Mr. Olayemi Cardoso Governor,
Central Bank of Nigeria, in this maiden address to banking and finance industry
stakeholders delivered at the Chartered Institute of Bankers of Nigeria (CIBN)
58th Annual Bankers’ Dinner last weekend in Lagos, outlined the basic policy
fundamentals to be pursued by his leadership of the nation’s monetary
authority.
Excerpt.
Global Economy
The global economy, much like our
domestic economy, often experiences cyclical patterns. The recent
Russia-Ukraine conflict, coupled with the ongoing disruptions caused by the
COVID19 pandemic, has had severe consequences for global supply chains, particularly
in agriculture and energy sectors. These disruptions have resulted in a
significant decline in commodity prices and international trade. The sustained
high crude oil prices, exceeding $80 per barrel, have posed challenges for
importdependent countries like Nigeria in managing prices.
The prospects of a global
economic recovery have been further dampened by the ongoing crisis between
Israel and Hamas. The International Monetary Fund (IMF) warns that these
conflicts have serious implications for global economic performance and leave
little room for policy errors. In response to the inflationary pressures caused
by the surge in energy prices resulting from the Russia-Ukraine conflict,
monetary authorities worldwide have raised policy interest rates, leading to
tighter global financial market conditions and significant outflows of funds
from emerging market countries. These developments have led to a strengthening
of the US dollar, exacerbating inflationary pressures while weakening
currencies and depleting external reserves in many emerging market countries.
As a result, several central banks in emerging markets and developing economies
have implemented restrictive policies to contain rising inflation and reduce
capital outflows.
The widespread tightening of
monetary policy, aimed at curbing inflation, has restrained economic We are
building back a better Central Bank — Cardoso CBN will discontinue direct
quasifiscal intervention Will adopt explicit inflation-targeting framework New
foreign exchange guidelines and legislation will be developed …maintain
effective communication with the public …monetary policies will aim to achieve
price stability ‘‘CBN is confident that with continued tightening measures for
the next two quarters, we will be able to effectively manage inflation’’ CBN
Governor, Yemi Cardoso activity and suppressed growth. According to the IMF,
global growth is projected to slow from 3.5 percent in 2022 to 3.0 percent in
2023 and 2.9 percent in 2024, well below the historical average of 3.8 percent
(2000-2019). Advanced economies are expected to experience a slowdown from 2.6
percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as the impact of
policy tightening takes hold. Meanwhile, emerging market and developing
economies are projected to have a modest decline in growth from 4.1 percent in
2022 to 4.0 percent in both 2023 and 2024.
Global inflation is forecasted to
steadily decline from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8
percent in 2024, thanks to tighter monetary policy measures and lower
international commodity prices. However, core inflation is expected to decline
more gradually, and inflation is not anticipated to return to target levels
until 2025 in most cases. It is crucial to note that monetary policy actions
and frameworks play a vital role in anchoring inflation expectations during
these challenging times.
In response to these challenges,
countries worldwide have adopted various conventional monetary policy measures.
Available data indicates a gradual recovery in output in the US, UK, and some
emerging market economies. GDP growth in the US, UK, and emerging market
economies reached 2.2 percent, 1.4 percent, and 3.4 percent, respectively, in
the second quarter of 2023, compared to the same period in 2022. In Africa,
countries such as South Africa, Ghana, Egypt, and Kenya saw growth rates of 0.6
percent, 3.2 percent, 3.9 percent, and 5.4 percent, respectively, in the second
quarter of 2023, thanks to complementary fiscal and monetary policy measures.
Furthermore, inflation rates have
continued to moderate in advanced economies like the United States, the United
Kingdom, and emerging market economies. This is largely due to the
responsiveness of interest rates to adjustments in monetary policy parameters.
However, countries such as Turkey, and Argentina have experienced upward
inflationary pressures, mainly due to legacy supply shocks, despite several
policy rate adjustments.
