Godwin Emefiele: Unsung, denied, vilified… What manner of hero?

By TESLIM SHITTA-BEY AND FELIX OLOYEDE

“Emefiele has contributed in saving the Nigerian economy from recession. The CBN has been very transparent in its policies and we are grateful for the contributions of the bank in helping the economy out of recession” – Aliko Dangote

As far as recent Central Bank governors go, Godwin Emefiele, Nigeria’s chief monetary policy Czar,  is the most self-effacing, least quarrelsome and perhaps, in the eyes of some, most incomprehensible. Central Bank of Nigeria (CBN) policies in the last two years has attracted a hailstorm of criticisms by operators and sundry analysts. But on the balance of performance, especially in the last six months, Emefiele appears to have reinvented himself and attracted a surge of new confidence from investors and other stakeholders alike.

Admittedly over the last twelve weeks the foreign exchange policy of the apex bank has placed it in direct conflict with both the International Monetary Fund (IMF) and other parties such as local industrialists who insist that the bank’s multi-tiered foreign exchange policy has reduced access to foreign exchange and raised the cost of imports, thereby hobbling growth. The debate on whether the CBN exchange rate management framework is poorly structured is ongoing.

According to Peter Folorunso chief executive officer Freewill Investments, a local investment boutique, ‘the CBN has played the role of an over anxious hen trying to protect its eggs; in an attempt to keep the eggs safe, it has inadvertently trampled on them’. Folorunso’s views are shared by a number of economists who believe that the monopoly price determination of foreign exchange rate by the CBN has led to poor investor perception of the local investment market and equally created the slow adjustment of the Naira to a homogenous exchange rate.

‘We could be looking at a really dangerous situation here if the CBN does not speedily find ways of merging the different rates for the same currency soon’ argues Angela Ereghare of Arbitrage Investments and Trust. According to her, ’a situation where different classes of foreign exchange users buy the same currency at different rates in the same economy in different market segments leads to the kind of arbitrage that enables modestly intelligent individuals take staggering profits off the table by just sitting at home and playing different market segments against themselves. Economists call this rent seeking, and this is the cheapest form of market corruption’.

This might seem extreme but anxiety over the multiple exchange rate regime supported by the CBN appears to be distorting the efficient pricing of the local currency. Is Emefiele to blame for the Naira’s woes? Not really but he does have some part to play in the problem.

Since mid-year 2015 the naira has struggled to reestablish its value of N160/US dollar in 2014 as a 60 per cent  fall in Nigeria’s oil revenue (from US$114 in June 2014 to US$27 in December 2015) resulted in the weakening of the naira. The local currency slumped 91 per cent between June 2015 and January 2017. By June 2017 the currency had marginally appreciated but still showed signs of frailty. Alex Otti, an economist and former Managing Director of Diamond Bank Plc in a recent interview with Business Hallmark noted that, ‘getting to the point of a uniform naira to dollar exchange rate is a gradual battle the central bank must win. A multi-layered foreign exchange rate regime is a throwback to the currency mayhem of the mid-1980’s where we had multi-tiered foreign exchange valuation in different markets. The consequence was the untidy round tripping of foreign currencies and the sudden appearance of emergency millionaires’. According to Otti, ‘the nasty act of playing the system for short term market gains was what got the economy into trouble then and what could get the economy into trouble again if we do not manage the process carefully’.

Otti believes that the central bank should embark on a guided float allowing the naira to rise gradually as the economy builds productive capacity. According to him, ‘Once the currency rises imports will fall and non-oil exports will become increasingly attractive as sources of foreign exchange thereby rearranging domestic consumption and production priorities’.  Indeed this has already started to happen as agricultural output has risen as domestic and foreign demand for farm produce begin to gradually climb.

This explains the progressive rise in the nation’s current account trade balance in recent months. Nigeria’s trade balance which has been negative since January 2015 with a negative balance of US$2.12billion has seen the trade balance scale up to a positive balance of US$3.25billion at the beginning of 2017. Observers see the country’s current account balance rise from US3.24billion in January to US$4.25billion in June when new figures are released sometime in July 2017.

The positive country’s positive current account balance has had other cheery effects on the economy; it has helped to bring down domestic inflation from about 19 per cent at the beginning of the year to a more recent 17.24 per cent.

