In his lecture entitled: “The dilemma of monetary policy and exchange rate management in a recession: Potential options for Nigeria”, at the Second Homecoming of the Department of Economics, Faculty of Social Sciences, University of Nigeria at Princess Alexandra Auditorium, University of Nigeria, Main Campus, Nsukka Central Bank of Nigeria (CBN) Governor Godwin Emefiele states how the import restriction policy on some items has helped the local economy. He also says Nigeria is on its way out of recession.
What then can we do to remedy this situation? Is it our inflexible destiny or collective decision to rely so much on other countries for her basic needs? What kind of future do we really want as a people? I do not think that one policy decision from any arm or agency of government can answer all these questions. But in the ensuing paragraphs, I will proffer my suggestions and present a vigorous defence of the bank’s current policies, which are geared towards engendering growth and curbing inflation.
Policy options
Rebuild our infrastructure:
Investing in basic infrastructure including roads, bridges, airports, railways and information technology is not only good in terms of immediate job creation; it acts as a catalyst to the movement of goods and services across the country. A recent World Bank study estimates that sub-Saharan Africa’s infrastructure deficit, especially in power and transportation, is costing us about two percentage points of GDP growth per annum. This study also indicates that about $93 billion per year would be needed to tackle the region’s infrastructural challenges. Although Nigeria has relatively better infrastructure than many of her African peers, our core stock of infrastructure is estimated at about 25 per cent of GDP. Given that most middle-income countries of Nigeria’s size have core infrastructure of about 70 per cent of GDP, the African Development Bank (AfDB) estimates that we have an infrastructure-funding gap of $300 billion.
Obviously, our fiscal resources alone would be inadequate to finance this gap. Therefore, it is critical that we begin to consider innovative mechanisms and ideas to do so. We need to explore opportunities for Public Private Partnerships (PPP) for similar opportunities in infrastructure projects that could offer lucrative returns to investors and help drive economic growth across the country.
Pursue growth-enhancing
fiscal policy
More than ever before, it is now critical to concentrate our best efforts in ensuring that fiscal policy is targeted at improving productivity of labour, increasing disposable incomes for workers, and deploying resources to creating an enabling environment for investors. We need to look at how fiscal policy can help stimulate household consumption and business investments. These two make up more than 85 per cent of Nigeria’s GDP by expenditure.
Jumpstart agriculture
and agribusiness
Agriculture remains the largest employer of labour in Nigeria and contributes about 24.2 per cent of our GDP. In addition, a good share of the demand for FX today go directly to importing agricultural produce. So, the CBN has both a direct and indirect rationale to ensure that this sector is revived in a significant way. In this regard, we are gratified that the CBN’s Anchor Borrowers’ Programme, together with other initiatives like the Commercial Agriculture Credit Scheme and Nigeria Incentive-based Risk Sharing System for Agricultural lending (NIRSAL), are proving to be successful in several states. To date, the bank has committed close to N29 billion in the Anchor Borrowers’ Programme with active participation across 24 states. In Kebbi State, over 78,000 smallholder farmers are now cultivating about 100,000 hectares of rice farms. It is expected that over one million metric tonnes of rice will be produced in that state alone this year. The positive impact of catalising domestic agricultural production is that we restore wealth and create employment in our rural communities. These were jobs that were exported to other countries while we impoverished our people. The CBN remains committed to doing more in the identified crops such as rice, maize, sorghum, tomatoes, cassava, cocoa, cotton, dairy, and groundnut. We also need to find ways to make land cultivation much easier especially for smallholder farmers. In this regard, the NIRSAL can assist with technical knowledge and deployment of relevant GIS and Satellite imaging that will realise this within a short period of time.