Considering these developments,
it is evident that economic fundamentals play a crucial role in the
effectiveness of monetary policy actions in addressing macroeconomic
challenges. Therefore, it is imperative that we build a robust institutional
framework to support monetary policy in achieving its objectives of ensuring
price and monetary stability, which in turn guarantee financial system
stability.
Domestic Economy
Considering recent developments
within our domestic economy, it is evident that we are facing significant
macroeconomic and social challenges. These challenges stem from a variety of
factors, including adverse global shocks, unfavorable domestic imbalances,
structural rigidities, and the unintended consequences of certain corrective
policy measures implemented to restore and realign our macroeconomic landscape.
In recent years, the continuous
decline in Nigeria’s crude oil production has further weakened our already
inadequate economic diversification. This has led to a decline in government
revenue and foreign exchange inflows, while simultaneously witnessing a growth
in public expenditures and a deterioration in macroeconomic indicators, which
has constrained our policy options. Consequently, we have seen the fiscal
deficit and public debt increase, placing additional strain on external
reserves and contributing to exchange rate instability.
The GDP growth rate has remained
modest, declining to 3.1 percent in 2022 from 3.4 percent in 2021, and further
dropping to 2.5 percent in the second quarter of 2023. The projection for 2023
stands at 2.9 percent. Despite this, the non-oil sector continues to be the
main driver of growth, expanding by 3.58 percent in the second quarter of 2023
compared to 2.77 percent in the first quarter. This growth is attributed to the
services, agriculture, and industrial sectors, which contributed 4.20 percent,
1.94 percent, and 1.50 percent, respectively, to overall output growth in Q2
2023. Looking ahead, a growth rate of 2.36 percent is expected in the third
quarter of 2023, with an anticipated increase to 3.97 percent in the fourth
quarter as various reforms take effect.
The domestic factors affecting
Nigeria’s economic performance span a wide range, encompassing both social and
economic aspects. Insecurity remains a pressing issue, affecting the
agricultural, industrial, and services sectors simultaneously. The persistently
high levels of insecurity have resulted in decreased national output and
productivity, as many farmers have been unable to access their farmlands,
disrupting supply chains and major economic activities. This has led to food
shortages and inflation in various parts of the country.
Infrastructure constraints also
pose significant challenges, undermining the production chain and distribution
network of goods and services. Additionally, issues such as business
bottlenecks and a culture of poor service delivery, particularly within the
public sector, further hinder the fortunes of the Nigerian economy. Addressing
these challenges requires a well-crafted structural policy, complemented by
coordinated monetary and fiscal policies.
Permit me to pause here, and
recognize the Hon. Minister of Finance and Coordinating Minister of the
Economy, Mr. Olawale Edun who also emerged from the banking industry and with
whom we are collaborating with on these critical issues on a continuous and
regular basis.
A thorough assessment of the
economy reveals significant challenges, including high and rising inflation,
inadequate foreign exchange supply, depreciation of the exchange rate, limited
external reserves, weakened output, and high unemployment. These challenges
have led to increased interest rates, discouraging investments in productive
activities. Within the banking system, high inflation has affected asset quality
and solvency ratios. Additionally, the persistent depreciation of the naira
poses a significant risk for domestic banks with foreign exchange exposures.
Addressing the Challenges of the Banking System and the Economy
Distinguished Ladies and
gentlemen, I understand that many of you have concerns about the current state
of our economy. I want to assure you that while it is indeed a formidable
challenge, it is not insurmountable. With the right policy measures, we can
overcome these obstacles and pave the way for progress and prosperity. I am
confident and optimistic that by taking appropriate corrective actions and
strategic steps, we can restore macroeconomic stability and address fundamental
flaws.
The removal of petrol subsidy and
the adoption of a floating exchange rate, among other government policies, are
anticipated to have positive effects on the economy in the mediumterm. These
measures are expected to enhance investor confidence, attract capital inflows,
stimulate domestic investment, and ultimately improve the level of external
reserves. Additionally, they are expected to contribute to the stabilization of
the domestic currency.
