These days, the Central Bank of Nigeria (CBN) is playing up its development function role. To enable Nigerians live longer and better, it is focusing on delivering price and financial system stability (FSS) and promoting sustainable economic development. COLLINS NWEZE writes on the bank’s key developmental functions, including its plans to further reduce interest rates and enhance the real sector.
The Monetary Policy Committee’s (MPC’s) decision to cut the benchmark interest rate from 13 per cent to 11 per cent during its last meeting indicated the Central Bank of Nigeria’s (CBN’s) commitment to economic development.
The action, the first rate slash in six years, showed CBN’s determination to stimulate growth in the real sector. Also, the MPC reduced Cash Reserve Requirement (CRR) from 25 per cent to 20 per cent to shore up liquidity in the financial sector and create more loanable funds for banks. The CRR is a portion of banks’ deposits kept with the CBN as reserves.
CBN Governor Godwin Emefiele explained that the liquidity from CRR reduction would only be released to banks that are willing to channel it to employment generating activities, such as agriculture, infrastructure and solid minerals.
He said the MPC evaluated the options for ensuring increased credit delivery to the key sectors, capable of generating employment and improving productivity and growth.
Even the Federal Ministry of Finance and the World Bank are working together to ensure that the economy rebounds.
Last weekend, CBN Director, Financial Policy Regulation Kelvin Amugo urged banks to appraise their customers’ loan requests relating to agricultural value chain, manufacturing, solid minerals, infrastructure and other sector-related projects and send same to the CBN for approval and disbursement.
Amugo said the CRR cut is part of the bank’s initiatives towards stimulating output growth, expanding the industrial base, diversifying the economy and increasing the accretion to foreign reserves. Banks are now required to appraise their customers’ loan requests relating to the agricultural value chain, manufacturing and solid minerals, infrastructure and other sector-related projects forward same to the CBN for final approval and disbursement.
Price stability
Aside need to lend to productive sectors of the economy, CBN’s price stability role 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,” Emefiele said.
This, it said, can be achieved by championing policies that promote the sustainability of its macroeconomic stability. The CBN pursues 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,” he said.
The regulator is also pursuing 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,” he said.
The bank chief explained that 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.
Emefiele said under his leadership, the apex lender will continue to focus on maintaining exchange rate stability and preserving 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,” he said.
“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 achieved”.
The CBN also wants to sustain the effective management of potential threats and avoid systemic crisis. The apex bank also effectively manages potential threats to financial stability, and creates a strong governance regime that is conducive for financial intermediation, innovative finance and inclusiveness. This, it does by managing factors that create liquidity shocks and zero tolerance on practices that undermine the health of financial institutions.
“We 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,” he said.
The regulator is also collaborating 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,” the CBN said.
Its target 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 analyse and monitor the risks inherent in these credits. In other words, every examiner is a generalist.
It believes specialisation 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.
Although Nigeria produces millions of barrels of crude oil per day, the importation of refined petroleum products alone consumes about 35 per cent of our annual import bill. The CBN is supporting efforts at domesticating Nigeria’s oil and gas resources to ensure that much more of these resources are produced and used here in Nigeria. This will stimulate inclusive growth, create jobs and reduce the pressure on the exchange rate occasioned by demand for imports of finished petroleum products.
Incentives for FDI in
upstream
The CBN recognises that there is a significant requirement for investment in the upstream sector especially for the Federal Government owned component of Upstream Joint Ventures. They currently struggle to match the investment in infrastructure provided by the International Oil Companies partners.
Alongside the Ministry of Finance and the Ministry of Petroleum and Natural Resources, is supporting efforts to secure these investments. It is exploring how this can be done through international capital markets. This will require looking at the current Joint Venture structures and ensuring that its proposals sit alongside the Petroleum Industry Bill proposals.
The apex bank also promises to support the Ministry of Petroleum and Natural Resources by looking at investment incentives in refining and promoting investment in the construction of much needed gas pipelines.
It also backs the establishment of small-scale modular refineries that can serve some of our domestic markets.
Also, given the myriad of issues facing the health sector, which has led to a huge bill of foreign exchange use for medical travels overseas, the CBN intends to play a facilitating role by unlocking the potentials that exist for the private sector to invest at various points along the healthcare value chain including hospital services, health insurance, pharmaceuticals, supply chain, and financing.
This window of opportunity, has already led the private sector to establish an institutional platform for health known as the Private Sector Health Alliance of Nigeria (PHN), with the support of the government.
The CBN is also exploring opportunities for partnering with the PHN to galvanise the private sector into playing a more active role in the health sector. The bank will maintain a keen interest in supporting the development of institutions, create an enabling environment to trigger private sector investment and curb the growing trend of medical tourism.
Experts’ views
Meanwhile, economists and financial experts have reacted to the policy decisions of the Central Bank of Nigeria’s Monetary Policy Committee, saying the moves might necessarily achieve the intended objective to stimulate economic growth and boost job creation.
An Economist, Michael Abiodun, said stimulating lending should be complemented by the fiscal authority if there would be lending to the real sector. He praised the central bank for the decision, stating that the move would assist in the reduction of the cost of funds as well as stimulate investments in the stock market.
He said: “The reduction in MPR from 13 per cent to 11 per cent will mean that interest rate will come down and this is good news for companies as it will assist in reducing the cost of capital for some of the businesses that borrow funds.
“Whenever there is liquidity in the financial market, it leads to a corresponding increase in the capital market through volume, and this will help the capital market to rebound. The reduction will also curb the fears that the economy will slide into recession, because a lot of productive activities will now pick up and more jobs will be created.”
Aside these benefits, Emefiele insists the regualator will continue to pursue a gradual reduction in key interest rates, and include the unemployment rate in monetary policy decisions. The regulator will also maintain exchange rate stability and aggressively shore up foreign exchange reserves while strengthening risk-based supervision mechanism of Nigerian banks to ensure overall health and banking system stability.
Going forward, the apex bank will continue to build sector-specific expertise in banking supervision to reflect loan concentration of the banking industry and in view of inadequate trigger thresholds from a macro-prudential perspective, consider and announce measures to effectively address this anomaly.
The apex bank also wants to 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,” Emefiele affirmed.
