Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) was in Lagos at the weekend for a media chat. He laid bare government’s plan to resuscitate the distressed economy, BusinessDay’s John Omachonu, Hope Moses-Ashike and Lolade Akinmurele were there.
Nigeria is in recession for the first time in 25 years. Businesses are groaning and people are suffering, how did we get here?
I think I must apologise when you say that people are suffering. I must apologise that this is happening to our people, but I must confess that what is happening today is as a result of a world global crisis.
Global crisis in the sense that we have seen commodity prices drop, we’ve seen geo-political tension, all around the world. Here you are talking about political tension between Russia, and Ukraine while indeed the US and EU are on one side watching. There is also political tension between Iran and Saudi Arabia trying to play their game as usual and of course the US Fed’s actions since 2009.
Following the mortgage crisis of 2009 which started in the USA , there has been a couple of actions which, given the size of US economy in the world, has had certain impact, both positive and negative on emerging markets and frontier markets, where Nigeria unfortunately stands today.
But I think when you want to address the issue of how we got here, it is important for us to go back into history, go back into history to begin to remind ourselves that there was a time in this country when we survived only on revenues from agricultural produce.
There was a time in this country when we survived from revenue from groundnut pyramid in the northern part of Nigeria, there was a time when this country survived from the revenues from the south west, and I am talking about from cocoa.
To the extent that the tallest building at that time, the Cocoa House, was built from the revenue of the export of cocoa, there was a time when this country survived with revenue the country generated from the production and export of palm oil and palm oil products in Nigeria from mid-western and the south –eastern part of the country.
At that time, I’m talking about the fifties and the sixties and indeed up to early nineties; Nigeria was the largest producer and exporter of palm produce in the world. Unfortunately we abandoned these sectors because we found oil. I wish what we did at that time was to ensure that we held strong to our potential in the agricultural sector, if we had held strong to our potential in the agricultural sector, in the same vein held strong to the potential that we found because we found oil in Nigeria our story would have been different today.
Unfortunately what happened was that, because we found oil, we let our guards down in the agricultural sector, and I’ll give you an example, this for me is a case of a country that unfortunately didn’t plan properly. Example is a country like Norway. Norway is a country with a population of less than five million people; Norway produces agricultural produce particularly fish.
It produces and exports fish today, Norway also produces crude oil, to the extent that today Norway is a country that has one of the highest investments in the sovereign wealth funds. Norway has $873billion in its sovereign wealth funds.
Notwithstanding having $873billion in its sovereign wealth funds Norway also takes very seriously the output from fish production, to the extent that the country survives on what I call, its annual basis revenue that is what it generates from the export of fish.
What does the country do with revenue from crude? It invests it, and at every point the country is about to use the funds from Crude oil, it only uses it for infrastructure purposes, that is a country that has planned for its people. Soon after we introduced the Forex restriction on the importation of Fish, the Norway’s farmers started complaining to the extent that the Parliament in Norway has met twice to see how to ameliorate the adverse impacts of not being able to export fish to Nigeria. Indeed the country has sent several trade delegations to Nigeria to encourage us to lift the restriction so that they can export fish to Nigeria and we in turn pay them our hard earned dollars, which we do not have at this time. What we should all realize is that by allowing the import of goods that can be produced in Nigeria, we export wealth and jobs to those countries and import poverty to our country.
But, unfortunately we didn’t plan this way for our people and that’s why we are where we are today, and I’ll give you a few examples again. In September 2008, Nigeria’s foreign reserve stood at $62billion, what did we do with $62billion? At a time when crude oil price was at aboutN120 per barrel, what did the country do?
What we could have done was save the money, if we couldn’t save the money, we could have invested it in infrastructure and industries. But what did we do?
I’ll give you an example, the Central Bank of Nigeria of that time went about licensing class ‘A’, class ‘B’, class ‘C’ bureau-de-change (BDC).
For class ‘A’ bureau-de-change, Central Bank was allocating $1million per week, for class ‘B’ bureau-de-change, Central Bank was allocating $750,000 per week, and for class ‘C’ bureau-de-change, Central Bank was allocating $500,000 per week to each bureau-de-change to the extent that between 2005 when CBN started selling dollar cash and 2016 January when we stopped it, the CBN had sold dollar of up to $66billion to BDCs. In 11 years, CBN allocated $66bn averaging $6 billion per year.