Indeed, despite the challenging
global and domestic macroeconomic environment, Nigeria’s financial sector has
demonstrated resilience in 2023, with key indicators of financial soundness
largely meeting regulatory benchmarks. Stress tests conducted on the banking
industry also indicate its strength under mild-to-moderate scenarios of
sustained economic and financial stress, although there is room for further
strengthening and enhancing resilience to shocks. Therefore, there is still
much work to be done in fortifying the industry for future challenges, a topic
that I will delve into later in my address.
In my recent speech at the 370th
Bankers’ Committee meeting, I highlighted the economic agenda of President Bola
Ahmed Tinubu’s administration. The administration, as outlined in the widely
circulated Policy Advisory Council report on the national economy earlier this
year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of
$1.0 trillion over the next seven years, with clearly defined priority areas
and strategies. Attaining this substantial target necessitates sustainable and
inclusive economic growth at a significantly higher pace than current levels.
The administration has already commenced this journey through fiscal reforms,
including the removal of petrol subsidy and the unification of the foreign
exchange market rate.
Esteemed guests, considering the
policy imperatives and the projected economic growth, it is crucial for us to
evaluate the adequacy of our banking industry to serve the envisioned larger
economy. It is not just about the stability of the financial system in the
present moment, as we have already established that the current assessment
shows stability. However, we need to ask ourselves: Will Nigerian banks have
sufficient capital relative to the financial system’s needs in servicing a $1.0
trillion economy in the near future? In my opinion, the answer is “No!” unless
we take action. Therefore, we must make difficult decisions regarding capital
adequacy. As a first step, we will be directing banks to increase their
capital.
Technology will continue to play
a critical role in delivering financial services and enhancing financial
inclusion. However, recent developments in the payment services landscape have
raised concerns regarding the use of technology and the existing licensing and
regulatory framework. We have observed that some licensees are operating
outside the approved activities, breaching the boundaries set for them. Any
intentional or unintended noncompliance will be subject to sanctions, as
operators have the responsibility to ensure that they are licensed for the
activities they undertake.
Concurrently, as we conduct a
comprehensive review of the licensing framework for payment services, we will
engage in extensive consultations to develop a new regulatory and compliance
framework that is suitable for the technology-driven payment services sector.
Looking ahead for the industry, banks should reassess the responsible banking
framework to ensure that the requirements are effectively integrated into their
strategies. I am aware that some banks have made commendable progress in this
regard. Furthermore, the Central Bank of Nigeria is taking steps to enhance its
in-house capacity so that it can assist other banks that still have progress to
make in implementing their sustainability principles.
Human Stories
While macroeconomic indicators
are valuable in assessing performance, I am equally concerned about the
well-being of the average citizen.
The plight of the hardworking
masses in our urban centers and villages is a pressing concern. We must ask
ourselves if there is a potential future where a brilliant and motivated
teenager from anywhere in Nigeria could attend a future anniversary dinner
instead of being drawn into outlawed militant groups or extremist ideologies.
Likewise, recognizing the pivotal role that women play as critical players in
the economy, one cannot overlook the significant impact that providing them
with opportunities can have on Nigeria’s economic advancement. To address this,
we need to develop stronger frameworks for measuring the human condition and
ensure that policymakers and business leaders pay as much attention to these
measures as they do to macroeconomic indicators. This means tracking indicators
such as access to food, shelter, and healthcare, as well as education and
skills training opportunities.
We must also monitor daily wage
rates in lower-income jobs, access to basic amenities like electricity, clean
water, and sanitation facilities, and availability of public transportation.
From a financial inclusion standpoint, we should track access to financial
services, including consumer credit, and ultimately, the ability to finance
home ownership on a large scale. By having accurate data on the human condition
and implementing appropriate policies based on this data, we can expect
inclusive economic growth that leads to tangible improvements in the lives of
our citizens. It is crucial to give the same visibility to human condition data
as we do to macroeconomic data to ensure that the expected economic progress
benefits the masses and helps lift them out of their current dire conditions.
