All Eyes on CBN to Goose Growth

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Obinna Chima writes on recent measures adopted by the Central Bank of Nigeria to steer the economy out of recession

The biting economic recession in Nigeria is already impacting negatively households and firms and making it difficult for them to meet basic needs such as food, healthcare and shelter, in an economy that had been battling with high rate of poverty.

The situation followed the impact of the coronavirus as well as the slump in crude oil which once more exposed the underbelly of the Nigerian economy, which has also been grappling with structural difficulties, dwindling revenue, muted economic growth and rising inequality.

Recent data from the National Bureau of Statistics (NBS) had shown that Nigeria’s real GDP contracted for the second consecutive quarter by 3.62 per cent in the third quarter of the year, compared to a growth of -6.10 per cent, which showed that the country had entered its second economic recession in five years.

Indeed, the spread of the disease caused by COVID-19 saw the federal government adopting several measures which included a lockdown of Lagos, Ogun as well as the Federal Capital Territory, which disrupted the movement of goods and services as well as production, thereby sending the financial markets into a tailspin.

Owing to this, just like in 2016, all eyes are now on the Central Bank of Nigeria (CBN) to roll out ammunitions needed to combat the economic downturn in order return the economic to the path of growth.

The CBN had after the economy entered into a recession in 2016, introduced the Nigerian Autonomous Foreign Exchange Fixing Mechanism (NAFEX), commonly known as the Investors and Exporters’ (I&E), aggressively intervened in the agriculture sector through its Anchor Borrowers’ Scheme and other development finance initiatives, as well as a raft of other measures to propel economic recovery.

And in line with its first-responder approach, just like in 2016, the CBN has been proactive in its efforts to steer the economy out of recession.

CBN Governor, Mr. Godwin Emefiele, recently assured Nigerians that just like policymakers did in 2016 when the economy slipped into recession, the fiscal and monetary policy managers would join forces to address the present economic challenge.

He expressed optimism that with measures to put in place to stimulate economic activities, the country would likely achieve a two per cent growth in 2021.

“However, downside risks remain, as restoration of full economic activities, particularly in service-related sectors, remains uncertain until a COVID-19 vaccine is produced and made available to millions of people across the world.

“Second, with the significant rise in cases in advanced markets and the imposition of lockdowns in parts of Europe, concerns remain on the impact this could have on growth in advanced economies, commodity prices and the financial markets.

“We must therefore find ways to insulate our economy from the impact of these shocks through our diversification efforts, while also working to ensure that we adhere to safety protocols in order to prevent a surge in COVID-19 related cases, as this could further cripple economic activities,” he explained.

He noted that given the fact that the rise in inflation was not due to monetary factors, but rather the prevalence of structural rigidities and supply shocks, traditional tools of monetary policy may not be helpful in addressing current inflationary pressures.

Rather, he said a more useful policy would be the supply-side measures implemented by the Bank.

Owing to this, Emefiele said emphasis would be placed on strengthening the development finance initiatives of the CBN in order to stimulate greater production and reduce unemployment.

“We intend to increase our support for measures that will improve cultivation of local produce in Nigeria, with particular emphasis on improving our yield levels, as food inflation continues to remain the key driver of inflationary trends.

“The banking sector therefore has a significant role to play as a facilitator of growth in the agriculture sector, through its intermediation function.

“Some of the opportunities in the agriculture sector that banks should explore include ways to address some of the existing gaps in the agriculture value chains, such as storage centres, transport logistics, and technology platforms, which can enable rural farmers to sell their produce directly to the markets.

“These measures would help to improve productivity of farmers, reduce post-harvest losses, increase access to finance for farmers and improve sourcing of local raw materials for processing by manufacturing and industrial firms.

“It will also aid improved production of local goods, enable the creation of jobs, while supporting the growth of other sectors of our economy such as manufacturing, and transportation,” Emefiele said.

Raising COVID-19 Targeted Facility

In order to reflate the economy, the Monetary Policy Committee (MPC) recently urged the CBN to raise its COVID-19-targeted facility to households and firms from N150 billion to N300 billion in order to accommodate more Nigerians.

