In Nigeria, Inflation and unemployment has been on the increase for over a decade number of years. The Nara remains constantly under pressure, while the Gross Domestic Product growth crawls from positive to negative. CHIMA NWOKOJI in this report examines Central Bank’s efforts to keep the economy afloat.
FOR being ubiquitous in the economy, the Central Bank of Nigeria (CBN) has received deafening blows from analysts’ punches from different corners of Nigeria’s boxing ring. Critics ask how can a monetary authority intervene in the creative and entertainment industry, aviation industry, agricultural sector, health, business and so on.
But the CBN’s body language echoes an Igbo proverb which says that “an elder does not sit at home and watch a tethered goat deliver.” On the other hand, other analysts seem to have interpreted the proverb with yet another question: “If various ministries in charge of all these sectors are handicapped due to administrative and structural problems, should the central bank which roles also encompasses developmental, sit and watch the economy sink into oblivion?”
The CBN’s mandate
The CBN, by its mandate is empowered to: ensure monetary and price stability; issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in Nigeria; and act as Banker and provide economic and financial advice to the Federal Government.
In pursuit of the above and its Developmental function provided for in Section 31 of the CBN Act (2007), the Bank has over the years intervened in critical sectors in order to safeguard the Nigerian economy. These interventions are not peculiar to Nigeria as most critics would portray it to be.
Among other stimulus packages/ interventions in the past, the US Federal Reserve and Treasury have injected over $4 trillion dollars into the economy this year. We cannot say because the Fed is independent, therefore, Trump and his array of policy makers are ignorant of the intervention.
The economy
Total number of Nigerians who are unemployed or underemployed as at second quarter (Q2) 2020 berthed at a combined 55.7 per cent. The Consumer Price Index, which measures inflation, increased to 13.22 per cent year-on-year in August 2020. Inflation has also remained at double digits and the economy has witnessed negative growth for two quarters. The price of crude oil remains low in the international market and there continues to be pressure on the Naira.
Due to the impact of COVID-19, the nation’s reserves are not being shored up as expected. These compares to the situation in 2016, when the Central Bank of Nigeria (CBN) had to navigate the murky waters and did all it could to get Nigeria out of recession.
Before now, the CBN governor, Godwin Emefiele, had warned of the possibility of the economy sliding into recession again unless appropriate complementary measures were taken by the monetary and fiscal authorities.
Some stakeholders have reasoned that but for the efforts of the CBN Governor and his team, perhaps the Nigerian economy would have been neck deep into recession by now as economies even stronger than Nigeria’s have since buckled under the impact of the COVID-19.
The efforts being put by the CBN involves making hard policy choices that more often than not, have unintended trade-offs. The trade-offs in turn require even more policy decisions.
For instance, when a major policy decision like the adjustment of the exchange rate, stoppage of fuel subsidy or deregulation of Nigeria’s downstream oil sector is made, its effect usually transmit to Government, Household, Business sector, Economy, financial, capital, commodity and Labour markets.
The pass-through effects, especially on inflation, employment, investment and price stability, often require hard choices involving: control of a fixed and stable exchange rate; the independent monetary policy; free and open international capital flows (the trinity).
Economists call it the Impossible or ‘unholy Trinity.’ They believe that a country cannot have it all. It must choose two out of the three. The theory is that a country that attempts to get all three at once will be broken by the international markets as they force a run on the currency.
If an independent central bank imposes low interest rates to stimulate the economy, capital will flow out in search of a decent return or yield, and the local currency will devalue. Most times monetary authorities will eventually have to release their currency pegs and devalue or impose strict controls to stop capital fleeing the country.
But Nigeria’s president Mohammadu Buhari has insisted that the country will not release its currency peg and will not devalue. Despite the pressures on the country’s foreign reserves due to a huge fall in the monthly foreign earnings, aggravated by the COVID-19 pandemic, the CBN has kept the economy very much afloat.
Critics
A policy analysts Mr. Joseph Ademola believes that while constructive criticism is welcome in a democratic setting, evidence has shown that some are not constructive enough, but based on personal interest and agenda.
According to him, “For instance, rather than support patriotic moves by the CBN to keep the economy afloat, some fifth columnists have taken up commissioned roles in blaming the CBN for the decisions aimed at shielding the Nigerian economy from the global economic shock. They choose to forget that there are two sides to managing an economy – the monetary and the fiscal.”
Specifically, “in recent times, there have been concerted effort by some groups to impugn on the integrity of the CBN and its officials because of the Bank’s policy or stance on foreign exchange, restriction of forex to 43 items that can be produced in Nigeria, ban on banks and third parties from using Third Party Form “M” to obtain forex, Treasury Bills and smuggling, among others.
“For the discerning, the CBN, in recent times has borne the burden of both authorities. Notwithstanding efforts by the bank, some stakeholders have chosen to turn a blind eye to the progress being made in driving the economy towards growth despite harsh global economic situations.