I recently met with a group of
small business owners who expressed their concerns about the impact of
inflation on their operations. They shared stories of struggling to maintain
affordable prices for their customers while facing rising costs for raw
materials and supplies. The instability caused by inflation not only
affectstheir profit margins but also hampers their ability to plan for the
future. These entrepreneurs stressed the need for price stability to create a
conducive business environment that allows them to thrive and contribute to the
economy.
In recent discussions with
individuals from different walks of life, I encountered a young family trying
to make ends meet in the face of rising prices. They shared their worries about
the erosion of their purchasing power and the challenges of meeting basic needs
within a tight budget. They emphasized the importance of stable prices to
protect the wellbeing of ordinary citizens and ensure a fair distribution of
resources. It is crucial that we prioritize price stability to safeguard the
livelihoods of our fellow Nigerians.
Stabilizing the exchange rate is
another critical aspect of our efforts to promote economic stability. I had the
privilege of speaking with business owners engaged in international trade. They
recounted the difficulties of navigating the fluctuations in the exchange rate,
which often led to uncertainties and unexpected costs. The volatility in the
foreign exchange market disrupted their planning and hindered their ability to
make informed business decisions. It is imperative that we provide transparency
and create a market environment that allows fair determination of exchange
rates, ensuring stability for businesses and individuals alike.
To address these challenges, the
Central Bank of Nigeria is committed to achieving monetary and price stability.
This is not just a technical objective, but it has reallife implications for
the wellbeing of our citizens. Through targeted policies, transparent market
operations, and coordination between monetary and fiscal authorities, we can
ensure a more stable exchange rate, control inflation, and create an enabling
environment for businesses and individuals to thrive.
This is what I, together with my
team at the Central Bank have been focused on doing in the past two months. We
have critically reviewed the effectiveness of the Central Bank’s monetary
policy tools and have spent time fixing the transmission mechanism to ensure
the decisions of MPC meetings actually result in desired objectives. For quite
some time, there has been a dislocation of our monetary transmission mechanisms
rendering the MPC meetings largely ineffective.
For the avoidance of doubt, the
Central Bank of Nigeria Act 2007 requires that the meeting of the Monetary
Policy Committee of the Bank holds at least four times a year, and the Bank has
satisfied this requirement for 2023. Our focus has been on ensuring these
meetings are useful and effective.
I am happy to report that our
efforts over the past two months have begun to yield fruit. The activities
include the following:
(i) Regular Open Market
Operations (OMO) to mop up excess liquidity from the banking system. An OMO
auction was recently held with a stop rate of 17.5% for the one-year tenor,
attracting oversubscription of N350 billion. Another round of OMO has been
approved to further reduce excess liquidity.
(ii) Offering N108.1 billion
worth of Treasury Bills with three tenors to the investing public, which can
help reduce liquidity in the banking system and support government fundraising.
(iii) Removal of the cap on the
remunerable Standing Deposit Facility (SDF) to increase activity in the SDF
window and manage liquidity.
(iv) Sustained Cash Reserve
Requirement (CRR) debits, which have moderated liquidity in September and
October 2023. Liquidity in the entire banking sector has been significantly
reduced to under N100 billion in November.
(v) Inauguration of a new
liquidity management committee within the Bank that meets daily at 8am to
assess liquidity conditions and ensure optimal levels.
These measures have already
started to yield results, as excess liquidity in the banking system has
significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased
to a level consistent with the monetary policy program. Month-on-month
inflation has also begun to decline, with a growth rate of 0.67% in October
compared to 0.97% previously.
While absolute inflation is still
rising, the declining rate of growth indicates progress. The CBN is confident
that with continued tightening measures for the next two quarters, we will be
able to effectively manage inflation.
Building Back a Better Central Bank
I am aware that events over the
past few years have also put the CBN in bad light. These issues can be
attributed to various factors, such as corporate governance failures,
diminished institutional autonomy of the Central Bank of Nigeria, a deviation
from the core mandate of the Bank, unorthodox use of monetary tools, an
inefficient and opaque foreign exchange market that hindered clear access, a
foray into fiscal activities under the cover of development finance activities.
There was also a lack of clarity in the relationship between fiscal and
monetary policies, among other challenges.
