How Emefiele navigated 4 years of storm

On June 3rd, 2014, Godwin Ifeanyi Emefiele, emerged the Central Bank of Nigeria (CBN) Governor. part of Emefiele’s inaugural speech said his leadership would “pursue a gradual reduction in key interest rates, and include the unemployment rate in monetary policy decisions; maintain exchange rate stability and aggressively shore up foreign exchange reserves.” But little had […]

On June 3rd, 2014, Godwin Ifeanyi Emefiele, emerged the Central Bank of Nigeria (CBN) Governor. part of Emefiele’s inaugural speech said his leadership would “pursue a gradual reduction in key interest rates, and include the unemployment rate in monetary policy decisions; maintain exchange rate stability and aggressively shore up foreign exchange reserves.”

But little had he settled down when  the lingering crude oil price volatility that engulfed Nigeria’s economy,  eventually plunged the  country into a recession.

The Apex bank was immediately faced with the task steering the mono economy back on growth terms. Everyone looked up to the Central bank to unilaterally fix the economy.

The Director-General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, was quoted as saying, “within these periods, CBN as an institution,  became the weeping child. Nobody is remembered the fiscal side of the economy.

The sharp fall in crude oil prices in June 2014, when the CBN Governor took over led to significant revenue shortfall in Nigeria. The multiplier effect of this, as well as the frequent shut-ins and shut-down of trunk lines at various oil terminals worsened the situation for Nigeria’s ailing and mono-product economy and resulted to high inflation, exacerbated foreign exchange (forex) crisis, decline in consumer confidence, among others.”

On his assumption, the monthly forex inflows into the CBN was about $3.6 billion, but in the aftermath of the sharp drop in oil price, made worse by falling production volumes in Nigeria, the monthly forex inflows fell to less than $700 million per month. Yet, the demand for forex from the market continued to be about $4.8 billion monthly.

Given this situation, the CBN dealt with the supply side of the problem by allowing commensurate depreciation of the currency several times.

In order to address these identified pressures, the CBN had to revisit its foreign exchange policy with a view to positioning it to respond adequately to changing market conditions. This is foundation of the capital control

The apex bank  also tried its hands on boosting local productions as a support to dwindling foreign exchange reserves and measure to reduce import-induced pressure.  for a start, CBN excluded 41 goods and services, which it assessed as capable of being produced locally from accessing forex at the interbank market.

The move was mainly targeted at encouraging local production of the affected items, according to CBN. This was to conserve forex, and ensure stability of the forex market, efficient and transparent utilisation of forex as well for optimum benefit to be derived from goods and services imported into the country.

As part of its forex management policy, the CBN in November 2014, shifted the band of the official exchange rate from N155/$1 to N168/$1. Although the move ensured temporary stability in the forex market, currency speculators later went on the prowl with illegal activities.

But the unabated onslaught of speculators and its resultant pressure on the naira compelled the CBN to carry out another round of currency depreciation with the sole objective of restoring calm in the forex. This led to the devaluation of the naira to N197/$1 in February 2015, and also the closure of the RDAS/WDAS forex market, while the interbank market became the official market.

The increasing demand pressure on the forex 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, Emefiele disclosed that the general operational principle of this new exchange rate framework is that forex currency will be traded in the inter-bank foreign exchange market through the platform of the Financial Markets Derivative Quotation (FMDQ).

A novel aspect of the framework was the introduction of non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System, which according to the bank would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market.

These worked after a while and then failed, as supple and speculative challenges heightened. Of particularly concern to the bank was the fact that the currency speculators held sway in market, just as they colluded with currency traffickers in an attempt to force down CBN’s hand.

This resulted to intense pressure on the forex market as the naira weakened to an all-time low of around N525/$1 before the apex bank once more, re-strategised.

The new plan was an aggressive intervention. Determined to calm the pressure in the forex market in February 2017, CBN released a new policy guideline aimed at increasing the availability of forex in the market and to ease the difficulties encountered by Nigerians, particularly retail end-users.

The decision was after a diligent study of the market dynamics, which required that funds for foreign exchange transactions for Personal and Business Travel, medical needs, and school fees, be put under the invisibles category. But now, it is to be settled at a rate not exceeding 20 per cent above the inter-bank market rate.

