarily focused on the exports markets. On the fiscal side, we have the various Presidential initiatives aimed at boosting domestic business environment (including the initiative on the ease of doing business), dismantling regulatory bottlenecks, enhancing competitiveness and supporting the growth of the industrial sector.
Distinguished guests, these countervailing efforts have continued to yield immense results, as seen in the trajectory of key macroeconomic indicators, and the cyclical recovery of the economy since the 2016 recession. For instance:
· GDP: After five quarters of uninterrupted GDP contraction (beginning from 2016Q1), the economy exited recession during the second quarter of 2017 and has remained in positive territory for nine consecutive quarters. Today, driven by the non-oil sector, real growth stands at 1.9 percent in Q2 2019 down from 2.1 percent in Q1 2019. Growth is projected at 2.3 percent in 2019 compared to 1.9 percentage growth recorded in 2018. Although growth remains tepid and below potential, we believe that the effects of our intervention programmes and the diversification efforts of the government together will strengthen the growth numbers in the near-to medium-term.
· Inflation: Following a period of rising inflationary pressure, the Nigerian economy recorded continued moderation in the inflation rate, from 18.7 percent in January 2017 to to 11.28 percent in September 2019.
· Exchange Rate: The exchange rate has remained largely stable at the FX markets with evident convergence across all segments. Since the introduction of the investors’ and exporters’ FX window, the further liberalization of the FX market and other cocktail of FX policies, we have seen a significant appreciation of the Naira from over N525/US$1 in February 2017 to about N362/US$1 today. In addition, we have seen stability in the rate for nearly three years complemented by convergence across various windows and segments of the market;
· FX Supply Improvement: Since the establishment of the I&E Window, we have recorded over US$50 billion in autonomous inflows through this window alone. This reflected the effect of the increased transparency which that window accorded the FX market and its benign impact of improving investor confidence and business sentiments;
· FX Reserves Accretion: Our reserves have recovered significantly from a low of about US$23.6 billion in October 2016 to over US$44.7 billion as at end-June 2019 before easing to about US41.3 billion today. The FX reserves position does not only reflect increased inflow but also our shrewd FX demand management strategy since 2015. Noticeable declines were steadily recorded in our monthly food import bill from about US$665.4 million in January 2015 to about US$160.4 million as at October 2018;
· BOP: The overall Balance of Payments account has remained positive since the fourth quarter of 2016, driven largely by positive balance of trade. From a negative of outcome of US$6.45 billion in 2014 trade balance rose steadily US$13.15 billion in 2017 and US$22.34 billion in 2018. This reflected both improved export revenue and contained import bill.
Balance of Trade (US$ billion)
Comparison with other Emerging Markets
Juxtaposed with peer economies, Nigeria has fared comparably well since the 2016 downturn. For instance:
Nigeria did not perform badly vis-à-vis other emerging market economies like Brazil, South Africa, Turkey, and Argentina, that had similar economic experiences. We have been able to keep real GDP growth positive and have avoided a double-dip recession in contrast to some other emerging markets economies.
Akin to key markets like Brazil, Russia and South Africa, and Turkey, Nigeria slipped into a recession in 2016. While we exited this recession in 2017Q2 and have maintained a recovery trend, countries like South Africa and Turkey have since recorded a double-dip recession with re-occurrences in 2018.
In Argentina, though the economy was in recession throughout 2016, moderate upticks which peaked at 1.9 percent quarter two of 2017 heralded a recovery. However, the Argentine economy shrank by 4.0 percent in 2018Q2, bringing the country to the brink of another recession.
Given rising trade tensions between the US and China, implications of Britain’s exit from the European Union, along with a slowdown in global growth, capital outflows from emerging markets have increased in recent months. These huge capital flow reversals have led to immense pressures on exchange rates, FX reserves, and sharp losses in several emerging markets.
While Nigeria has not been immune to the effects of the slowdown in global growth, net outflows have been moderate due to our policies that ensured the stability of the I&E FX rate. It was likewise reinforced by attractive yields compared with other key emerging market economies. Investors are also sure that they can exit their positions if they want, which has been crucial in persuading investors to come into the Nigerian financial market.