In the last twelve weeks inflation has made a gradual downward trip; reversing its stunning leap from 9 per cent in January 2015 to 19 per cent in January 2017 or what amount to a 111 per cent rise in inflation over a two year period. The persistent rise in the consumer domestic price index (CPI) has led Emefiele to keep a tight rein on interest rates. The CBN’s indication monetary policy rate (MPR) has stayed at 14 per cent over the first two quarters of the year a policy stance that has pitted the central bank governor against the minister of finance Kemi Adeosun who has insisted that Emefiele’s intransigence over increasing money supply and reducing interest rates has made it difficult for the economy to grow. In April in a fit of frustration the minister had urged the CBN to reduce the MPR to lower domestic lending rates and spur faster real sector growth; a recommendation Emefiele waved off as he insisted that biting inflation was of a greater concern than slower GDP growth. Besides, Emefiele and his colleagues propounded the argument that the matter of growth was more the problem child of the fiscal authorities than that of the central bank.

A number of economists including Dr Boniface Chizea, Managing Partner, BIC Consulting tend to agree with Emefiele. According to Chizea, ‘the cause of our domestic inflationary pressure is not due to demand pull factors but cost push, it means that you cannot find a solution as if what has caused the inflation is excessive demand which could then be impacted by the cost of borrowing which is benchmarked on the Monetary Policy Rate (MPR).’ According to Chizea, a former banker,’ the central bank remains mindful of the need to maintain the attractiveness of monetary instruments to sustain inflow particularly from portfolio investors which would be negatively affected if rates were allowed to go southwards.’

Chizea’s argument could be contested on the grounds that inflation is always and everywhere a monetary phenomenon and that cost push disputes are not valid over the medium to long term. Nevertheless, Chizea’s position reflects the reasoning behind the CBN’s dogged commitment to a high domestic interest rate monetary environment.

Getting Nigeria growing again

The CBN’s argument over domestic interest rates has been a bit dodgy, but not necessarily wrong. For inflation to fall over the long term the economy needs to improve productivity and consistently increase output. This comes basically through fiscal stimulation but the extent to which fiscal policy becomes effective is tied to the CBN’s preparedness to ‘accommodate’ or support the expansion of government spending by increasing money supply. Data from the CBN actually shows that the bank has gradually been increasing money supply between 2012 and 2017. Economists, however, believe that the real bull in the china shop is not the CBN’s money supply growth but its pegging of the monetary policy rate at 14 per cent and the pricing of treasury bills at a coupon of between 16 and 18 per cent per annum.

The high yields on risk free local investment instruments has pushed out funds from the private credit market as investors pile into the treasury bill business. This has definitely reduced private lending and slowed down the pace of economic growth, a conclusion Emefiele is reluctant to accept.

Nevertheless, Dr Adesola Adedutan, Managing Director, First Bank of Nigeria believes that despite earlier conflicts between the finance ministry and the CBN, ‘there is a growing consensus and conscious collaboration between the two bodies. Rather than two blades of two individual swordsmen fighting for dominance we are beginning to see two blades of a single scissors working in harmony’, says Adeduntan.

Adeduntan believes that in months ahead the economy will see greater growth and lower inflation, but a lot of this would depend on the continued stability of international oil prices at about US$50 per barrel, says Adedutan, ’if the oil market stays firm and supports a US$50 per barrel price then the federal authorities will have some wriggle-room to increase fiscal spending while avoiding high levels of inflation. The balancing act is not going to be easy, but it is not impossible’.

Other accountants and economists have argued different perspectives on the Emefiele- led CBN so far.   The interpretations to the apex banks policies seem to be as varied as the number of individuals doing the analysis.

The CBN under Emefiele’s watch has (surprisingly) succeeded in placing the economy on the path of restored growth, having seen the economy buckle in five consecutive quarters between January 2016 and March 2017. Nigeria’s Gross Domestic Product (GDP) growth rate which was 2.35 percent when Emefiele took over as CBN governor in June 2014, slumped to -0.36 per cent in the first quarter of 2016 and then went on to tumble further by -2.06 per cent in the second quarter. By the third quarter the GDP growth rate had dipped to -2.24 per cent and ended the year at -1.5 per cent. However, since the beginning of 2017 the trend has gradually reversed as GDP grew at -0.5 percent at the end of Q1 2017, which is the smallest drop the economy has seen in the last four consecutive quarters.