Hitherto, the CBN had strayed
from its core mandates and was engaged in quasi-fiscal activities that pumped
over 10 trillion naira in the economy through almost different initiatives in
sectors ranging from agriculture, aviation, power, youth and many others. These
clearly distracted the Bank from achieving its own objectives and took it into
areas where it clearly had limited expertise.
Under my leadership, the Central
Bank of Nigeria will vigorously address these issues. We will tackle
institutional deficiencies, restore corporate governance, strengthen
regulations, and implement prudent policies. We assure investors and the business
community that the economy will experience significant stability in the
short-to-medium term as we recalibrate our policy toolkits and implement
far-reaching measures.
The primary mandate of the CBN is
to ensure price stability, in addition to other objectives such as issuing
legal tender currency, safeguarding external reserves, promoting a sound
financial system, and providing economic and financial advice to the
government. In line with our strategy to refocus on our core mandate, the CBN
will discontinue direct quasi-fiscal interventionist activities and instead
utilize orthodox monetary policy tools for implementing monetary policy. As
part of this refocus, the CBN has just approved the adoption of an explicit
inflation-targeting framework to enhance the effectiveness of our monetary
policy. The details and requirements for this framework are currently being
finalized alongside the fiscal authorities. Additionally, the CBN will provide
forward guidance, enhance transparency, and maintain effective communication
with the public to anchor expectations and build trust among stakeholders.
Our monetary policies will aim to
achieve price stability, foster sustainable economic growth, stabilize the
exchange rate of the naira, and reduce interest rates to facilitate borrowing
and investments in the real sector.
In order to ensure the proper
functioning of domestic and foreign currency markets, clear, transparent, and
harmonized rules governing market operations are essential. New foreign
exchange guidelines and legislation will be developed, and extensive
consultations will be conducted with banks and FX market operators before
implementing any new requirements.
We have already witnessed
improvements in FX market liquidity in recent weeks, as the market responded
positively to tranche payments which have been made to 31 banks to clear the
backlog of FX forward obligations. We have been subjecting these payments to
detailed verification to ensure only valid transactions are honored. In a
properly functioning market, it is reasonable to expect significant FX
liquidity, with daily trade potentially exceeding $1.0 billion. We envision
that, with discipline and focused commitment, foreign exchange reserves can be
rebuilt to comparable levels with similar economies.
Significantly, the envisioned GDP
target will put Nigeria in a position of much more favourable macro-economic
indices, comparable to other economies of $1.0 trillion and above, with similar
population and development characteristics. As with these countries, there is
an expectation that driving to this target requires improvements in
productivity, employment, and key macroeconomic growth indices. In drawing a
comparison with some of these countries, I had in the same address to the
Bankers ’Committee audience referred to selected BRICS and MINT economies, such
as Brazil, Mexico, and Indonesia for their capacity to absorb economic shocks
and rebound from cyclical downturn. Significantly, Brazil with a population of
215 million, Mexico 129 million, and Indonesia 275 million, which have 2023
unemployment rates at 7.8%, 3.1%, 5.4%, respectively. These are unemployment
levels that we in Nigeria should aspire to achieve, and with resolve can
attain.
Further to the projected growth
target, sectors including Agri processing, Oil & Gas, Manufacturing, Solid
Minerals, Fintech and Information Technology, Real Estate construction and
Infrastructure, among others are expected to attract significant capital
investments. Having mentioned all these sectors, we must appreciate the soft
power projected by the incredibly talented cohorts in the Creative Industries:
Afrobeat, Nollywood, Food, Fashion, Design, and the Arts, continue to make
strong impact in youth employment and contribution to Nigeria’s international
image. As these sectors expand, so will opportunities for incumbent players and
new entrants alike, who are willing to make calculated bets as economic spaces
open from expansion of the economy.
Therefore, key macro-economic
Continue from page 5 indicators both on fiscal and monetary activities must be
tracked, diligently evaluated, and necessary adjustments made if things are not
pointing in the right direction or moving at the right pace.
