Friday, June 6, 2014

Our vision for Nigeria’s economy, by Emefiele

 Being excerpts of the opening remarks at the maiden press briefing byGodwin Emefiele, on his resumption as Governor of Central Bank of Nigeria, CBN, yesterday OUR Vision to Create a People-Centred Central BankThe vision of the Central Bank of Nigeria is to “be the Model Central Bank delivering price and financial system stability and promoting sustainable economic development”.This vision draws inspiration from our understanding of the multiple mandate of the Bank to pursue both price and financial system stability as well as provide complementary developmental functions by creating an environment for Nigerians to live better and more fulfilled lives. Rather than being competing goals, as some may argue, these mandates are truly complementary.EmefieleIn fact, price stability can rarely be adjudged a goal in itself except cast against the ultimate objective of improvement in the quality of life. Price stability, therefore, remains a cardinal contribution, indeed a cornerstone, to the ultimate goal of economic development.I believe that reasonably stable prices provide a catalyst for rational consumption and investment decisions and for orderly economic progress. That is why throughout most of economic history, periods of price and financial system stability have coincided with economic growth and development.In order to realize the CBN’s vision, therefore, I believe we must start with championing policies that promote the sustainability of our hard-earned macroeconomic stability.A. Macroeconomic StabilityMonetary Policy: We shall pursue a gradual reduction in interest rates. A comparison of selected macroeconomic aggregates from some emerging market countries including South Africa, Brazil, India, China, Turkey, and Malaysia indicate that Nigeria has one of the highest T-bill rates. Such high rates create a perverse incentive for commercial banks to simply buy virtually risk-free government bonds rather than lend to the real sector.To enhance financial access and reduced borrower cost of credit, we would pursue policies targeted at making Nigeria’s T-bill rates more comparable with other emerging markets and by extension, pursue a reduction in both deposit and lending rates. While a reduction in deposit rates would encourage investment attitudes in savers, a reduction in lending rates would make credit cheaper for potential investors.The Bank would also begin to include the unemployment rate as one of the key variables considered for its Monetary Policy decisions. In the interim, we would continue to maintain a monetary policy stance, reflecting the liquidity conditions in the economy as well as the potential fiscal expansion in the run-up to the 2015 General Elections.Exchange Rate Policy: Our key goal here would be to maintain exchange rate stability. In view of the high import-dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the Naira would literarily translate to considerable inflationary pressure with attendant effect on macroeconomic stability.Therefore, under my leadership, the Bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency. We will sustain the managed float regime in the management of the exchange rate, as this will allow the Bank to intervene when necessary to offset pressures on the exchange rate. To support this strategy, we will strive to build-up and maintain a healthy external reserves position and ensure external balance.There is no doubt that reducing the interest rate and maintaining the exchange rate are very daunting twin goals. However, the CBN would work assiduously with all stakeholders to device countervailing measures that would ensure that these goals are mutually achievedFinancial System Stability: We hope to sustain the effective management of potential threats and avoid systemic crisis. The core of my vision is to effectively manage potential threats to financial stability, and create a strong governance regime that is conducive for financial intermediation, innovative finance and inclusiveness. In this regard, we hope to anchor on two main pillars: managing factors that create liquidity shocks and zero tolerance on practices that undermine the health of financial institutions. In order to achieve these goals, we would:•Work with the relevant stakeholders to aggressively shore up reserves. We hope to engage the fiscal and political authorities, as well as other stakeholders to improve our policy buffers, which will further create space for the Bank to implement monetary policy using its limited instruments;•Enhance the Bank’s supervisory purview over the banking system as well as strengthen macro-prudential regulation by improving supervisory diligence, ethical standards as well as highest level of professionalism in carrying out on and off-site supervision activities;•Strengthen risk-based supervision mechanism of Nigerian banks to ensure overall health and banking system stability. To that end, banks shall be enjoined to proffer remedial actions where weaknesses are observed in RBS examination reports so as to avoid further build-up of NPLs. Where banks proffer inadequate remedies, the CBN shall advance its own solutions and insist on compliance;•In the light of the size of the economy following the rebased GDP, the trigger thresholds from a macro-prudential perspective are no longer adequate. In due course, the CBN would consider and announce measures to effectively address this anomaly.