If this didn’t happen, we would comfortably be having well over $90 billion in our reserves today and we will not be struggling to pay our bills today. If we had thought of other ways to utilize our reserves in 2008 when it was as high as $62 billion, perhaps we would not be where we are today. We have a situation where at that time, I as the MD of Zenith bank, a deputy Governor of central bank would call to quarrel with me to ask say I was not coming to Central Bank to collect dollar cash to sell to bureau-de-change. I was called to be queried that some people in Kano, some people in Port-Harcourt and in Lagos were calling to say Zenith Bank was not selling Dollar cash to bureau-de-change but of course the bank didn’t see any serious need to disburse Dollar cash to bureau-de-change at that time. That was what we did with part of our $62 billion.
I go further, between 2009 or 2010 and 2014 of course you remember 2009 was when we had the crisis, when it started with Lehman Brothers collapse, America pumped a lot of money to stimulate the economy, and as a result of pumping that money, some of those funds flowed into emerging markets including Nigeria.
At that time again Nigeria removed all forms of capital control to encourage the flow of capital into Nigeria. So what happened during that time, in 5 straight years we saw crude price at above $105 per barrel for five straight years. That period we also saw unhindered flow of capital into emerging market into Nigeria; to the extent that by 2013, we had $23 billion in capital flows into Nigeria.
What did we also do? The CBN started encouraging Nigerians to buy shares/ securities abroad. Although the dividends and proceeds of sale of the shares were to be repatriated through the CBN, we don’t have any records to show that the dividends and proceeds of share sale were repatriated. People just had all the discretion to transfer funds as wished, just because we thought we had a lot and didn’t think about a day like today when crude prices will be so low.
We should have at that time built our reserves. What did we do with our reserves at that time? I repeat those were some of the actions we took as central Bank that resulted in the situation that we are today. Now I want to take us back a little. In January 2014 the country had forex reserve which stood at $40.6b at that time when crude price was about $110 per barrel…Sometime about 2013 September 2013,the country was generating from crude oil export on a monthly basis average of about $3.2b.
By June 2014 when I took over as the Governor of Central Bank of Nigeria, reserve had dropped to $37b and crude price was about $108 per barrel. At that time receipts from FX crude sale had dropped to just about $1.7b monthly. Soon after that we saw the crisis all over again and between that August and September 2014, up to this time which is about 2 years, we have seen consistent drop in the prices of crude to the extent that in March 2015, our reserves had dropped to $31b dollars.
What does it take to produce these items? To produce fertilizer you need gas, and to produce petrochemical products like polythene, you need gas also. To produce petroleum products all you need is crude oil. So, all you need to do is to import the machines.
So, I’m saying that the structural adjustment will work. The government is pushing that we must diversify the economy. And that items that we were importing, which can be produced in Nigeria, must be produced here. That is why the government has continued to support the restriction on foreign exchange for these items like rice, fish and tomatoes.
I have told you the successes we have attained. I can say that for the first time I’m seeing a toothpick that is produced in Nigeria. The VP gave me a sample of that toothpick on Wednesday. And what does it take to produce toothpick? Bamboo and the machine you need to produce toothpick which costs less than $50,000.
We must embrace structural reforms to the extent that we learn some important lessons. There is a recession and a global economic crisis where revenues dropped. When there is structural adjustment program and fortunately your revenue also grows, you adopt structural reform strategy. In event that there’s another round of recession, you will be able to withstand it because economic crises come in season. They come and they go.
When next an economic crisis comes in, it’s either you are at par with it or even stand taller and enjoy growth rather than going into the valley.
You also talked about petroleum products pricing. Petroleum pricing is something that citizens have taken passionately. I think Nigerians love and trust Mr President that is why despite the increase in the prices, Nigerians accepted it.
Why, because they found out that because of shortage of foreign exchange, marketers stopped importing the product.