“The first two years of Emefiele as CBN Governor were disasters for the manufacturing sector, but since February this year, we have witnessed significant improvement,” says Dr Frank Jacobs, President of the Manufacturers Association of Nigeria (MAN) in a telephone chat with Business Hallmark. The MAN chief explained that about 272 companies were forced to close business last year, but with the easing of foreign exchange volatility, many of them are reopening factories. The most recent Labour Productivity report by the National Bureau of Statistics (NBS) shows that Labour Productivity Index rose 10.8 percent in 2016.

Dr Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry (LCCI) told Business Hallmark in an e-mail response to a question on the Emefiele-led institution that the CBN Governor assumed the leadership of the CBN at a very difficult time, adding that the macroeconomic conditions posed enormous challenges to the effectiveness of monetary policy.

“The collapse of oil prices and the sharp declines in oil output were significant factors in the challenges that the economy faced.  This situation largely shaped the character of monetary policy.  But I do not consider some aspects of the monetary policy appropriate for the economy at this time,” he explained.

Foreign Exchange, all about the Benjamin’s

A drastic fall in crude oil prices in 2014 wrecked havoc on the country’s local currency which was N162.49 on June 3, 2014, causing it to lose about 223 percent of its value when it depreciated to N525 per dollar at the parallel market in February 2017, before the apex bank started its aggressive intervention in the foreign exchange market. Crude oil price which peaked at $115 per barrel in June 2014 tumbled to $27 per barrel in January 2016 before recovery to $47.85 as at the early hours of June 9, 2017. Crude oil provides more than 90 percent of Nigeria’s foreign exchange and 70 percent of government revenue.

The CBN under Emefiele had to employ several measures to tackle the forex challenge that bedeviled the country and almost brought it to its knees. The apex bank had in February 2015 closed the Retail Dutch Auction System (rDAS) and Wholesale Dutch Auction System (wDAS) windows and also banned 41 items from accessing forex from the official window. It also reviewed weekly allocation of forex to Bureau de Change (BDC) operators from $10,000 to $30,000 to boost liquidity in the retail end of the forex market. And with the increase in oil price in 2017, which boosted the country’s foreign reserves, the CBN was able to commence aggressive intervention in the forex market which seen it inject over $5 billion in the forex market in the last four months and ensuring that demand for invisibles such as Basic Transport Allowance (BTA); Personal Transport Allowance (PTA); medical and school fees were met. The creation of Investors’ and Exporters’ forex window and SMEs forex window has eased the country volatility significantly, which has helped renewed foreign investors’ confidence in the Nigerian Stock Market (NSE) with market capitalization appreciating 22.3 percent to N11.1 trillion on June 8 from N9.1 trillion in January. These steps taken by the apex bank has also created convergence in the forex market with the dollar exchanging for N377.37 and N368 on Thursday at the Investors’ and Exporters’ window and parallel market respectively, according to information on FMDQ and Abokifx websites. The dollar was, however, sold for N324.56 at the interbank market on Thursday.

“The CBN by the clever manner in which it managed the crisis has saved the nation from a humongous currency collapse, which would have been made worse by currency speculators” Mr. Isaac Okorafor, spokesman for the apex bank told Business Hallmark in a text message.

“The three years of Emefiele’s regime is challenged with a lot of foreign exchange spikes as a result of falling oil prices, depleted foreign reserves and reduced oil production. Under his leadership, however, a few observers believe that the CBN has adopted proactive strategies to push back crisis.

“The governor was the first to merge the retail and wholesale Dutch Auction Systems in the market. His various FX policies culminated into the present convergence we are witnessing in the market. I think overall he is dogged and has finally achieved results by eliminating speculators and panic” Alhaji Aminu Gwadabe, President, Association of Bureau d Change Operators of Nigeria (ABCON) said in a text message to Business Hallmark.

