Gains as CBN weaves monetary, fiscal tools to rescue a battered economy

WITH a vision to be the model central bank delivering price and financial system stability while promoting sustainable economic development, Central Bank of Nigeria (CBN) has consistently combined its traditional tools with innovations through its real sector intervention mechanism and flexible exchange rate management to guarantee liquidity in the foreign exchange market thereby boosting domestic production and stabilizing the foreign reserves.

According to the International Monetary Fund (IMF), central banks have in recent times begun to place renewed emphasis on the promotion of economic development and structural transformation, looking beyond narrow mandates for macroeconomic stability. Developmental central bank policies have included policies directed at financial sector development, the promotion of financial inclusion and aligning the financial system with sustainable development. The orthodox approach to central banking – according to which central banks should primarily focus on price stability – has been severely undermined by the global financial crisis. It has become clear that central banks also ought to take responsibility for safeguarding financial stability.

Moreover, in the aftermath of the 2008 global financial crisis, many central banks have adopted unconventional policies to address problems of debt, stagnation and deflation. In practice, many central banks in developing countries nowadays proactively seek to promote sustainable economic development. Specifically, an increasing number of central banks and financial regulators have become active in promoting financial inclusion and in greening financial systems, rendering them important actors in development financing.

The reform of central bank policy frameworks may help to ensure that central banks promote economic development and stability in a balanced manner, and thus be an important building block of a new framework for development finance.

This is why CBN has combined its traditional roles of ensuring monetary and price stability, maintaining external reserves to safeguard the international value of the legal tender currency, and act as banker and provide economic and financial advice to the Federal Government with development financing to uplift the economy. According to the CBN, persistent shocks to the global and domestic economy associated with sustained weakness in global oil and commodity prices has continued to impact adversely on the accretion to foreign reserves and government revenues. The sustained weakness in oil prices did not only reduce accretion to reserves, but also heightened perceived risk by foreign portfolio investors, causing a rise in capital outflows and pressure on the exchange rate.

To address these pressures, CBN Governor, Mr. Godwin Emefiele, says the bank has had to revisit 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 stresses that the structure of the Nigerian economy does not allow for the full operation of market forces and thus the need to complement for market failures.

This led to the exclusion of 41 goods and services from accessing foreign exchange at the Nigerian foreign exchange markets on June 24, 2015, in order to encourage local production of these items. CBN hinged its reason for this move on the need to 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.

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 apex 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.

Despite these efforts, 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 design a new framework for the management of foreign exchange in a period of declining supply.

In June 2016, Emefiele explained the general operational principle of this new exchange rate framework as being that foreign currencies would be traded in the inter-bank foreign exchange market through the platform of the Financial Markets Derivative Quotation (FMDQ).

In spite of the proactivity of the CBN in safeguarding the international value of the Naira, the activities of speculators and some noticeable failures in the market mechanism led to further depreciation of the currency. Particularly of concern to the bank, and indeed the economy, was the fact that the currency speculators held sway across various social strata and held on to huge dollar deposits in anticipation that the Naira would further decline in the face of scarcity of the greenback.

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 should be settled at a rate not exceeding 20 per cent above the inter-bank market rate.

Between February and May 2017, the CBN 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, CBN again introduced two new forex windows: a special window for Small and Medium Enterprises (SMEs) to enable SMEs import eligible finished and semi-finished items, and another widow for investors and exporters tagged: “Investors’ & Exporters’ FX Window”. The CBN’s objective in creating these windows is to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions. Ultimately, it aims to achieve the convergence of rates between the inter-bank and Bureau de Change (BDC) segments.

Emefiele gave assurance that the bank had enough dollar power to defend the Naira and as such would not relent in the attainment of the goals of liquidity and stability. How well it has done can be assessed by how stable the forex market has been in recent times. The strategy is yielding immense results as both the futures and spot prices are stabilizing with analysts of the view that the CBN is headed in the right direction.

Whilst the bank has made commendable progress as it relates to monetary policy and foreign exchange management, the pressures persist. However, the unrelenting CBN Governor, Godwin Emefiele, insists that regardless of current challenges, the CBN will act in good faith, with the best available information and in cognizance of current economic conditions, to pursue the goals of price and financial system stability, as well as catalyze job creation and inclusive growth in the country.

Despite these efforts, the bank has in addition to its monetary policy goal, continued the implementation of its development finance initiatives as well as its payments system including the cash-less policy, Bank Verification Number (BVN) and Internet Banking, all of which are targeted at ensuring financial inclusion. The CBN has also continued to protect customers of Deposit Money Bank (DMBs).

Development Financing

CBN 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 bank’s interventions in this regard include: the Commercial Agricultural Credit Scheme (CACS); Agricultural Credit Support Scheme (ACSS); Agricultural Credit Guarantee Scheme Fund (ACGSF); the N213 Billion Nigerian Electricity Market Stabilisation Facility (NEMSF); the N300 Billion Real Sector Support Fund (RSSF);   the Youth Entrepreneurship Development Programme (YEDP), the Micro, Small and Medium Enterprises Development Fund (MSMEDF) and the Anchor Borrowers’ Programme (ABP), which has been widely commended as a masterstroke in the unlocking of agricultural potential in Nigeria.

The Anchor Borrowers’ Programme (ABP) launched in November 2015 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.

It is also promoting National Collateral Registry (NCR), which is a financial infrastructure designed as part of efforts to boost the flow of credit to Micro, Small and Medium Enterprises (MSMEs). It will allow them to leverage movable assets such as crops, vehicles and machinery as collaterals for loans for growth.

The Collateral Registry registers charges and collaterals created by borrowers to secure credit facilities provided by lenders. It also provides information on the existence of relationships between lenders and borrowers as they relate to moveable collaterals.

As of April 20, 2017, the NCR had received over 10,535 financing statements by registrants, while the value of financing statements by registrants had surpassed N174 billion.

Banking and Payments System

In its commitment to have a safe, reliable and efficient payments system, the CBN introduced the following payments initiatives: Payments System Vision (PSV) 2020, mobile payments, agent banking, E-payment incentive scheme, Nigeria electronic fraud forum, Bank Verification Number (BVN) and cash-less Nigeria.

Restoring Investor Confidence

Working closely with sister agencies, the CBN has exuded confidence that confidence will be restored in the Nigerian economy through the stabilization of inflation and the exchange rate. With the recession easing off, the bank says it is shifting its focus, once again, to price stability and is now set to address inflation and the exchange, which are the two core prices under its mandate.