Miracle worker: Inside story of how Emefiele is saving the Nigerian economy

FELIX OLOYEDE

When he came to office in 2015, Godwin Emefiele, was not the most popular candidate for the job of Central Bank of Nigeria (CBN) Governor, industry insiders saw him as too much of an administrative poster boy of conventional banking, while outsiders were wary of his lack of macroeconomic policy experience. Indeed within the CBN itself several top management staff wanted to see one of their own take over the mantle of leadership. But two years into a five year tenor, Emefiele, has gradually silenced doubting Toms by deft policy interventions and principled refusal to expand money supply and worsen domestic inflation. Juxtaposed against the mayhem happening in once thriving but now lacklustre economies such as Brazil and Venezuela, Emefiele’s central bank has pulled off a near miracle.

Faced with similar reversals of economic fortunes as Nigeria on the back of falling commodity prices, both Brazil and Venezuela have seen their economies spiral into hyperinflationary recession. Inflation rate in Venezuela soared to 740 per cent in 2016 after a sustained glide in 2015 when it ended the year at a heart stumping 141 per cent in September. The Venezuela inflation problem, unlike its Nigerian counterpart, has become so dire that the government has refused to publish regular data on monthly price changes. Queues for food and other essentials have grown longer by the day as citizen’s scamper for scraps of whatever they can lay their hands on from near empty shops. Things got so bad last year that food riots broke out. Imports from the country’s six largest trading partners including Brazil, the U.S., China, Argentina, Mexico and Colombia dropped to $840.5 million in June 2016, the lowest in a decade, according to data from Bloomberg Intelligence.

Brazil has also had its unfortunate share of a recessionary backlash as falling commodity and industrial export prices poke holes in its fiscal revenues. Falling revenue and rising debt has stumped the Brazilian economy slowing down its growth while tough line monetary policy (unlike in Venezuela) has seen a reversal in double digit inflation rates. Inflation has fallen from a decade high of 14 per cent last seen in 2013 and replicated in 2016 to 5 per cent by January 2017. This has become a clear antirecessionary approach adopted by Nigeria’s central bank which is still grappling with the unpleasant task of pulling down inflation. Nigeria’s inflation rate has risen from a relatively modest 9.9 per cent in January 2015 to 18.55 per cent by December 2016. Inflation dipped marginally to 17.78 per cent in February 2017, the first fall in inflation rate in the last 15 months.

Despite calls by the fiscal authority and academics that the central bank should cut interest rates, the apex bank has refused to follow common wisdom. Two things seem to inform Emefiele and his team’s stubbornness to keep rates up. First, the fear (and rightly so) that cutting interest rates would spur a spike in inflation and wreck havoc in financial markets and the real sector of the economy as savings get decimated and investment funds disappear on the premise that higher prices could not be passed on to consumers already overburdened by steep retail cost increases. A fact borne out by the staggering losses or weaker earnings posted by a slew of companies such as Cadbury, Nestle, Guinness, Nigerian Breweries and  7Up. Other firms have also seen their annual profits dip as costs of goods sold and higher finance charges savage their earnings before interest, depreciation and amortization charges leading to profit after tax nose diving. Peter Folorunsho, an attorney and former banker and chief executive of Freewill Investment Group, notes that, ‘the economic landscape has been uncertain. This is different from just being risky. In a risky environment within limits you can predict your downside and prepare against adverse consequences but in an uncertain environment you are damned, the lack of estimated odds means that you are pushed down a waterfall without a paddle, will you survive? As careless as soothsayers are in these parts none of them would stick out a neck.’

Says Folorounsho, ‘the central bank has kept true to an abiding mandate; fight inflation. So far the results have been mixed but with a marginal fall in February, there does seem to be hope’. The CBN has had to fend off intense pressure to increase money supply and drag down rates as the fiscal authorities led by the ministry of finance has argued that the banks tight stance on inflation has slowed down the pace of economic growth. The difference between the ministry and the bank blew open recently when the finance minister, Kemi Adeosun, requested that the national assembly consider reducing the powers of the CBN Governor to allow for better coordination between fiscal and monetary policy.

Analysts who spoke with Business Hallmark, however, see the call by the minister as vagrant and actually counterproductive. They insist that the country, like most other economies, needs a strong and independent central bank to ensure checks on excessive executive spending which could impair financial stability and long term growth. Rotimi Ogunwale, chief investment officer at Imperial Finance and Investment, a firm with N800million under management argues that, ‘ an independent central bank is critical to economic growth, you cannot have a fiscal authority with dodgy long term economic outlook dictating both fiscal and monetary policy, it is a recipe for economic disaster’.

The CBN’s catholic commitment to containing inflation has also assisted in preventing what would have been a massive decline in the external value of the naira and a run on the country’s external reserves (the reserve has tipped over USD$30billion for the first time in over a year). Says Ogunwale, ‘if rates had come down, access to cheaper funds would have piled intense pressure on the naira as traders and manufacturers stampeded for foreign currencies, the consequence would have been as deadly as a Python squeezing a Giselle’.