NNPC was saddled entirely with the responsibility of importing petroleum products. Of course, it became so bad that it became embarrassing to the citizen to the point that people were buying fuel at N86 while others were buying at prices as high as N150/N200 a litre in different parts of the country.
People began to about the availability of the product despite the price differences. That now informed the decision to increase the pump price from N86 to N145 per litre so that people can move around to conduct their business.
Hence, at that rate, it will be possible for them to source their foreign exchange at a price not less than N280 to the dollar.
It is unfortunate this has attracted high rate of inflation, with the rise in petrol price from N86 to N145, which is about 80% increase. Imagine a wholesaler transporting some goods from Jigawa or Zamfara. By the increase in petrol price, it means the transporter has no choice than to increase the price of transportation fare by 80%. That tomato lands in Ketu or Wuse market. By the time it lands there, the retailer gets to the market to buy tomatoes and the wholesaler adds 80% to the usual price. That’s the second leg of the 80%.
The woman carries the basket of tomatoes to Ketu bust stop and takes a taxi. The cabman takes another 80% increase in transportation from Ketu to Obalende, which is increment number three. The tomatoes get to Obalende where the woman begins to resell. When you and I now go to buy from her, you can imagine how the 80% scenario has come to affect the price vis-a-vis inflation.
If you go to the restaurant, the price of the plate of rice laced with tomatoes – that has been bought from the woman who has resold at an 80% increase- and meat that you are going to buy will also go up.
So in the transmission mechanism, the price goes up 5 times as a result of the adjustment from N86 to N145.
That is why the adverse impact on prices has been so colossal on our people and the government will continue to do its best to moderate and we the monetary authorities will look for our own way to inject liquidity so that what has gone up through the exchange rate, manufacturers can get it through moderated interest and improved industrial capacity.
It will help to moderate prices so the impact of exchange rate is not so adverse on prices. It is a delicate balance and we must give credit to the fiscal and monetary authorities for what they are doing to ensure that the impact is reduced and that we turn round the corner as soon as possible.
How will the Government avert the looming petrol crisis on account of naira volatility?
I am telling you that with the arrangement put in place; and I mean the agreement between CBN and NNPC to ensure that dollar is available to the importers of petroleum products, all the IOCS selling dollars have been directed to channel to marketers to import fuel.
This a mechanism created by CBN and NNPC. At the time this programme started we were told that they could procure forex at no more than N280 to the dollar and the price should not be more than N145 per litre. In working out the effective price of N145, the template provides for nothing less than N30 per litre margin for the marketer.
You can quote me on this. That template is available. By making N30 per litre available to the marketer what this does is that even if the marketer does not find the product at N280 to the dollar and he finds it at a price close to N300 to the dollar or N305 or even N310, that marketer will still make a profit even though it could be a reduced margin.
That is the template that is currently in place and I am optimistic that it will work. Based on this arrangement between CBN and NNPC we will see to it that IOCS are not compelled to sell at a fixed rate, we will see to it that they sell at the average of the interbank rate of the previous day which means where the marginal rate is N305, and some are selling at N310 or N315 the rate will then be between N305 and N310.
If the marketer procures forex at an average of N305 and N310, they will still make a profit and sell that petroleum product at not more than N145 per litre.
I want to know what you are looking at in the short term and on the bridge funding arrangement to stimulate the economy. You talked about the need to sell some assets in the oil industry and just yesterday, when Alh. Aliko Dangote also spoke to CNBC he talked about selling some of the assets the government is holding onto in order to raise money. But the impression one is getting is that Government is not considering that advice.
What I am saying is that government can stimulate demand by spending to fund its budget and we as the monetary authority have told the fiscal side that if the need arises to the point where they need a bridge fund, we will provide that.
We are not there yet and I would imagine that should not bother you at this time.
Government is working to stimulate the economy by spending. That’s why as you heard the minister of finance talking about, the fact that N420bn and another N370bn to N400bn is being made available this week, is certainly an attempt to stimulate the economy through spending.
The most important thing now is that we need to stimulate the economy and the fiscal authority is alive to its responsibilities in achieving this objective.
On the sale of assets in oil industry, you will recall that April 2015 I granted an interview to Financial Times of London where I suggested that in order to raise money to fund its capital expenditure, government needed to sell between 10% to 15% of its oil and gas assets.
