Nigeria's central bank governor, Godwin Emefiele, tells James King that his economic policies, which some have blamed for a decline in manufacturing in the country, encourage foreign exchange flows and improve transparency, and thus investor confidence.

Godwin Emefiele

Godwin Emefiele’s tenure as governor of the Central Bank of Nigeria (CBN), which began in June 2014, has coincided with a challenging time for the country. Faced with a precipitous decline in the price of crude oil, a cooling global economy and the normalisation of monetary policy by the US Federal Reserve, Nigeria’s gross domestic product (GDP) growth has slumped from 6.3% in 2014 to a forecast contraction of -1.8% in 2016, according to the International Monetary Fund. 

These conditions have made the implementation of the CBN’s core mandate – which includes the effective and efficient implementation of monetary and exchange rate policy, and the management of the financial sector – all the more difficult. But under Mr Emefiele’s leadership, the central bank has focused more widely on economic development issues. This has led to the implementation of policies designed to stimulate domestic growth but that have been perceived to be unorthodox.

Beyond the peg

From the outset, Mr Emefiele described his intentions to preside over a ‘people-focused’ central bank, and one that would serve Nigeria’s growth and development needs. To that end, in March 2015 the CBN started to peg the naira at 197 to 199 to the US dollar in an effort to stave off inflationary pressures linked with a devaluation of the currency. But by June 2016, the bank announced a shift to a flexible exchange rate as the effect of depleting foreign exchange (FX) reserves and falling receipts (among other challenges) took their toll.

“To the extent that the bank’s reintroduction of a flexible exchange rate system has helped increase transparency in the FX market, clear an estimated $4bn backlog in FX demand, reduce arbitrage and speculative opportunities, and create a more predictable structure for businesses to prioritise their FX demand, we believe that this policy has been beneficial to the economy,” says Mr Emefiele.

With time, it is hoped that a flexible exchange rate will offer positive multiplier effects to the economy, particularly as confidence in Nigeria improves. Indeed, collapsing portfolio inflows and the sell-off by foreign investors of Nigerian stocks and bonds while the currency was pegged have caused particular concern over the past 18 months. A flexible exchange rate should go some way towards addressing these concerns.

“This policy has led to a gradual but steady inflow of new FX into the market. All of these have largely met the bank’s expectations in the short term. We believe that these benefits will become magnified as the policy’s sustenance improves the credibility of the CBN and investors trust us more to return more forcefully as active participants in Nigeria’s FX market,” says Mr Emefiele.

Mismatch in rates

Nevertheless, a gap between the official and parallel exchange rates on the interbank market remains. This could partly reflect a mismatch between supply and demand of US dollars in the market, as FX receipts from the all-important oil sector have dwindled in response to falling production. By early September, the official dollar/naira rate was slightly above 300, though it stood at over 400 on the black market.

“Obviously, the reintroduction of the flexible exchange rate system immediately led to a depreciation of the naira in the interbank market, and helped close the significant spread with the parallel market. Also, this policy encouraged movement of FX demand from the parallel to the interbank market, which also brought the two rates closer,” says Mr Emefiele.

“Finally, new foreign portfolio inflows into the interbank market and our recent policy of allowing commercial banks to transfer some share of diaspora remittances to bureaux de change have also helped moderate rates in both markets.”

For now, however, a lack of hard currency is continuing to squeeze economic growth. Businesses, particularly those that must import goods, are bearing the brunt of this, as are Nigeria’s banks. In August, the central bank barred nine lenders for their failure to shift dollar-denominated funds from the state-owned gas group NNPC and the state-owned oil group NLNG to the treasury single account (TSA), a recently introduced single repository for all government funds.

“One of the most sacred obligations of a commercial bank is to produce customers’ deposits ‘on demand’. That is why these deposits are classified as ‘demand deposits’. Some of our banks failed to meet this obligation with respect to deposits of US dollars by the NNPC and the NLNG. We had given them quite some time to transfer these balances into the federal government’s TSA,” says Mr Emefiele.

Tough action

The banks’ failure to comply with this directive led the central bank to expel them from the interbank FX market. International press reports have indicated that some of these lenders blamed their breach of this directive on the lack of dollar liquidity in the market. Nevertheless, the CBN’s actions sit within the wider government’s attempts to impose greater transparency on the movement and allocation of public funds.

“When we became uncomfortable with their plans and seriousness to comply with the TSA, we thought we had to take strong action to ensure these monies were returned. The good news is that this action jolted them and some of the banks have transferred all their balances, while the remainder now have stronger and more credible plans to return these funds,” says Mr Emefiele.

Under his leadership, the central bank has also adopted a more interventionist approach to the development of the Nigerian economy. In an effort to stimulate local production and preserve the country’s FX reserves, the central bank established a list of 41 items (including rice, cement and wheelbarrows) for which importers must procure their FX needs independently of the interbank FX market.

In addition, the CBN issued a circular in August 2016 requiring commercial banks to allocate 60% of their FX purchases to manufacturers. “Following the review of returns on the disbursement of FX by authorised dealers to end users, we observed that only a negligible proportion was channelled towards the importation of raw materials for the manufacturing sector,” says Mr Emefiele.

To address this imbalance and promote the growth of the real sector, Mr Emefiele says the CBN had to compel authorised dealers to dedicate at least 60% of their total FX purchases to end-users, strictly for the purpose of importation of raw materials and machinery. “The aim is to help support activities in the real sector, especially at this time when we need a significant fillip to reverse the deceleration in economic activities, as measured by the first two quarters of GDP in 2016,” he says.

The move was widely praised by Nigerian manufacturers, who have been starved of much-needed hard currency. But pressure remains on Mr Emefiele to lift the ban on the 41 items from accessing the FX market. According to several international press reports, the policy has hit the country’s manufacturing sector hard, and data from the first half of 2016 indicates the sector has experienced a broad-based decline.

Private sector difficulties

These are difficult times for Nigeria’s private sector as a whole. In an attempt to combat spiralling inflation, which stood at about 17% in July, the monetary policy rate was lifted by 200 basis points (bps) to 14% in the same month. While this is acting as a drag on private sector growth, it is nevertheless making Nigeria more attractive to foreign investors. Mr Emefiele, however, does not consider these to be distinct issues.

“The CBN does not reckon that curbing inflation, attracting foreign investors and supporting growth are mutually exclusive objectives,” he says. “Rather, the monetary policy committee’s decision reflects the [central bank's] prioritisation of its core mandate of pursuing price stability as an anchor and enabler for economic growth. As we have consistently said, the bank will continue to ensure that its decisions not only consider price and financial system stability, but also issues of employment and growth.”

Despite these and other challenges, Mr Emefiele remains upbeat about the prospects for Nigeria’s economy. As part of a wider package of reforms, president Muhammadu Buhari has tripled capital expenditure plans under the 2016 budget, though this is contingent on securing external financing. Indeed, most analysts agree that public sector transparency is increasing, while reforms to the country’s tax system are widening the tax base. In this sense, there is plenty of room for optimism, even if the current outlook remains deeply problematic.

“The Nigerian economy is adjusting to the aftermaths of the oil price shocks that led to a slowdown in output growth in 2015, and eventual contraction in output in the first half of 2016. Energy shortages, high electricity tariffs, FX supply shocks and depressed consumer demand have also exacerbated the adverse nature of this adjustment,” says Mr Emefiele.

“However, we are very optimistic that a strong rebound in the economy will occur soon. This optimism stems from our expectations that the reforms pursued by the new administration are in the right direction and are beginning to lay a foundation for renewed growth.”


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