The initiative is to cushion the impact of the pandemic that pushed the economy into recession, spur consumer spending and accelerate recovery from recession.

Furthermore, Emefiele said increasing the targeted credit facility will, by boosting consumer spending, stimulate output and ensure that all the six geopolitical zones benefitted from the palliative.

He said: “We have been advised or nudged on by the MPC that given that this had been very impactful positively, that the CBN should do more.

“We have been told that we have to increase it not just from the N140 billion to N150 billion that it is now, but increase it to about N250 billion to N300 billion to accommodate more people that have not accessed this facility.

“But we do insist that this must be done in a way that it goes round because we found out that some zones are more represented in the country than others.

“But understand that a zone like North-central, where we have predominantly Abuja, or South-west, where you have predominantly Lagos, would certainly have a larger share.

“The important thing is that we want to use this as an opportunity to see what can be done to boost consumer spending for our people and also see to it that output is stimulated positively for the good of our people.”

He, however, reinforced his call for diversifying the economy to end reliance on crude oil and save the country from exogenous shocks often arising from volatility in oil prices.

He said it was high time the country went back into agriculture for economic sustainability amidst current efforts to steer it out of the second recession.

According to him, the bank will continue to boost support for agriculture, industry and manufacturing to stimulate job creation as well as moderate inflationary pressure.

Boosting FX Liquidity

In addition, the CBN recently unveiled a new policy that grants unfettered access to foreign exchange (FX) from Diaspora and other money transfer remittances like Western Union and MoneyGram.

The bank also clarified transactions that were eligible under the policy in line with global best practices.

The policy became effective last Friday.

The policy allows beneficiaries of Diaspora remittances through International Money Transfer Operators (IMTOs) to henceforth receive such inflows in the original foreign currency through the designated bank of their choice.

The new regulation is part of efforts to liberalise, simplify and improve the receipt and administration of Diaspora remittances into Nigeria.

The central bank announced the new policy in a circular signed by its Director, Trade and Exchange Department, Dr. Ozoemena Nnaji.

With the new policy, recipients of remittances may have the option of receiving such funds in foreign currency cash (US Dollars) or into their ordinary domiciliary account.

“These changes are necessary to deepen the foreign exchange market, provide more liquidity and create more transparency in the administration of Diaspora remittances into Nigeria,” the apex bank stated.

It explained that the changes would help finance a future stream of investment opportunities for Nigerians in the Diaspora, while also guaranteeing that the recipients of remittances would receive a market- reflective exchange rate for their inflows.

Owing to the new policy, the CBN last week directed all banks to close all naira ledger accounts opened for receiving International Monetary Transfer Operators’ (IMTOs’) proceeds.

Also during the week, the CBN introduced special bills to support economic recovery and deepen the financial market.

The 90-day special bills are expected to avail the monetary authority additional liquidity management tool.

The CBN stated in a circular addressed to all banks, dated December 1, 2020, signed by Hassan that the features of the special bills include tenor of 90 days, zero coupon, applicable yield at issuance to be determined by the CBN; the instrument will be tradable amongst banks, retail and institutional investors.

Also, it added that the instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window. The instrument will also qualify as liquid assets in the computation of liquidity ratio for deposit money banks.

“The CBN will continue to ensure optimal regulation of systemic liquidity and promote efficient financial markets in support of economic recovery and sustained growth,” it added.

Role of IMTOs

Emefiele said following the announcement of the new policy measures, the apex bank, in an effort to enable smooth implementation had engaged with the commercial banks and the International Money Transfer Operators (IMTOs) to ensure recipients of remittance inflows are able to receive their funds in the designated foreign currency of their choice.

According to him, data on IMTO inflows into the country over the past year, and through central bank’s investigations discovered that some IMTOs, rather than compete on improving transaction volumes and create more efficient ways for Nigerians in the Diaspora to remit funds, resorted to engaging in arbitrage arrangements on the naira-dollar exchange rate.

This, he said, to a large extent resulted in a significant drop in flows into the country. It also encouraged the use of unsafe unofficial channels, which also supported diversion of remittance flows meant for Nigeria, thereby undermining foreign exchange management framework, he said.

