26 June 2017

Nigeria: Navigating Economic Storm With Monetary Manoeuvres


The three years of Mr. Godwin Emefiele as the Governor of the Central Bank of Nigeria has been marked with series of monetary manoeuvrings aimed out navigating the nation out of an economic storm precipitated by crashing crude oil prices.

CRUDE oil price shockEmefiele assumed leadership of the apex bank on June 3, 2014, with an agenda to consolidate on the achievements of the apex bank with respect to price stability and interventions aimed at boosting the real sector of the economy. But the same month he assumed leadership, price of crude oil, which accounts for 90 per cent of Nigeria's foreign exchange revenue, began to nosedive. From a high of $114 per barrel, price of crude oil dropped steady to below $30 per barrel first quarter 2016.

As a monthly forex inflow into the CBN dropped from a high of $4 billion to below $700 million within this period, while monthly forex demand was rigid above $4 billion. This led to steady decline in the nation's external reserve which triggered dollar shortages in the economy, and eventually the worst economic recession in three decades.

Economic recession

In order to address these challenges, the CBN tinkered with its foreign exchange policy with a view to positioning it to respond adequately to changing market conditions. The macroeconomic response to dwindling foreign reserves would ordinarily be to depreciate the currency within an agreed percentage within a fixed band or allow it to enter a free float and settle at a point determined by market forces. However, the CBN insisted that the structure of the Nigerian economy does not allow for the full operation of market forces and thus the need to compliment for market failures

Enhancing local production

In order to address the drain of import bills on the nation's foreign reserves, the CBN, on June 24, 2015, excluded importers of 41 goods and services from accessing foreign exchange at the Nigerian foreign exchange markets in order to encourage local production of these items. In response to widespread criticism against the policy, the CBN explained that it was necessary to among other things, conserve foreign exchange; sustain foreign exchange market stability; ensure the efficient utilization of foreign exchange; ensure that optimum benefit is derived from goods and services imported into the country; and encourage local production of items on the "Not valid for Forex" list.

So far, there has been a boost in the local production of the items on the list of 41, just as substantial foreign exchange has been conserved owing to the reduction in the import bills of the country. Also, industries across various fields of production, have recorded profits in their earnings.

Checkmating currency speculation: As part of its foreign exchange management effort, the CBN Monetary Policy Committee (MPC) in November 2014 shifted the band of the official exchange rate from N155/$1 to N168/$1. The Committee also broadened the corridor around the mid-point from +/-3% to +/-5%. Although the move by the CBN MPC ensured temporary stability in the forex market, currency speculators did not lie low as speculations from this set of people continued to mount pressure on the Naira in the hope that the Naira would experience further depreciation.

The unabated onslaught of speculators and its resultant pressure on the Naira impelled the CBN to carry out another round of currency depreciation with the sole objective of restoring calm in the foreign exchange market. Accordingly, the bank on February 18, 2015 closed the rDAS/wDAS forex market, leaving the interbank market as the only official market, which opened at a depreciated rate of N197/$1.

Between the removal of the rDAS market in February 2015 and the July 2015 MPC, the CBN reports that demand pressure in the foreign exchange market continued at an increased pace, reaching unprecedented levels.

New forex regime: The increasing demand pressure on the foreign exchange coupled with the low accretion to the country's reserves due to weakening global oil price prompted the CBN to redesign a new framework for the management of foreign exchange in a period of declining supply.

Unveiling the new guidelines in June 2016, the Governor of the CBN, Godwin Emefiele, disclosed that the general operational principle of this new exchange rate framework is that foreign currency will be traded in the inter-bank foreign exchange market through the platform of the Financial Markets Derivative Quotation (FMDQ). Forex intervention & rate convergence: Determined not to budge in the face of threats from speculators, local and international financial analysts, the CBN went aggressively into the inter-bank forex market, ensuring access, boosting liquidity in all segments of the forex market and forcing down the exchange rate.