At that time oil price was about N50/N55 per barrel, and our consultants did the numbers and told us that we could raise between $25 to $35 billion.
I would imagine that that option is still on the table because more people even in the cabinet have made the same suggestion and if it happens , that will be fine, including the option to buy back the assets at some premium if contemplating buying back when the crude prices move up and the assets value also move up.
You know that in government there are those against and those in favour. The argument in favour of selling the assets has gained a lot of credence recently.
We noticed the inconsistency of CBN in the resumption of sale of forex to BDCs after you stopped that in January this year. Secondly, the $1bn you said has started flowing in; don’t you think these are hot money which may be dangerous for the economy?
CBN is not inconsistent. And I will tell you how. As at January 2016, CBN was the only central bank in the world that was selling forex cash to BDCs and we felt that because of the haemorrhage on our reserves we needed to stop.
At the time we said that we were stopping. We said that the CBN would seek to open other windows where the BDCs could continue to do their business. By this current arrangement, we are saying that the diaspora funds coming in through money transfer operators should form a substantial part of what should go to fund the BDC market.
This is not a reversal. It is certainly not a reversal. It only took us about six months to eventually say let’s look at this window as a way to channel the funds coming. In any case we are being told that over $20bn comes in annually in diaspora money.
If some portion of this diaspora money comes in, we might as well channel a little of it towards meeting the needs of citizens who need retail cash who want $5,000 and below. It is by no means a reversal but in consonant with what had been said at the time we contemplated that the CBN was no longer going to put cash into the market.
Now the question of whether the inflow of about $1bn is not hot money; you see the template that we designed for the new flexible forex market regime is the template where we said that that we will introduce not just spot but also futures.
The futures market encourages more and more importers to push their FX demand into the futures with varying maturity profiles. What I mean is the we are in the valley now and we have put in place a document that provides for a single exchange rate determination mechanism, we put in place a system that reduces the level of volatility where it pushes demand that would have been stuck in the spot market into the future.
Because that system is seen to be a credible system, they are coming at a time when you are in the valley I don’t think it can be worse than where it is right now.
So what am I saying? You will find a situation where naturally there would be maturity of these investments.
As many are coming in others are going out and if the net effect is a negative we dip into our reserves to plug in. If the net effect is positive it goes to boost the reserves. That’s the way it is supposed to work. If while we are in the valley they are encouraged by the system we have put in place to come in then all we can expect is that as more and more of the FPIs come in, we will naturally move northwards and up the hill.
What we know of getting countries out of recession is that government fraternises with the private sector. During the President’s visit to the US we were told that he was not favourably disposed that they were on the trip. Secondly when you introduced the flexible exchange rate it was supposed to close the gap between the official and black market rates, but that is not happening yet.
That report was untrue. It is false that the President was unhappy with the private sector people who attended that event albeit as you used the word ‘uninvited’.
It is untrue and I want to use this opportunity to correct the impression and to put it bluntly that Mr. President was cracking a joke and if you watch that video after he cracked that joke everybody laughed.
Again I am aware that President Buhari has been meeting with private sector leaders to encourage them to work with government to get us out of this situation and that is being done.
Only last week the economic management team met leaders of the private sector to talk about what role the private sector would play. On Monday, the day after tomorrow, the economic management team is going to meet with the private sector in Abuja. That is not a government that does not want to fraternize with the private sector.
Secondly, the flexible forex system is supposed to close the gap. But don’t forget that we are coming from a very wide gap situation. I am aware that there are two rates in the market. The CBN rate and the interbank rate. I am also aware that some people are operating in the parallel /free funds market; which by Nigeria’s Foreign exchange laws is an illegal market.
That market is very shallow and we often stressed that the rate in that market should not be used as a barometer for determining the value of our currency. Now, talking about the interbank rate which today varies between N305 and the other rate at about N320, I am optimistic about it and I am saying this for the record, that as more flows come in, the market rate will close.
Again, on the parallel market, it is unfair to use the shallow market as a basis for determining the value of our currency. No one uses the travelex rate at Heathrow to determine the exchange rate for the pound in the United Kingdom.
