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.