Nigeria: Building Resilience to External Shocks

Victoria Island, Lagos
16 March 2020

Akure — The past few days in Nigeria has seen government officials directly responsible for economic management being under.

From the Minister of Finance, Budget and National Planning, Mrs. Aisha Ahmed; Minister of State for Petroleum Resources, Mr. Timipre Sylva; the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, and the Group Managing Director of the Nigeria National Petroleum Corporation (NNPC), Malam Mele Kyari, they have all been very busy trying to find out ways to help the country come of out of the present challenge it has found itself.

Precisely, the impact of the coronavirus, which is now a global epidemic and last week's significant drop in the price of crude oil due to a price war between Saudi Arabia have exposed Nigeria's weak underbelly.

Already, the naira has been under pressure in the past few days and the stock market has lost significant value as well. Also, the country's external reserves have been under intense pressure in the past few weeks.

This is one situation the International Monetary Fund (IMF); the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, and other notable economists had warned against.

For instance, in all its Article IV Consultation on Nigeria, in the past few years, the Washington-based institution had consistently stressed the fact that the country would be vulnerable in the case of an external shock. In its latest report on Nigeria released last month, the IMF had stated that external vulnerabilities in the country were increasing and reflected a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals.

In the same vein, Emefiele, had in his last three personal statements at the Monetary Policy Committee (MPC), consistently highlighted the need for measures to diversify the economy, to guard against external shocks.

For instance, at the November 2019 MPC, Emefiele, had warned that though the short-term outlook was positive, it was threatened by subdued oil price trends, fragile domestic contexts, and adverse global conditions.

"I remain convinced that an adequate mitigation of these risks, buoyed by sustained foreign exchange stability, appropriate credit policy to the domestic real sector, sustained non-conventional development financing by the CBN, and expected implementation of the 2020 capital budget will enhance short-term outlook," he had stated.

Also, at the January 2020 MPC, Emefiele, also called for measures to urgently diversify the economy and create institutional structures that will insulate the economy from oil shocks. He also warned that a potential fall in oil prices could debilitate the economy and adversely impact exchange rate and heighten inflationary pressure.

He had said: "I reiterate that even as economic recovery stayed fragile, effective anchoring of inflation expectations remain fundamental.

"Besides, potential fall in oil prices could debilitate the economy and adversely impact the exchange rate with ramifications for inflation.

"It remains urgently imperative to diversify the economy and create institutional structures that will insulate the economy from oil shocks."

Furthermore, Emefiele said cautious policy was irrefutable as growth was still low while per capita income and unemployment rate remained outside tolerable levels.

According to him, this was what

informed the Bank's aggressive intervention in the non-oil sector through its development finance activities.

"Besides, the modest short-term prospect is threatened by delicate oil price dynamics, weak aggregate demand, persistent herder-farmer conflicts and prevalent security challenges.

"I am of the view that a favourable resolution of these challenges, reinforced by sustained FX stability, as well as continued implementation of the Loan-to-Deposit Ratio (LDR) policy, will further boost short-term outlook," he added.

"I note the improvements in banks' Non-Performing Loans (NPLs) position and our continuing efforts at de-risking the target sectors.

"Robust credits will bolster domestic investment, household demand and factor productivity while accelerating economic diversification, and ensuring strong and inclusive growth," he added.

Indeed, the improvement in private sector credit from N15.3 trillion in May 2019, to over N17.4 trillion as of January 2020, and reduction in lending rates, have been attributed to the CBN's directive on 65 per cent minimum loan-to-deposit ratio (LDR).

Treasury bills rates also dropped significantly due to the restriction of individuals and non-bank institutions from the open market operations (OMO) auctions.

In February, the bank introduced longer-term contracts on the naira in a move to attract more foreign inflows, shore up its dwindling dollar reserves and stave off a currency devaluation.