Emefiele said the new policy would help in providing a more convenient channel for Nigerians in the Diaspora to remit funds to the country as well as ensure that the funds can contribute to the development of the economy.

According to him, the apex bank’s policy to allow for unfettered access to foreign exchange from the Diaspora and other money transfer remittances is to support improved remittance inflows into the country through official channels.

Emefiele said the current annual remittance inflow of about $24 billion could help in improving the balance of payment position, reduce dependence on external borrowing and mitigate the impact of COVID-19 on forex inflows into the country.

He, however, said following up on the implementation of the new forex and Diaspora remittance policies, the CBN observed some pushback by some of the IMTOs, which he said were bent on continuing their nefarious activities of undermining the new policy by attempting to resist it.

He said: “This was the reason the CBN had to insist on Wednesday, December 2, 2020, that all DMBs must close all naira general ledgers through which the naira remittances were hitherto being carried out.

“It also encouraged the use of unsafe unofficial channels, which also supported diversion of remittance flows meant for Nigeria, thereby undermining our foreign exchange management framework.”

He added that the new policies will be a major game-changer in remittance inflows into the country.

He said: “As a matter of fact, from the data that we have, the way the size of remittance is computed by the International Monetary Fund (IMF) takes into consideration, not just the money that comes in directly as flows but also what we call the earnings of Nigerians in Diaspora in different parts of the world – because they believe and we believe as well that some portion of these monies actually flow back home to support members of their families.

“But it is important for me to draw a parallel. I am aware from data available that for instance, Pakistan even in the midst of COVID-19 receives $2 billion monthly from Pakistanis in Diaspora. This is a country that I will say by geography, demography is about the same with Nigeria.

“So we are hereby saying that if Nigeria is even able to receive even if it’s just $1 billion monthly or $2 billion monthly, I am certain that you all know what will happen to the exchange rate of Nigeria.”

He said he was certain that after some time, deposit money banks will not have any need to call on the central bank to provide dollar to fund their imports or commercial operations.

Emefiele also dispelled concerns that the new policies could support money laundering, adding that the institutions involved in money transfer have good reputation as well as a robust customer identification system in the country.

He said: “I want you to know that even from abroad, where these funds are coming, that is why we talk about institutions that are tested like Western Union, Ria and MoneyGram, which also in those countries where they are domiciled are properly licensed and regulated and I know for certain that countries, where they are domiciled, would not allow money laundering practices or remittance of funds from those countries into our country to be associated with money laundering.”

He said the CBN would ensure that most of those who would be receiving Diaspora remittances come with some forms of identity card, saying when the transfers started in 1996 with some forms of identification at that time, First Bank was able to ensure that people who were receiving funds were properly identified and could easily be traced talk less of even today where there is BVN.

He stated that the measures would help finance a future stream of investment opportunities for Nigerians in the Diaspora while also guaranteeing that recipients of remittances will receive a market-reflective exchange rate for their inflows.

Naira Appreciates on Parallel Market

However, the new monetary policy by the CBN has started impacting the value of the naira as it appreciated on the parallel market last week.

The naira, which went for N480 to a dollar on the parallel market last Tuesday, appreciated to N450 to a dollar during the week, before closing at about N455 to a dollar last week.

The ICT Sector

Emefiele stressed that the information communication technology (ICT) remains one sector, which has emerged as a significant source of resilience in mitigating the impact of COVID-19 on the economy.

He pointed out that in the third quarter of 2020, the ICT sector made contributions of over 17.8 per cent to GDP growth, 47 per cent higher than its contributions a year earlier.

The growth of start-ups in the fintech and health care space rose in response to the pandemic.

“It is important that we leverage ICT as an enabler for growth in key sectors of the economy. ICT start-ups are emerging to support SMEs, farmers, and in providing quality learning to students.

“It is important that the banking sector consider viable IT firms in these areas that have the potential to not only serve the needs of the local market but are also able to export ICT related services to countries across the world.

“India for example exports close to a $100 billion worth of ICT related services every year and I believe that our ICT industry can make significant contributions to our export earnings,” Emefiele added.

According to him, the central bank recently issued payment service bank licences to three firms as part of efforts to drive financial inclusion and ensure that majority of Nigerian citizens are banked.