Dr Muda Yusuf noted, “The liquidity crisis in the foreign exchange market that the economy witnessed in the last one year was aggravated by inappropriate policy choices.  It took a major toll on investors’ confidence.  The good news however, is that the policy is now being reversed.  The market is now being made to play a bigger role in forex trading.  This has impacted positively on capital importation, inflow of export proceeds, stock market recovery and the general air of confidence amongst investors.”

Stability, a dog with a collar

The financial sector has enjoyed some relative stability in the last three years despite turmoil which the country has undergone in the last three years. Since Mr. Emefiele took over the reins at the apex bank, no bank has gone belly-up. The CBN promptly responded when Skye Bank showed signs of ailment, failing its stress test, by replacing the bank’s board of directors and key management staff. The apex bank had to inject N100 billion into Skye Bank to enable it meet its obligations to customers.

But Mr. Sam Victor Olorunsogo, a former branch manager with Main Street Bank, which was acquired by Skye Bank, said the CBN governor has not been as proactive as his predecessors. “It may seem the sector is stable but some banks are sick with diseases that may or may not be terminal,” he insists.

In the last two years the Nigerian banking system has been battling with high impairment charges for bad loans occasioned by dwindling economic fortunes and growing exposure to the oil and gas sector which was fatally affected by falling oil prices. In 2016, the banking sectors average Non-performing loan (NPL) ratio tipped over the 5 percent threshold set by the CBN, hitting a record high of 12 percent.

Inflation Rate, not-invented-here

High inflation rate has been a major albatross. The country’s inflation rate was 8 percent at end of May 2014, reaching a twelve year record high of 18.72 percent by January 2017. It has since slowed in three consecutive months to 17.24 percent at the end of April. The high inflation rate has been largely driven by high cost of food and the devaluation of the naira as the country imports most of the things it consumes. But it seems the CBN is beginning to win the inflation battle.

Interest rates, knocking at heaven’s door

The Monetary Policy Committee (MPC) of the CBN retained interest rate 14 percent for the fifth time at the end of its meeting in May, which is Nigeria’s all time high. The CBN increased the Monetary Policy Rate (MPR) from 12 percent to 14 percent in July 2016 and has maintained this rate since then, citing the need to combat high inflation rate and attract foreign investors for its decision.

The CBN under the current governor increased interest rate to 13 percent in November 2014 from 12 percent when Emefiele assumed office on June 3, 2014. After a year, it was reviewed downward to 11 percent in November 2015 and later increased to 12 percent in March 2016.

The Organised Private Sector (OPS) has been uncomfortable with Monetary Policy rate pegged at 14 percent. “High interest rate remains a concern for domestic investors.  The tight monetary policy has done more harm to the economy than it has benefited it.  I commend the commitment of the CBN to development finance through the various intervention funds.  But access to the funds is another matter,” the LCCI director-General maintained.

Interventions; something about Emeifele’s reliefs

In the past three years, the apex bank has introduced several intervention programmes to help stimulate the economy. The CBN Governor last year disclosed that the apex bank had set aside N2.02 trillion to intervene in different sectors of the economy. The CBN proposed to inject N213 billion into the country’s ailing power sector to assist remand it. The bank also introduced N220 billion SMEs fund in 2014 to enable small and medium businesses play meaningful in the country’s economic growth. The apex bank also introduced a N300 Billion Real Sector Support Facility in 2014 to revamp the country’s manufacturing sector.

And the Anchor Borrowers Programme (ABP), which gives credit facilities at single digit interest rates to farmers, which was launched last year, is turning Nigeria into a rice production hub. With the N33 billion which the CBN has invested in 21 states through this project, the country’s rice production has jumped from two million metric tons to over four million metric tons. Nigeria’s rice need is put at six million metric tons annually. So, the apex bank is targeting that through the Anchor Borrowers Programme, the country should be able to stop the importation of rice in the next two years. The ABP has been one of the most successful interventions of the CBN in recent times.

Mr Johnson Chukwu, Managing Director, Cowry Assets Management Company Limited believes if the fiscal authority had properly complimented the efforts of the CBN; the economy wouldn’t have shrunk the way it did over the last two years.

Governor Emefiele may not have started off as a poster boy for clear-headed and politically-savvy central banking but as he matures in the job he has been able to convince friends and adversaries alike that he has a canny ability to get the job done.