The directive for banks to raise lending was aimed at stimulating lending to the real economy. It was to motivate small and mid-size enterprises, retail, mortgage and consumer lending.

The policy was introduced to support the federal government's diversification efforts. Also, the central bank has continued to seek ways to de-risk key high-impact non-oil private sector activities.

Similarly, the Bank has sustained its development finance interventions by channeling vital funds to the real sector to boost local productivity, spur job creation, and moderate poverty.

For instance, the bumper harvest recorded recently by maize, sorghum, cassava, tomatoes and cotton farmers under the Central Bank of Nigeria's (CBN) Anchor Borrowers' Programme (ABP) gave the agricultural initiative a major boost. So, the cultivation of the last rainy season harvested recently was very successful and a bumper one. So, it impacted positively on the ABP and made it easy for farmers to repay their loan.

The ABP was designed to assist small-scale farmers to increase the production and supply of feedstock to agro-processors with the aim of creating an ecosystem to link out-growers (smallholders) to local processors.

The programme is also expected to increase banks' financing to the agricultural sector, enhance capacity utilisation of agricultural firms involved in the production of identified commodities as well as the productivity and incomes of farmers.

It has helped in reducing poverty among smallholders, while assisting rural subsistent farmers to reach commercial production levels.

After the rice boom that has seen many homes ditching expensive imported rice for home grown local rice consequently saving the country huge foreign exchange, the President Muhammadu Buhari administration's quest to diversify the economy, the CBN recently commenced efforts to revive commercial production of tomato and textile in the country, in a remarkable lift to the economy.

Through programmes such as the ABP, the Commercial Agriculture Credit Scheme and the Bankers Committee Agri-Business/Small and Medium Enterprises Investment Scheme (AGSMEIS), the CBN has improved access to markets for farmers by facilitating greater partnership with agro-processors and manufacturing firms in the sourcing of raw materials.

"As a result, manufacturers have integrated local options in sourcing their raw materials. Partnerships forged through contracts between farmer cooperatives and agro-processors have also helped to support improved production of agricultural commodities such as rice, cotton and maize.

"In order to address some of the challenges faced by local farmers and manufacturers, we embarked on measures to discourage smuggling and dumping of restricted items into the country, by imposing restrictions on the use of financial institutions in Nigeria by identified smugglers, as their activities undermined the growth of our local industries.

"These measures are aiding our efforts to support local cultivation in rice, cotton and fish, etc," he disclosed.

Accordingly, he has continued to reiterate the need for the central bank to intensify, refocus and become more aggressive with its efforts to structurally rebalance and diversify the economy from oil. "We need to strengthen our forex reserves on the fortitude of the non-oil sector. In this regard, the success of the 43 items in buoying productivity is fervently acknowledged.

"I emphasise once more the need to maintain our unconventional approach to tackling macroeconomic challenges. We have seen a pickup in real growth rate up to 2019 third quarter, traceable to improved credits and higher LDR. This is even more pleasing as NPL continued to decline even with higher credits, due primarily to regulatory mechanisms.

"We also observed marginal uptick in inflation rate due to supply hitches heralded by border closures. Given the price stability mandate of the CBN, it is foremost to keep inflationary concerns within sight while remaining mindful of the need to correct the output gap. Hence, on a balance of evidence and probability, it may be more judicious to hold all parameters at this time," Emefiele said.

The President/Chairman of Council, Chartered Institute of Bankers' of Nigeria, Dr. Uche Olowu, recently said diversifying the economy away from crude oil earnings would help boost foreign investors' confidence in the economy.

He disclosed that as soon as the economy is diversified, the country will see higher accretion to the foreign reserves and improved confidence in the economy.

He said opportunities in the agricultural sector should be explored to improve the country's capacity to export agric products. He said the country has so much to gain by investing in agriculture, which will boost foreign reserves.

Olowu added that access to credit is also a key factor that will lead to economic growth and development.

Ayoade, wrote in from Akure

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