•Pursue a zero-tolerance policy on fraudulent borrowers. We will collaborate with commercial banks to significantly improve the credit culture in the Nigerian banking system. The CBN’s focus would be directed at serial debtors who access loans from different banks and default on all of them even when they have the means to pay. Going forward, the CBN will work towards reducing the effect of information asymmetry in the credit market. In this regard, we shall do the following:•Enhance the operation of Credit Reference Bureaus;o•Establish Secured Transaction and National Collateral Registry;•Strengthen the sanction system to include: blacklisting of companies/individuals that have been found to be serial loan defaulters. Indeed, these names would be circulated in the banking system to guide banks in identifying bad borrowers and denying them access to credits in the banking system;•Implement stringent loan provisions and penalties for banks that lends to blacklisted persons and companies;•Intensify our collaboration with relevant agencies, and in particular, the Justice Ministry, to strengthen bank’s ability to enforce contracts and recover matured debts.•Renew vigorous advocacy for the creation of commercial courts for quick adjudications on loan and related offences.•Establish a National Credit Scoring System that will improve access to information on borrowers and assist to make good credit decisions.Banking Supervision: Our take on banking supervision would be to work towards a better risk-based supervision framework. This will be achieved by:•Training sector-specific bank examiners. For example, while the banking industry has excessive concentration in oil and gas loans, the CBN does not have the expertise to analyze and monitor the risks inherent in these credits. In other words, every examiner is a generalist.•In connection with the above, specialization will help reduce an increasing reliance on outside consultants, ensure that confidential supervisory information are protected and guarantee a staff depth that can generate robust in-house data to help senior Central Bank officials prepare adequately for public engagements.The Payments System: We hope to better align the Cashless Policy. This policy was introduced in 2012 with pilots now completed in Lagos, Kano, Anambra, Abia, Rivers, and the FCT. The policy is now expected to go nation-wide on 1st July 2014. Over the course of the pilot, we have become aware of complaints by customers particularly regarding the charges being imposed for cash deposits.This has resulted in customers devising various means to avoid the charges through opening of multiplicity of accounts and other disingenuous behaviour all aimed at undermining the objective of this policy. Given these outcomes and to better reflect our goal of having more cash under our control, all charges on deposits are hereby stopped with immediate effect.Charges on withdrawals, in view of their eventual elimination, remain sustained at the current 3 percent for individual transactions exceeding N500,000 and 5 percent for corporate transactions exceeding N3 million. Currently, these fees go entirely to the commercial banks. However, going forward, the Central Bank shall determine what percentage of these fees on excess drawings that will be redeemed by the bank while the rest shall be remitted to the CBN.Let me now turn to the second aspect of my vision, which centres on development banking.B.Central Banks and Economic DevelopmentFor quite some time, the dominant school of thought regarding central banking was that focusing on low inflation will eventually lead to greater growth, increase in employment generating activities, and poverty reduction. However, early and recent evidence of central banking in places such as the United States, England, Japan, and France indicate that supporting selected economic sectors using “direct methods” of intervention have been essential tasks of their central banks.Essential tasks of Central BankAs Epstein (2005) encapsulates, “virtually all central banks, including the Bank of England (BOE) and the U.S. Federal Reserve (the Fed) have used direct means to support economic sectors. And this has not simply been a matter of historical aberration, but rather, it has been an essential aspect of their structures and behaviour for decades on end.In particular, a crucial role for both the BOE and the Fed has been to promote the financial sectors of their economies, and especially, to support the international role of their financial services industries. They have done this by using subsidized interest rates, legal restrictions, directed credit and moral suasion to promote particular markets and institutions. Moreover, at times, they have even oriented their overall monetary policy toward promoting the development of this particular economic sector”.As I have shown in the section on recent macroeconomic developments, Nigeria has witnessed impressive GDP growth rates over the past seven years. Yet, there is an absence of a corresponding reduction in the unemployment rate in Nigeria, which has risen to 23.9 percent in 2012 relative to 13.9 percent in 2000. Particularly worrisome is the rate of youth unemployment, which is too high.With an annual addition of 1.8 million Nigerians to the labour pool, the Central Bank cannot afford to sit idly by and concentrate only on price and monetary stability. Additional measures would be required towards identifying productive sectors of the economy and channeling