Explore opportunities
for more revenue
There are several ways we can raise additional revenue to finance the increased expenditure that is needed to engender fast and sustainable growth in the economy. I think we can consider a full implementation of the 2003 Cabotage Act. This Act stipulates that all cargoes and passengers in the inland and coastal waters be transported by ships and ferries built, owned, crewed and manned by Nigerians. Contrary to the requirement of this Act, there are several foreign-owned vessels providing shipping services locally. Out of about 600 ships that operate within our waters, only about 60 of them are owned by Nigerians and are mostly idle, in violation of the Act. Industry sources suggest Nigeria may be losing as much as N2 trillion annually from this anomaly. In addition to raising revenue, a full implementation of the Act could also spur job creation, capacity building, and significant backward integration.
Pursue non-oil exports
From preliminary analyses of global trade trends and discussions with potential trade partners, it is now increasingly evident that Nigeria can benefit significantly from tapping into the market for certain goods, which are in high demand. For example, the demand for Halal meat and sesame across the Gulf Cooperation Council (GCC) countries is huge. In fact, we have credible information that the Saudis may need up to 120,000 heads of frozen goat/sheep per week from Nigeria. Similarly, the demand for cashew nuts and shea-nut butter across the world is rising. Nigeria has comparative advantage in all these products and can quickly tap into the vacuum created from the sharp fall in supply of these products from their erstwhile major suppliers. From these, we can earn forex to bolster our Reserves while also creating jobs and engendering broad-based economic growth.
Pursue import-reducing policies
In view of the fact that oil prices would remain low for a long period, it is clear to us that FX revenue inflows will remain low, with relatively low FX Reserves, for a while. Given this scenario, we need to take bold and decisive steps at fundamentally changing the structure of our economy. Of course, monetary policy alone cannot achieve this but it must do its part. Throughout this speech, I have talked about the damaging effects of Nigeria’s unsustainable propensity to import. In line with Winston Churchill’s admonition to “never let a good crisis go to waste”, the CBN believes that it is high time we started looking inwards and stopped supporting the importation of items that we can produce locally, using Nigeria’s hard-earned forex.
I must hasten to add that while they may seem controversial, variants of this policy have proven to be highly effective in other climes and even here in Nigeria. For example, throughout the early days of South Korea’s economic renaissance, the government intermittently used excessively stiff tariffs, quantitative restrictions and prohibitive inland taxes to effectively ban many items. In the Western Hemisphere for example, the U.S. prohibits imports of generic Canadian drugs that are way cheaper but just as effective as those locally made in the U.S. And for almost a decade now, Indian retailers have been waging a war against their government’s proposal to open up the retail sector to more efficient global players like Wal-Mart. We all know how European governments have helped local taxi drivers in their battle against the new, less costly, and more efficient American taxi company, Uber: a service that uses a smartphone app to get users taxis from the comfort of their locations.
And here at home, variants of this policy were used to achieve significant sufficiency in cement, a product whose importation could have been costing us over $3.2 billion in FX Reserves annually. In effect, therefore, this policy needs to be supported not just in response to the pressure on the Naira but as an opportunity to change the economy’s structure, resuscitate local manufacturing, and expand job creation for our citizens.
Take rice imports, for example: why should we keep allocating scarce FX to rice importers when vast amounts of paddy rice of comparable quality produced by poor hardworking local farmers across the rice belts of Nigeria are wasted, and farmers are falling deeper into poverty while we export their jobs and income to rice producing countries abroad? Few decades ago, Nigeria was one of the world’s largest producers of palm oil but today, we import nearly 600,000 metric tonnes while Indonesia and Malaysia combined export over 90 per cent of global demand. Under these circumstances, I believe it is appropriate, and in fact, expected, that the CBN contributes to protecting the jobs and incomes of local farmers, using some of the same principles Western Economies use to justify the protection of their farmers through huge subsidies.