These indicators include GDP
growth, Tax-to-GDP, per capita income, balance of payments, foreign exchange
reserves, unemployment rate, consumer price indices, headline, and core
inflation rates, as well as more granular measures that we as the regulator use
in assessing stability of the financial system. In our assessment of these key
ratios, they need to continue to improve, however we are aware of laudable
efforts by the fiscal authorities on this and recognize that visible
improvements will take time to manifest.
As the monetary authority, we are
taking measured and deliberate steps to send the right signals to the market
and achieve our mandate. To ensure stability, curb speculation, and restore
confidence in the foreign exchange market, we have initiated the payment of
unsettled forward foreign exchange obligations, and these payments will
continue until all obligations are cleared. This intervention has already had a
positive impact on liquidity and has led to a significant appreciation of the
exchange rate at certain points. The CBN also recently lifted the ban on 43
items from accessing the official foreign exchange market, allowing market
forces to determine exchange rates based on the Willing Buyer – Willing Seller
principle. We are witnessing clear progress in stabilizing the Nigerian foreign
exchange market.
Allow me to provide further
clarification on the issue of the 43 items. Firstly, it is important to note
that these items were never outrightly banned by the government. The CBN had
imposed restrictions on their access to foreign exchange in the official
market. However, these restrictions resulted in increased demand for foreign
exchange in the parallel market, leading to the depreciation of the exchange
rate in that segment of the Nigerian Foreign Exchange Market (NFEM) and
widening the premium between the parallel and official market. Studies have
shown that during the period when the 43 items were restricted, there was a
51.0% increase in trade evasion by importers accessing the foreign exchange market,
resulting in a revenue drop of approximately US$1.4 billion, or US$275 million
annually, between 2015 and 2019.
Additionally, revenue from
tariffs on goods decreased from a high of approximately US$920 million in 2011
to about US$250 million in 2017. In 2019, the actual tariff on goods stood at
US$320 million, but counterfactual evidence suggests that as much as US$680
million could have been earned in the same year. Furthermore, evidence has
shown that foreign exchange restrictions had an adverse impact on Nigerian
households and contributed to inflationary pressures. The reduction in trade
restrictions and levies on rice, sugar, and wheat by 50.0% had only a minimal
impact on welfare, with a 0.8% improvement, and a mere 0.4% reduction in
extreme poverty. Moreover, the benefits of trade gains for the general
population were negligible, as the average industry in Nigeria pays 13.7% more
for its inputs. Lastly, it is important to note that trade policy is primarily
the responsibility of the fiscal authorities, and delving into such matters
falls outside the purview of the CBN.
As an adviser to the government,
the CBN will be repositioned as a catalyst for economic stability and growth.
Instead of direct interventions, we will collaborate with stakeholders and
formulate policies that create an enabling environment for sustained economic
growth and development. Our catalytic role will support increased investment
and private sector participation in the economy, improve access to finance for
MSMEs, and enhance financial services for the underbanked. This includes
promoting specialized institutions and financial products to support emerging
sectors, developing regulatory frameworks to unlock dormant capital in land and
property holdings, facilitating accelerated access to consumer credit, and
expanding financial inclusion to reach the masses. Furthermore, we will work
with experts to develop derisking instruments that encourage private sector
investment in key industry verticals such as housing, textiles and clothing,
food supply chain, healthcare, and educational supplies, which have high
potential for local inputs and value retention. The CBN will leverage its
convening power to engage multilateral and international stakeholders in
government and private sector initiatives.
In conclusion, there is much work
to be done, and collaboration from all stakeholders is essential as we rebuild
trust. Central banks are known as banks of last resort because they underpin
the financial system. To do so effectively will require rebuilding and
restoring trust in the Central Bank of Nigeria. Let me assure you that I am
irrevocably committed to that calling.
In navigating these challenging
economic times, the Central Bank of Nigeria is fully committed to ensuring
price stability and financial system sustainability. We will stand by Nigeria
and Nigerians. Our actions will be fully guided by the principles of
transparency, responsibility, and a deep commitment to Nigeria’s progress.
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