Emefiele’s CBN: One year after (2)

Godwin Emefiele, CBN Governor

Godwin Emefiele, CBN Governor

Continued from yesterday
FOREIGN currency exposures of banks’ assets and liabilities have increased. Indeed, Nigeria is observed to be one of the largest importers of dollars in the world. Dollarisation grew from 15% of deposits in 2011 to 23% by 2014 as the dollar has been used both as medium of exchange or currency substitution or /and as store of value or asset substitution. Recent CBN directives on dollarisation have been focused more on dollar being used for transactions or medium of exchange; while its use as store of value will remain with high inflationary expectations and exchange rate depreciations.

Further, about a fifth of total loans are denominated in foreign currency. In addition, a quarter of total loans are concentrated in the oil sector, making their loan portfolios vulnerable to the decline in oil prices. While the banking industry’s non-performing loan (NPL) ratios remain within prudential guidelines, it has been observed that the full impact of the oil price shocks and devaluation will result in higher bad debt positions.

The link between the Monetary Policy and the Financial Trilemmas is financial integration. Macro-prudential policies then provide appropriate instruments for fostering financial stability in countries with open capital movement. The CBN macro-prudential guidelines that limit foreign currency exposure by banks, including limiting foreign currency borrowing from 200 per cent to 75 per cent of shareholders’ funds, and banning the issuing of invoices in U.S. dollar for domestic services, are therefore appropriate.

Nigeria’s Misery Index
The third set of goals focuses on engendering economic development and job creation with a new financing instruments for investments in SMEs, agriculture, manufacturing, oil and gas, and the power sector. In the afore-mentioned article, it was observed that Governor Godwin Emefiele has essentially started the journey towards appropriately redefining the economic welfare function of Nigeria and Nigerians for the CBN. He has taken a positive decision to include unemployment rate in the discourse of the Monetary Policy Committee.

To his credit, nearly half of his maiden speech has been devoted to issues of economic development and development finance. The objective is to address and tackle the very high Nigeria’s misery index – a simple sum of inflation, lending rates and unemployment rates, minus year-on-year per capita GDP growth. It has been noted that his tenure should be measured by the progress and success in reducing Nigeria’s misery index from 48 by half to 24 in 2016, by another half to 12 by 2018, and by another half to six by 2020.

In reality, Nigeria’s misery index—has not improved much from 48 in 2014, with most of its components worsened: Inflation rate has increased as noted above, with maximum lending rates in the mid- to high 20s. Although the National Bureau of Statistics (NBS) has changed its reclassification approach, Nigeria’s unemployment rate still jumped to 7.5% in Q1 of 2015 compared to 6.4% in the Q4 of 2014; with four out of 10 youths between the age of 15 and 24 either unemployed or under-employed. The GDP growth rates fell from 7.2% in Q2 2014 to 3.9% in Q1 2015.

Nevertheless, the CBN has since introduced a N300 billion Real Sector Support Fund, with half the amount approved for five projects; a quarter of the N213 billion – Nigerian Electricity Market Stabilization Facility to settle outstanding debts in the Nigerian Electricity Supply Industry – has been disbursed. The guidelines for the Commercial Agricultural Credit Scheme have been reviewed to facilitate lending at an all-inclusive interest rate of nine per cent and extended the expiration of the scheme from 2016 to 2025. About N44 billion has been disbursed via the Micro, Small and Medium Enterprises Development Fund. The CBN has also invested about N500 billion in the Development Bank of Nigeria (DBN).

Looking Forward
The CBN appears to have maintained financial stability with both micro and macro-prudential instruments. However, supervision and enforcements still need to go further given the fact that commercial banks have been able to circumvent its CRR position, with substitution of public sector deposits for private sector deposits compelling the apex institution to reverse its earlier position and reduced CRR on public sector deposits from 75% to 31%.

The CBN’s objectives of monetary and price stability have been severely challenged over the past one year. In particular, there is need to address persistent structural liquidity, with liquidity ratio reaching as high as 50%, often linked to attempt to first convert or monetise oil revenue earnings in dollars to naira for prior allocation among the federating units as per fiscal institutional and legal requirements. This fiscal dominance of monetary space with constraints on the transmission mechanism for injecting liquidity into the Nigerian economy is worth looking into.

On the third set of objectives, the CBN needs to anchor and align its development finance agenda with the overarching vision of the incoming administration, which appears to be a social-democratic welfare state with a dynamic market economy. The All Progressives Congress (APC) plans to pursue equitable, inclusive and shared prosperity while tackling economic diversification through labour-intensive manufacturing and agro-processing with SMEs Loan Guarantee of N10 trillion or $50 billion and agriculture commodity trade board of N250 billion or $1.25 billion.

In this context, the Development Bank of Nigeria (DBN) can indeed become an important instrument for financing economic development as in the BRIC countries. It has been observed that the $1.6 trillion assets of the China Development Bank are ten times bigger than that of the Asian Development Bank. The $335 billion assets of Brazil Development Bank are three times that of the Inter-American Development Bank. Nigeria’s DBN should aim to grow its assets and surpass the $33 billion assets of the African Development Bank.

Indeed, if the fiscal authority can set its priority right and plug fiscal leakages, the development finance interventions of the CBN will be minimised and the fiscal agent will assume direct responsibilities for most of those activities. Then, the CBN could enhance economic development primarily by promoting a regime of low interest rate and access to financial intermediation.

In summary, the CBN over the past one year under Governor Emefiele, has succeeded in maintaining financial stability, but has also been seriously challenged on economy-wide issues with persistent structural liquidity, depreciating exchange rates, rising inflation rates, high interest rates, high unemployment and elevated misery indices.

•Dr. Oshikoya is CEO of Nextnomics Advisory based in Lagos.

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