Parallel Market Can’t Be Used to Determine Naira Exchange Rate

Godwin Emefiele


Citibank, last week, organised an investor conference call titled: “COVID-19 Economic and Budgetary Update”, which featured four top government officials. During the event that lasted for an hour and 15 minutes, the Nigerian officials spoke about fiscal and monetary policy responses since the outbreak of the virus in the country as well as efforts to reflate the economy. They also expressed optimism that with the right dose of measures, the damaging impact of the deadly virus on the economy and livelihoods would not be severe. Obinna Chima, who monitored the event brings excerpts from the presentations as well as responses to questions by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, and the Central Bank of Nigeria Governor, Mr. Godwin Emefiele

Nigeria’s Gross Domestic Product

Like some of you already know, during the first quarter of this year, GDP was at 1.87 per cent as against what most people had predicted. So, for us, it was a pleasant one because if you imagine what happened in other economies, whether developing or developed, most of them suffered contraction in output growth, but we were lucky that we saw a positive growth. Of course, the reason it was positive was because we had actually gained some momentum in growth into the fourth quarter of 2019, and that momentum had continued into January and February. Also, in March when COVID-19 started, the impact didn’t come quite fast as some would have thought it would be. So, that was the reason why we saw a positive growth during the first quarter. So, because of the adverse consequence of the COVID-19, we do not agree with analysts and those who are looking at Nigeria’s GDP. Yes, second quarter would be bad in terms of growth.

So, we do expect that there would be negative growth during the second quarter of 2020, but for third quarter, some have also projected that it would be negative and that, that would unfortunately take us into technical recession. But some of you that listened to our last Monetary Policy Committee press conference after the meeting or read the communique, would have known that some of us at the Monetary Policy Committee feel that if all hands are on the deck and we all work together as we have been doing on the monetary and fiscal policy side, we might be possible for us to escape a contraction during the quarter of 2020, which would make the economy not to go into a recession. But, even if those who are pessimistic win in their prediction, we feel that the contraction would be somewhat minimised. But we are very positive that even if it happens, by the first quarter of 2021, we would reverse the situation to positive growth.

Whereas those who are forecasting for 2021 have predicted a contraction by four per cent for 2021, we are not that pessimistic and we think that if we get aggressive on our job and what we are doing in terms of policies that are being put in place to grow the economy, we might be lucky not to have a negative growth. Let me say that this positive expectation is anchored on the proactive policies of government in response to Covid-19, including the combined N3.3 trillion stimulus that have been put together by the CBN to support the Nigerian economy and all sectors. Now, we are taking about the healthcare, pharmaceutical, agriculture, SMEs, household loans and manufacturing sector, where we have put different policies or stimulus packages that would help turn the situation around for the economy.

Inflation Expectation

We saw a remarkably stable inflation rate in the last one year, having hovered around a one per cent point variation, from 11.37 per cent in April 2019, to 12.34 per cent in April 2020. Despite supply shocks as a result of COVID-19, price increases have been recorded in 2020. Our outlook on inflation is for a backward trend during the third and fourth quarter as we see improvement in productivity in the course of the year.

Exchange Rate

We saw significant drop in crude oil prices and everybody panicked as it got to as low as $12 per barrel during the bad days. So, with the significant drop in crude oil, forex inflow as well pressure, particularly from our foreign portfolio investors (FPIs) to safe haven, which led to a sizable currency depreciation. So, there was movement by about 15 per cent, from about N305 to a dollar, to an official rate of about N360 to a dollar. And the more market determined rate, which is the Investors and Exporters’ window has stabilised at about N388 to a dollar since the last two months. The expectation is that liquidity would continue as forex inflows resume with the recovery in the price of crude oil and capital flows. Now, even if you take that aside, you will all see that we have been able to access $3.4 billion from the International Monetary Fund (IMF), but we are expecting about $3 billion from different development partners and that is expected to shore up our reserves. As we speak, our reserves is slightly above $36 billion, which is a comfortable level to support the economy and all obligations that would come that requires forex.

External Reserves

Spillover from global shocks implied that reserves have also been under pressure. Although it reduced from about $44 billion in June 2019, to about $36 billion as of today, it is more than adequate to cover imports. The outlook is that as oil prices recovers and inflows improve and of course, whether we like it or not, we have to consider inflows from our development partners, we believe that our reserves accretion would commence.

Balance of Payment

Also, as a result of weakened global activities and significant compression in export earnings, our Balance of Payment (BoP) went into negative territory. But we still believe that with all the policies being put in place by both the monetary and fiscal side, to reduce imports and also encourage exports, we believe that BoP would return to positive numbers in the course of 2020.

Health of Banking Sector

The banking sector remains strong and resilient as indicated by financial sector indicators. For instance, capital adequacy ratio of the industry stood at 14.9 per cent as at April 2020, from about 14.5 per cent at the end of December 2019. The minimum expected is 10 per cent. Non-performing loans (NPLs) is slightly above five per cent, with minimum threshold standing at about 6.6 per cent as at April 2020. But, compared to 11 per cent as at April 2019, we think that is a very good position and we are determined to ensure that everything is done to continue bringing down the NPLs. Liquidity ratio of the industry was about 38.4 per cent as at April 2020, from about 45 per cent as at December 2019. With the expected minimum being 30 per cent, then we think 38.4 per cent is good enough, given the fact that we are putting in place policies that would encourage banks to lend. The sector is showing strong growth.