However, the storm appears to have settled as the country has since exited recession with  stability in the foreign exchange; inflation has been decelerating inflation and the CBN has rolled out a number of initiatives to support micro, small and medium scale enterprises (MSMEs) and the non-oil sectors.

The Investors’ and Exporters’ (I&E) forex window, which was created in April 2017  proved to be the magic wand. One year after its creation, the impact of the I & E window on the market has been positive as it has attracted over $20 billion since it was set up.

The Chief Executive Officer, First Bank of Nigeria Limited, Mr.Adesola Adeduntan,  pointed out that since the introduction of the I&E window, the economy has witnessed remarkable improvement in forex inflows and an upsurge in capital importation.

He also noted that prior to the introduction of the I & E forexwindow, there were concerns around multiple exchange rates, huge gap between the official exchange rate and the parallel market rates and the opaqueness in the forexmanagement system.

As the central bank continues to rebuild the external reserves, the reserves accretions which has been supported by earnings from crude oil price, inflows through the I & E window, as well as the Eurobond sales, closed at a five year-high of $47.6 billion as of the end of May 2018.

Also, for the 15th consecutive month since January 2017, inflation rate recorded a decline in April from 13.34 per cent in March 2018 to 12.48 per cent (year-on-year), even as food prices remained high.

Last month’s drop in the Consumer Price Index (CPI) inched closer to the CBN’s target of 12 per cent of less, signposting the commencement of monetary policy easing by the central bank possibly by the second half of 2018.

In terms of monetary policy, the CBN in the last four years has majorly operated a tight monetary policy regime.

Its last meeting for May 2018, made it the 11th consecutive time it retained the Monetary Policy Rate (MPR) at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio (LR) at 30 per cent, and the asymmetric corridor at +200-500 basis points around the MPR, which has been criticised by some financial market analysts.

But Emefiele had explained that the MPC decided not to lower the MPR for now as a pre-emptive measure to guard against possible inflationary pressures that the late implementation of the 2018 budget and election expenses might exert on the economy.

As part of efforts to achieve that since 2014, the CBN had been working with the International Finance Corporation (IFC), an arm of the World Bank, to sponsor the bill on the Collateral Registry. This has culminated  the Secured Transactions in Movable Assets Act (otherwise known as National Collateral Registry Act) and the Credit Reporting Actwere recently signed into law. They would help to expand access to financing by MSMEs in the country.

One major milestone for Emefiele is the Anchor Borrowers’ Programme (ABP), aimed at improving domestic supply of commodities and eventually moderating pressure on the forex reserves.

The ABP has created a unique funding platform for financing small holder farmers in Nigeria under a value chain approach that guarantees the supply of quality inputs at the right price and time to suit production cycle and provide a guaranteed market through anchors/aggregators that serve as off-takers to the farmers.

Presently, domestic rice production has increased significantly, while rice importation has dropped.

The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu believes “Emefiele has won a good fight so far.” adding that,  “At some point, there was a fiscal vacuum and then he was basically the one who was trying to restore the economy. If you recall, on a number of time, the MPC urged the federal government to improve the fiscal space.

“Basically, one can say that a lot of the recoveries that we witnessed so far can be attributed to his efforts as the CBN Governor. For instance, look at the I & E window, it was the major boost to achieving forex stability and growing the reserves to what it is today.”

The Chairman of United Bank for Africa, Tony Elumelu, praised the CBN Governor for restoring credibility, transparency and confidence in the forex market.

Elumelu, who is also the Chairman of Heirs Holdings, pointed out that recent policy initiatives of the central bank under the watch of Emefiele had restored predictability, improved market confidence and significantly added a boost to the value of the national currency, fuelling optimism that the economy would soon rebound from recession.

In terms of development financing, the Bank 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 President of the Dangote Group, Aliko Dangote, in assessing Emefiele’s performance, said the intervention of the CBN under Emefiele saved the economy.
Dangote specifically highlighted the Central Bank’s intervention in the agriculture and real sectors of the economy, noting that they have been impactful.