Outlook for the Nigerian Economy
Distinguished ladies and gentlemen, in the light of the current developments in the global and domestic economies, and based on extensive simulations, the Bank is of the view that the short-term outlook of the Nigerian economy remains positive:
· GDP: With benign oil price developments and continued efforts at driving indigenous production in high-impact real sector activities, especially agriculture and manufacturing, the recovery of the GDP is expected to strengthen in the medium-term. This would be buoyed by the anticipated dividends of the diversification drive, and the development finance efforts of the Federal Government. From 1.91 percent in 2018, growth is expected to strengthen to nearly 2.3 percent in 2019 and over 3.0 percent by 2020;
· Inflation: Inflation expectations which rose in anticipation of 2019 election-induced liquidity injections has largely been contained following a continued moderation of inflation. For the rest of 2019 and towards mid-2020 inflations are expected to fall, albeit slowly. Though we do not expect a single-digit outcome by end-2019, due to inherent inertia, it would traverse towards the bank’s 6–9 percent tolerance range by 2020;
· Exchange Rate: The continued risk-balancing disposition of foreign investors and the associated capital flow reversal in some emerging markets could exert some pressures on the exchange rate, even as the prospect of interest rate hike in the US wanes. Regardless, the stability and convergence of the naira exchange rate is expected to continue in the short- to medium-term. Gross stability is projected in the FX market given increased oil related inflows, reserve sufficiency, and curbed import bill;
Our Vision for the Next 5 years: A Roadmap
Distinguished ladies and gentlemen, on the backdrop of global shocks which the Nigerian economy recently endured, the underlying structural challenges, and the prognosis of medium-term outlook we have drawn-up a roadmap for the next 5-years to help place the economy on a path of sustainable and prosperous recovery. Accordingly, the CBN will continue to work closely with our fiscal authorities, to target a double-digit growth by the next five years and at the CBN, we are committed to bringing down inflation to single digit rates, while accelerating the rate of employment.
Put succinctly, our priorities at the CBN over the next 5 years are the following; First, preserve domestic macroeconomic and financial stability; Second, foster the development of a robust payments system infrastructure that will increase access to finance for all Nigerians thereby raising the financial inclusion rate in the country; Third, continue to work with the deposit money banks to improve access to credit for not only small holder farmers and MSMEs but also consumer credit and mortgage facilities for bank customers. Our intervention support shall also be extended to our youth population who possess entrepreneurship skills in the creative industry.
Ladies and gentlemen, the Nigerian economy is on the path of recovery. Relative to our peers, the favourable economic outcomes and strengthening outlook is traceable to the timeous adoption of some unconventional policies . The federal government has made strides with institutional and governance reforms, including implementation of the Integrated Financial Management and Information System and the Integrated Payroll and Personnel Information System. The enactment of the Secured Transactions in Movable Assets Act 2017 and the establishment of the National Collateral Registry have institutionalized and widened coverage of collateral to stimulate lending to small and medium enterprises and improve access to credits.
The CBN has been able to reduce inflation, build our FX reserves, maintain FX market stability, and foster real growth. Nonetheless, challenges still remain. The pace of population growth at about 2.7 percent still outstrips real growth rate while inflation is outside our tolerance band. Unemployment rate and incidence of poverty remain at unacceptable levels. We are determined to aggressively reduce unemployment levels through initiatives that will spur credit growth, create jobs on a mass scale in the agricultural sector, reduce imports of goods that can be produced in the country and keep our industries alive again. We are truly determined to achieve these because if we do not kill unnecessary imports, imports will kill us all. This is because , when we import, we export jobs. Without jobs, we promote crime, kidnapping and terrorism. The CBN under my watch will use monetary policy to rebalance our imports, promote jobs creation and lay a solid foundation for a double digit growth in Nigeria.
The CBN understands the importance of exchange rate stability (rather than its level) for price and monetary stability as well as its ramifications for overall macroeconomic stability. Accordingly, the Bank will continue to ensure that stability is maintained in the FX market. In the medium- to long-term, the CBN will gradually but steadily continue to ensure that the market system of price determination applies in the FX market. The I&E window will be sustained along with other initiatives that have proven to be successful.
The Bank will also ensure greater access to FX and will continue to boost confidence in the FX market. Monetary policy will remain proactive, appropriate and research-driven with robust forward guidance elements. The Bank will continue to creatively accommodate the needs of the various end-users, particularly, manufacturers and other priority stakeholders in support of the macroeconomic objectives of creating employment, making the economy competitive and promoting growth. Development finance initiatives designed to raise domestic production, stimulate non-oil export and increase foreign exchange earnings will also continue.
Most importantly, we will continue to compel banks to undertake their statutory licensed roles of financial intermediation. In this regard, the recently announced policy to raise the domestic loan-deposit ratio from 57 percent to 60 percent by end-September and to 65 per cent by end-December 2019 would be sustained, intensified and resolutely implemented. This we believe will help to support greater growth and improved investment into the Nigerian economy. I am optimistic that our friends from Canada will work with us in leveraging their strengths towards harnessing some of the immense gains available in the Nigerian market, which will be mutually beneficially for both nations.
I Thank you all for your attention.
*Being the full text of the presentation by the Governor of Central Bank of Nigeria, Mr. Godwin Emefiele, at the 2nd Nigeria-Canada Investment Summit, Abuja Monday