Total assets of the banking industry as at April 2020 stood at N46 trillion, which was an increase of about 18 per cent between April 2019 and April 2020. We see ample liquidity buffers for the sector, even with the over N10 trillion maintained today in the cash reserve balances of the CBN. There has been strong growth in the sector as a result of central bank’s policy. Under our loan to deposit ratio (LDR) policy, total gross credit increased over N3 trillion to about N15.5 trillion at the end of May 2019, to about N18.6 trillion as at the end April 2020. The credit growth was largely recorded in manufacturing, consumer credit, general commerce, information and communication and agriculture. And of course, we also saw interest coming from borrowers because of reduced lending rate.

On the issue of open market operation (OMO) bills, the policy has improved banks’ funding level, which is our view, some may disagree. That is because monies that ordinarily ought to have been invested in OMO bills, as a result of the LDR policy, we have seen over N5 trillion on the balance sheet of our banks. Complementary measures are also being taken to ensure that NPLs are managed through our global standing instruction policy. Some of you would know what this means. In order to reduce the number of NPLs in the industry, we came up with the policy that if you are a borrower of a prospective borrower who intends to access a loan in a bank, you would sign an agreement guaranteeing that you would pay your loan and that if for any reason you want to abandon the loan and go to another bank and you are reported to the Credit Management System, the CBN would have the mandate to go round and scan our name using your Bank Verification Number and wherever you are having credit balances, we would set off the credit balance against the loan that you took from the bank. That is what we call a global standing instruction policy and this has been working very well.

COVID-19 Interventions

Regarding what we have done since the COVID-19, immediately the virus set in sometime around March, we unveiled a package of facilities for the industry to support the SMEs and household businesses that were adversely impacted. We put in place a N50 billion intervention fund and those loans are being reasonably drawn at this time because who are affected have been able to attract fund. We also unveiled a N100 billion facility for the pharmaceutical and health practitioners and companies for them to re-tool or set up new lines where drugs can be produced and our hospitals can be in a position to take care of the health needs of our people. After that, we also unveiled a N1 trillion facility to support companies in the agriculture and manufacturing sectors. We also have other policies we have in place to help meet some of our interventions to support under a PPP arrangement, under some structured financial packages to support infrastructural development in the country. Under that we have about N1.5 trillion to N2 trillion available. From April 2019 into March 2020, all intervention facilities are to be accessed at five per cent rather than nine per cent, just to give borrowers some lease of life. We have also been able to engage the banks to grant some form of forbearance to those companies that are adversely impacted by COVID-19, for the restructuring of their loans or to grant them moratorium, so that they can be alive to continue to service their facilities. Based on this, we believe that NPLs would remain moderately under control.

Exchange Rate Unification

What we mean by exchange rate unification is moving towards the Nigerian Autonomous Foreign Exchange Market (NAFEX). NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars. That means that whether you are a business man, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars you can come to the market. Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business does outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX. Now, talking about the parallel market, we have always said that the parallel market, or what people always refer to as the black market, is a market for people who want to do dealings that are not recognised by the authorities.

Unfortunately, you find out that some people who do not want to procure the type of documentations that are required would sometimes rush to that market. But we have used the period of this pandemic to prove that anybody dealing in that market today is dealing in an illegal business. I give you an example: there is a global lockdown right now, particularly on travels and airlines are not flying. So, there shouldn’t be any demand for forex in that market. Notwithstanding the fact that airlines are not flying and there is lockdown, you still find that some people are dealing in that market. So, we are not going to be talking about the unification of our exchange rate around rates for people who are dealing in corrupt practices. Everybody who wants to buy or sell forex is allowed to deal through our NAFEX market. That is the market that is recognised and that is why we are saying unification is going to be around the NAFEX.

Talks of Forex Scarcity

As a result of the pandemic and the drop in crude prices, naturally we have been under pressure. But the fact that reserves still remains above $36 billion, I would imagine it is enough to make somebody feel comfortable and want to do business in Nigeria. You all know that as a result of the pandemic, all manufacturing supply chains have been shut down; and if manufacturing chains have been shut down, we wonder why people would still be talking about opening fresh LCs at this period. So, when anybody comes today and tells us they want to open fresh LCs, we begin to wonder the motives behind that. However, we do recognise that there are some maturing obligations either for LCs or for bills and we have said that notwithstanding that the LCs and bills of transactions are bilateral contract between the exporter and importer, that the CBN and federal government stand ready to ensure that where there are forex shortages, that we would come in to support the market. So, when somebody says he can’t get dollars to meet maturing obligations or matured obligations, I would want that person to come out. Again, I must recognise that as a result of the pressure where you find people trying to front-load their obligations or the foreign portfolio investors who just want to go out, we are saying we would appreciate if people go out in an orderly manner. When we had similar crisis in 2016, I told everybody to be patient and they were patient and everybody was paid. There is nobody who would say he lost any amount from Nigeria. I am saying same thing now. There is no need for anybody to worry and I can guarantee that everybody would pay.

Import Bill Reduction

In the last four years, the government has been doing everything possible to reduce the size of its import. And even now, we are doing more to ensure that we reduce the size of our import and encourage export of our goods. I am sure in the next few weeks or more you would hear more about what we shall be unfolding to make sure we reduce import. We are making intervention funds available for people who want to go into large scale agriculture. We do know that food importation makes up a sizable chunk of our forex and we believe that if we encourage people to go more into agriculture, large scale agriculture, we would achieve a reduction in import and we might even be lucky to see exports that would improve our balance of payment.