Curb inflation
In order to tackle inflation, we must first understand what kind of inflation we have in Nigeria. Is it demand-pull, with too much money chasing few goods, or cost-push where supply constraints result in few goods in marketplace? Our analyses at the CBN suggest that we have cost-push inflation in Nigeria. Indeed, we currently have several supply constraints that can be christened “Three Problematic Fs”: Food: Low harvest, disease outbreak, northeast crisis, etc; Fuels: High electricity, PMS, and Kerosene prices; and forex, high demand and low supply of FX
Given this analysis, it is easy to see why the CBN is doing a lot to ease these supply constraints. In response to recent calls by notable persons and groups on the CBN to reduce the country’s high lending rates, I think it is important that I share my views on this issue. Let me first state that I have long been a believer in low interest rates. In fact, when I unveiled my vision for the CBN on resumption of duty in June 2014, reducing interest rates was one of my cardinal priorities. Yet, it is important that we discuss this issue based on facts, rather than politics and/or emotions.
First, interest rates are a veritable tool for curtailing inflation and with inflation at over 16 per cent; the CBN would be abjectly failing in one of its key mandates if it cuts interest rates at this time. Second, for those who say we need a rate cut to spur growth, we need to be reminded that high inflation is inimical to economic growth. Indeed, many empirical studies including at the CBN Central Bank of Nigeria – 2014 and 2017 – have estimated the threshold level for Nigeria at which inflation becomes significantly growth retarding to be 10 – 12.6 per cent. With Nigeria’s at 16.1 per cent, one must question the judgment of cutting interest rates at this time. Finally, I think it is important to underscore that interest rates reflects not just the cost of capital but also the cost of doing business, and so, we need to also look at interest rates from the perspective of the lender. Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates. Notwithstanding these facts, we will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers.
Let me note at this juncture that one of the reasons the CBN ventured into development banking was to minimise the effects of high interest rates on customers particularly in some select sectors of the economy like core manufacturing, agriculture and micro small and medium enterprises. This push started in 1977 with the Agricultural Credit Guarantee Scheme, and since then, the bank has intervened through various developmental initiatives, all at single digit interest rates. To date, the CBN has disbursed over N393 billion in 490 projects under the Commercial Agriculture Credit Scheme. The CBN has also disbursed over N29 billion under the Anchor Borrowers programme, N150 billion under the MSME scheme, and N236.4 under the Power and Aviation Intervention Fund. In addition, through its Refinancing and Restructuring Facility (RRF), the CBN has disbursed over N400 billion to core manufacturers through the restructuring of their loans in DMBs into longer term facilities, thereby helping to stimulate the economy with immediate liquidity for growth of the manufacturing sector. Combined, these schemes have created over 6.7 million direct jobs and a lot more indirect jobs.
Strong policy coordination
Finally, in times like this, there is usually the need for strong policy coordination between the key aspects of economic policymaking space. In Nigeria, this would include fiscal, monetary, exchange and trade policies, which must be targeted at protecting farmers, companies and industries that are committing resources to support government’s drive to diversify the economy away from oil and fossil fuels.
I am not unaware of the short-term pains we are all going through right now. But I urge you all to use it as an opportunity to look inwards, diversify our economy, produce locally, and create jobs for our unemployed youths. We are a resilient and hardworking people. Since gold only glitters after it has gone through enormous heat, I am confident that out of these difficulties would come our very best ideas and decisions. We definitely cannot survive as a people by importing everything and anything. Even when we disagree about the way forward, we need to treat each other with respect and fairness. We cannot keep suspecting one another and impugning motives for people’s actions.
Well, ladies and gentlemen, you would agree with me that whatever you do, even in good faith, someone else would have a different idea. We should, therefore, never lose sight of what is important. We should remain resolutely committed to the course and be motivated by the achievability of our desire to strengthen the macroeconomic management space and performance.
Fittingly, to end my address I will lean on the sagacity of Abraham Lincoln portrayed in these words:
“It often requires more courage to dare to do right than to fear to do wrong.” Hence, “neither let us be slandered from our duty… nor frightened from it by menaces of destruction… Let us have faith that right makes might; and in that faith let us to the end dare to do our duty as we understand it.”