They insist that the CBN should operate within its “core” monetary policy role, when in fact the Act confers on it powers to engage in developmental functions,” Joseph argues.
CBN’s interventions to salvage economy
To safeguard the Naira and avoid further depletion in the country’s reserves, the CBN took a number of countervailing actions including the prioritization of the most critical needs for foreign exchange by restricting access to the Nigerian foreign exchange market for the importers of 43 items that can be produced in Nigeria.
Emefiele and his team, in spurring the effort of the Federal Government to create jobs, have established several intervention programmes such as the Anchor Borrowers’ Programme (ABP), Commodity Development Initiative (CDI), the Youth Entrepreneurship Development Programme, Agribusiness/ Small and Medium Equity Investment Scheme (AGSMEIS), the National Collateral Registry (NCR) and lately the Creative Industry Financing Initiative (CIFI).
Going by the level of work put in by the CBN in ensuring the stability of the economy, many industry watchers are persuaded to give their trust to them as it relates to monetary policy.
While the Nigerian economy is not yet where even the apex bank said it expects it to be, collaboration with the fiscal authorities in ensuring that the country’s economy bounces back strong is powerfully needed.
The Bank, through its Development Finance Department, has embarked on several developmental initiatives aimed at lowering cost of funds in Nigeria, accelerating financial inclusion and diversifying the economy. Consequently, jobs will be created and the country will earn more to shore up its foreign reserves.
Recently, the Bank also unveiled the framework for the following: Implementation of Family Homes financing initiative; National Gas Expansion Programme; and Solar Connection Facility.
Related to these, the CBN Governor had met severally with stakeholders in the value chains of not less than ten crops to discuss effective linkages and consider measures to increase domestic production of the relevant crops, in the attempt to attain self-sufficiency in the production of those crops.
The outcome of that was the establishment of the Anchor Borrowers’ Programme (ABP) with a view to collaborating with anchor companies involved in the production and processing of key agricultural commodities. The Programme is expected to assist local farmers increase production and supply of feedstock to processors, reduce importation and conserve Nigeria’s external reserves.
As is the case with central banks in many top developing countries, focus is on promoting the process of economic growth. Central Banks in those climes ensure adequate monetary expansion in the country and provide funds for initiating investment in the public sector. This exactly is what the CBN, in recent times, has been doing in the critical sectors of the economy by taking up a direct and active role in financing development activities in Nigeria.
Tackling the negative effects of COVID’19 on the economy will require unconventional monetary policy, said Uche Uwaleke, professor of finance and capital markets at the Nasarawa State University Keffi.
The apex bank has already risen to the challenge through the stimulus packages it rolled out recently. The Nigerian banking sector regulator took decisive action to safeguard the Nigerian financial system and the economy from the emerging headwinds he agreed.
Following his appointment for a second term as CBN Governor, Mr. Godwin Emefiele, rolled out the five-year policy trust of the apex bank aimed at enhancing growth and development of the Nigerian economy. The policy trust is anchored on five key priorities, namely: Preserve domestic macroeconomic and financial stability; Create robust payment system infrastructure; Work with the Deposit Money Banks to improve access to credit for smallholder farmers, Micro, Small & Medium Enterprises, (MSMEs); Consumer credit and mortgage facilities for bank customers; Grow external reserves; And support efforts at diversifying the economy through intervention programmes in the agricultural and manufacturing sectors.
Listing the possible impact of these measures while speaking at the media presentation of its report, Head of Research, FSDH Merchant Bank, Mr. Ayo Akinwunmi, said: “With the implementation of these priorities, more funds will be available to finance non-oil export-led sectors. This should create new businesses, reduce import dependency, grow foreign exchange earnings, ensure stable exchange rate and possibly cause the value of the currency to remain stable to appreciate.
He, however, stressed that CBN policy trust requires complementary fiscal policies to produce the expected impact. These, he said, include: improving the transportation network in the country so that goods can be moved easily from farmland to the market. This will reduce wastages.
Way forward
A Nigerian businessman, economist and writer, Mr.Tope Kolade Fasua believes that the CBN should understand that any market will have end users, speculators, day-traders, hedgers, arbitrageurs and long-and-short-term investors and that there is no point fighting arbitrageurs and speculators openly.
According to the founder, and CEO of the Abuja based Global Analytics Consulting Limited, an international consulting firm the CBN should act as if they don’t exist, while devising ways of clipping their wings underneath.
He supported CBN’s measures at defending the naira in a recent article by saying that no one jokes with their currency, stressing that Margaret Thatcher in 1990 once addressed a bunch of British businessmen, and echoed Stalin by saying, “to destroy a country, first debauch their currency”. No one could be more liberal than Thatcher, he added. So, should the apex bank sit back and watch the naira debauched?
– Nigerian Tribune