According economist, Dr Boniface Chizea, chief executive of BIC Consultancy, the finance ministry’s desire to see a less powerful central bank stems from the difference of opinion between the two arms of government on broad policy priorities, especially in respect to growth and inflation. Chizea is of the opinion that, ‘the level of domestic interest rate is hardly conducive to real sector investment but what is most certain is that high interest rate was not the cause of recession and in my opinion interest rate reduction might not carry the punch being attributed to it in the emergency circumstances the country currently finds itself as it is in a hurry to exit the recession.’

Chizea further notes that, ‘with inflation rate at about 18 per cent, it is illogical to expect the rate of interest to fall below that threshold, otherwise savers will be paying an inflation tax! Therefore if interest rates are expected to exceed the rate of inflation and we factor in the cost of doing business and reasonable profit margin, interest rates will be probably justified at the prevalent levels.’

As far as the former banker is concerned,  ‘the CBN has pleaded to be allowed to concentrate on attaining stability on the exchange rate which would necessitate that returns in our economy must remain competitive if we must stand a chance of attracting investment inflows not ignoring the relatively high risk the Nigerian economy represents.’

In this light he notes that it is common knowledge that the fiscal authorities have been remiss in keeping faith with their mandate as has been clearly witnessed by the lacklustre record of various budgets. According to the one time bank director, ‘the powers of the CBN in any economy are almost sacrosanct and it is not envisaged that Nigeria would attempt to be different because the Honourable Minister has made the request!’

Emefiele’s dogged position on money supply growth and interest rates has seen the economy hold up firmly against inflationary pressures and has equally seen the naira firm up nicely in foreign currency markets.

The CBN’s recent persistent intervention in the foreign exchange has gummed up the gap between the interbank rate of the dollar to the naira and the parallel market rate as naira firmed to N390 per dollar on the black market on Friday, up 2.6 percent from its previous session.

This is the closest convergence the interbank and black rates have witnessed in recent weeks.

The Emefiele led central bank  has been intervening in the official market to try to narrow the currency spread between the official and black market rate, which was N520 to the dollar a month ago after it devaluing the naira to N375/$. The gambit was to nuke speculative pressure on the local currency as arbitrageurs made the shorting (selling) of the local currency against the dollar a one way bet to prosperity.

As at last Friday, the official interbank market quote for the dollar was N307. February’s partial devaluation of the naira effectively created multiple exchange rates in Africa’s biggest economy.

After the release of its new foreign exchange guidelines on February 20, 2017, the CBN mandated all local banks to sell foreign exchange (forex) to customers who need it for Personal Transport Allowance (PTA), Business Travel Allowance (BTA), school fees and medical fees abroad, the bank has so far injected about $2 billion into the interbank market.

Two weeks after the CBN commenced its recent intervention in the forex market, commercial banks said they had glut of dollar, urging customers with forex demands to approach their branches.

The CBN noted that the volatility in the country’s forex market was caused by liquidity tightness at the retail end of the market worsened by activities of currency speculators; the bank, therefore, decided to increase forex supply to this end of the market to reduce volatility and ease the pressure on the naira.

But manufacturers in the country are still complaining over scarcity of forex, saying the apex bank’s current foreign exchange policy focuses mainly on FX demands for invisibles.

They are asking the CBN to make foreign exchange more available to the productive sectors of the economy, not just meeting the needs of those using it to pay school fees, medical fees, PAT and BAT.

A banker with one of the tier one bank in Lagos who did not want his name mentioned in print, said unless the CBN unbanned the 41 items it listed as not valid for forex in the interbank market, manufacturers in the country would continue to encounter serious challenge sourcing forex, because most of the items are inputs for the products of these manufacturers.

But the apex bank spokesman, Mr Isaac Okorafor, Acting Director, Corporate Communications of the CBN in an exclusive with Business Hallmark, said retail auction or wholesale auction are targeted at manufacturing by way of raw materials, plant and machinery and agriculture, among others.

“For some days now we have not sold much to those asking for invisibles because that segment is being sufficiently served. We are now focusing on those who have opened LCs. And we will continue to supply the market as we plan to steadily sustain the supply in the coming days,” he forward stated.

The apex bank had on March 3 issued a directive to authorized forex dealers to open teller point for FX transactions in all locations in order to ensure access to foreign exchange by their customers and other users, without any hindrance.

“Banks are mandated to process and meet the demand for Travel Allowances (PTA/BTA) by end-users within 24 hours of such application, as long as the end users meet basic requirements already outlined in earlier directives,” he stated.

With the foreign currency policy of the apex bank in recent weeks effectively damaging the stash of cash amassed by currency speculators and with inflation showing signs of easing up, CBN governor, Emefiele’s, gingerly policy touches seem to be working magic after all.