In February 2017, the CBN emerged with a new policy aimed at increasing the availability of Foreign Exchange in the market and to ease the difficulties encountered by Nigerians, particularly retail end-users, in obtaining funds for foreign exchange transactions for Personal and Business Travel, Medical needs, and School fees, all of which fall under the invisibles category. It also directed that all retail transactions are to be settled at a rate not exceeding 20 percent above the inter-bank market rate.

Following the clearing of a backlog of matured letters of credit at the inception of the current flexible exchange rate system, the CBN promised and indeed began to provide foreign exchange to all commercial banks to meet the needs of both personal travel allowances (PTA) and business travel allowances (BTA) for onward sale to customers. Under the arrangement, all banks received amounts commensurate with their demand per week, which were thereafter sold to customers who meet usual basic documentation requirements.

In order to further ease the burden of travelers and ensure that transactions are settled at much more competitive exchange rates, the CBN also directed all banks to open FX retail outlets at major airports as soon as logistics permitted them to. In a bid to further increase the availability of foreign exchange to all end-users, the CBN equally reduced the tenor of its forward sales from the hitherto maximum cycle of 180 days to not more than 60 days from the date of transaction.

Between the period February and May 2017, the CBN has intervened in the wholesale and retail segments of the forex market with over $3 billion, just as it has re-admitted operators in the Bureau de Change (BDC) segment, which receive $20,000 each for onward sale to low-end users.

Only recently, the CBN also introduced two new forex windows: a special forex window for Small and Medium Enterprises (SMEs) to enable SMEs import eligible finished and semi-finished items, and another Forex widow for investors and exporters tagged: "Investors' & Exporters' (I&E) FX Window". Within two months of its introduction the I&E window has attracted $2.2 billion in transactions, with the naira appreciating at the window from N400 per dollar to N363 per dollar as at June 22nd.

These efforts culminated into the convergence of the parallel marker exchange rate and Nigeria Autonomous Foreign Exchange Rate (NAFEX) at N367 per dollar in the second week of June.

Anchor Borrowers' Programme (ABP): In terms of development financing, the CBN under Emefiele has continued to act as a financial catalyst in specific sectors of the economy particularly agriculture, in its determination to create jobs on a mass scale, improve local food production, and conserve scarce foreign reserves. The most notable of the bank's intervention in this regard is the Anchor Borrowers' Programme (ABP) launched in November 2015, It has created economic linkages between over 600,000 smallholder farmers and reputable large-scale processors with a view to increasing agricultural output and significantly improving capacity utilization of integrated mills.

Under the programme, the sum of N40 billion has been set aside from the N 220 billion Micro, Small and Medium Enterprises Development Fund for farmers at a single-digit interest rate of 9 per cent. As at March 31, 2017 a total sum of N 33.34 billion had been released through twelve (12) Participating Financial Institutions in respect of 146,557 farmers across twenty-one (21) States cultivating over 180,018 hectares of land.

Banking industry

While the forex challenge and economic recession impacted the banking industry severely leading to sharp increase in industry's non-performing loans (NPLs) to 14 per cent at the end of 2016, far above the five per cent threshold set by the regulator, the apex bank on several occasions insisted that the industry has enough buffers to withstand the shocks.

This position was confirmed recently by Moody's Investors Service, which maintained its stable outlook on the Nigerian banking system, reflecting the rating agency's view that acute foreign-currency shortages in the country will gradually ease.

According to the global rating agency, with oil prices and economic activity gradually recovering in Nigeria, it expects banks' dollar liquidity pressures to gradually ease.

Investors' confidence returns

Besides restoring the nation's economy to the path of positive growth, which analysts opined will be achieved by the end of the third quarter, the various monetary responses of the Emefiele led CBN has revived investors' confidence in the Nigerian economy. This is aptly reflected in the inflow of foreign investment into the nation's capital market, which cause the capitalisation of the Nigeria Stock Market to rise from N8.3 trillion on February 22nd to N11.4 trillion as at June 22, thus reversing year-to-date decline of 6.0 per cent to a increase of 22.5 percent during the period.


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