credit towards these sectors, while imposing proper monitoring and performance measures in order to ensure that the goals of increased employment and poverty reduction are attained.This will require a review of the Bank’s development finance program, the participatory agencies responsible for the disbursement of funds, improving our monitoring capacity and developing performance targets relevant to our focus on generating employment and poverty reduction. To be effective, the measures taken by the Bank will not work in isolation. We will work with the fiscal authorities in reducing other structural distortions to productive growth, as this will enhance access to credit, as well as stimulate growth and employment generation.Our Agenda for Development FinanceThe core principle here is that the CBN will act as a financial catalyst by targeting predetermined sectors that can create jobs on a mass scale and significantly reduce our import bills. The CBN would deploy developmental initiatives to create an enabling environment with appropriate incentives to empower innovative entrepreneurs to drive growth and development.It is important to stress here that the CBN would not be targeting individual companies but rather specific sectors. We would establish rules and criteria that create a level playing field so that anyone who fairly qualifies can benefit from these schemes.Some of the Central Bank’s developmental functions will include credit allocations and direct interventions in key sectors of the economy such as Power, Agriculture, MSME, Oil & Gas, and Health. While playing an active developmental role, the CBN will not only operate within the law and its mandate but will also be transparent about what it believes as strategic and appropriate interventions.•A New Framework for Funding SMEs: Funding for SMEs in Nigeria has largely been viewed from a social development perspective with the goal to reduce poverty through job and wealth creation. This has put the development of the sector squarely in the hands of the government, with mixed results. Going forward, we propose a business approach to funding SMEs, which requires the strong involvement of the private sector.The new framework proposed will combine the profit motives of the private sector and the development objectives of the government. It proposes a structure that enables the government to leverage the project selection and credit analysis processes of private sector investors who will place more of their resources at risk in funding the SMEs.Number of initiativesAt the moment, the CBN has a number of initiatives including the N220 billion to finance Small- and Medium-Scale Enterprises with specific focus on women entrepreneurs and to be administered through Microfinance Banks owned either by state governments and/or private organizations. While the private sector invests more of their risk capital in the selected companies, CBN funds will focus on resolving challenges such as access to collateral, enterprise development support, development of a nationwide credit scoring system, etc.•The Power sectorGiven CBN’s mandate to “develop and implement various policies, programmes and schemes aimed at the effective, efficient and sustainable delivery of financial services to special sectors of the economy”, there is an important role the CBN must play to ensure the success of the power sector reforms. The corresponding effect on GDP that could occur as a result of improvements in the power sector cannot be overstated.How then can the CBN add value in the power sector?While these plans still need to be fully developed, permit me to share broad outlines:•We will facilitate investment in key parts of the value chain nment to trigger private sector investment and curb the growing trend of medical tourism.ConclusionThe sole objective of this briefing is to place before you our plans to move our country forward. These ideas can be summarized as follows: •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; •Strengthen risk-based supervision mechanism of Nigerian banks to ensure overall health and banking system stability;Build sector-specific expertise in banking supervision to reflect loan concentration of the banking industry;In view of inadequate trigger thresholds from a macro-prudential perspective, consider and announce measures to effectively address this anomaly; •Abolish fees associated with limits on deposits and reconsider ongoing practice in which all fees associated with limits on withdrawals accrue to banks alone;Introduce a broad spectrum of financial instruments to boost specific enterprise areas in agriculture, manufacturing, health, and oil and gas;Establish Secured Transaction and National Collateral Registry as well as establish a National Credit Scoring System that will improve access to information on borrowers and assist lenders to make good credit decisions;Build resilient financial infrastructure that serves the needs of the lower end of the market, especially those without collateral; •Renew vigorous advocacy for the creation of commercial courts for quick adjudications on loan and related offences.We must, by now, have been tired of hearing people talk about the “potentials” of Nigeria. Now is the time to live that dream. I truly believe that working together, we can achieve our goals and give Nigerians the chance to live longer, better and more fulfilled lives.Thank you for your kind attention.

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