Emefiele said the payment service banks, along with mobile money operators and banks are expected to leverage ICT channels in improving penetration of digital financial services and products to Nigerians. He pointed out that driving sustainable growth in the economy would require that the banking industry support growth of ICT firms that are inclined to improve productivity across key sectors in the economy.

Infrastructure Development

Another critical area that the banking sector ought to consider for stable growth of our economy is infrastructure finance, Emefiele said.

According to the CBN governor, with the decline in revenues due to federal and state government as a result of the drop in crude oil prices, alternative ways of funding infrastructure are critical in generating sustained growth of in the economy.

“A well-built infrastructure system, comprising hard infrastructure such as roads and ports, and soft infrastructure such as broadband penetration, can have a multiplier effect on growth by enabling the expansion of business activities in the country.

“We believe that a well-structured infrastructure fund can act as a catalyst for growth in the medium and the long run. The support of the banking community will be important in achieving this objective.

“Let me add that while COVID-19 has brought on several challenges to our economy and indeed the banking sector, it offers a unique opportunity for us to build a more resilient economy that is better able to contain external shocks, whilst supporting growth and wealth creation in key sectors of our economy,” he added.

Implementing Economic Sustainability Plan

The central bank has also advised the federal government to quicken the implementation of its Economic Sustainability Plan (ESP) in order to boost economic recovery.

A speedy implementation of the policy, the CBN said, will help in addressing the structural impediments to growth and job creation as well as improving the poor state of the country’s infrastructure.

The Deputy Governor, Financial System Stability Directorate, CBN, Mrs. Aishah Ahmad, who made this remarks, noted that for optimum benefits to the economy, monetary policy instruments can only compliment policies in other sectors of the economy to deliver broad-based economic prosperity.

She stated those aspects of the plan, which seek to improve non-oil government revenue and reduce non-essential spending are vital and reinforce the importance of prioritising government expenditure to support social infrastructure, including but not limited to health, education and security, to help drive economic growth prospects.

“The bank must support these fiscal efforts by sustaining its intervention policies particularly in the agricultural sector, which will be critical to strengthening output and curtail food inflation and COVID-19 monetary stimulus measures and other initiatives designed to channel credit to critical sectors such as agriculture, manufacturing and small businesses,” she added.

She said there was a need to continue to push for the implementation of the minimum Loan to Deposit Ratio Policy (LDR); vigilance over the banking sector to preserve its strength, resilience and capacity to support the economy; and support for Small and Medium Enterprise (SMEs) to mitigate their exposure to adverse impacts of the pandemic.

On his part, the Deputy Governor, Corporate Services Directorate, CBN, Mr. Edward Lametek Adamu, said COVID -19 had altered the way people live and conduct economic activity/business, adding that some of its consequences might remain for a while.

“There will be lasting consequences for employment, production cost and how economic agents engage resources, even under the best circumstances of early vaccine plus a cure,” Adamu added.

According to him, the surest path to early economic recovery entails, amongst others, significant financial support to the health system to enable it to cope with the pandemic.

He stated that the CBN is already leading the way with dedicated interventions in the health sector.

He, however, called for the collaboration of the private sector and government at all levels.

In his personal statement, the Deputy Governor, Economic Policy Directorate, Dr. Kingsley Isitua Obiora, noted that despite the persistence of the pandemic, the financial system has remained relatively stable and robust to withstand shocks.

“In order to support the naira, we must also continue to build a Nigeria that meets the needs of all citizens.”

Also, the Deputy Governor, Operations Directorate, CBN, Mr. Folashodun Shonubi, said: “Overall, the state of the economy requires that we must keep as many as possible economic agents active and promote the expansion of economic activities to create more employment and guarantee income.

“On the back of an inflationary pressure that is induced, largely, by temporary disruption to supply chain, one-off shocks and structural rigidity, I am certain that as we keep the engine of economic activities grinding, the cost reducing the effect of increased productivity and economies of scale will eventually, drive prices down.”

Nevertheless, there is need for policymakers in the country to follow through efforts to diversifying the revenue base of Nigeria’s economy and creating institutional structures to insulate it from external shocks. There is also the need for increased interaction among policymakers in the country to revive the traumatised economy.