The Central Bank of Nigeria governor, Mr Godwin Emefiele, in this interview with the Financial Times of London explained why he believes recent steps like cutting off dollar access to importers of certain key goods will enable him to avoid further devaluing the currency
- a strategy widely criticised by the market, which believes putting off another devaluation risks more economic instability.
He justified restricting imports by saying it would stimulate local production and gave his views on the state of the parallel market and liquidity. He also discussed efforts by the country’s new president to block leakages and recover stolen oil revenues. Here are excerpts from Mr Emefiele’s interview with the Financial Times:
You said in June that monetary policy remains “handicapped” without fiscal guidance. Now it’s August and there is still no cabinet, no economic policymakers appointed yet. Do you still hold the same view you expressed in June?
Well let me say that the Central Bank of Nigeria as a monetary policy authority is independent and thus it carries out responsibility in line with mandate. Our mandate is very clear in the Central Bank Act of 2007. We are carrying on with our mandate and not having a cabinet team I daresay does not hamper our ability to do our work. Naturally, what you would expect is that the fiscal authorities would complement whatever we were doing - we would work together, we would collaborate. But when you talk about the fiscal authorities, you talk primarily about the ministry of finance. The ministry still has a chief accountant’s office, its permanent secretary, we have people in the budget office, in the debt management office, they are working. For me, yes, it’s important to underscore the fact that if the minister is there, yes, it’s good, but the people who are working there, we should give credit to them, they are human beings, we should give credit. So there’s nothing like, whether or not having a cabinet team hampers our ability to do our work or to collaborate with the Ministry of Finance.
But do you see it now as your role to be the sole voice to the market, in the absence of the cabinet?
No I don’t. What I’m saying is we are doing our work whether or not there’s a finance minister, we will still do and say and act the way we are acting now so not having a finance minister at this time, I repeat, does not hamper our ability to carry out our responsibility.
Many people I speak to say that the import restrictions you introduced in June to strengthen the naira are actually making matters worse by increasing inflation and hurting the poorest Nigerians the most. What evidence do you have that your measures are working to stabilise the naira and the economy?
First of all, when you talk about how it will increase prices or increase inflation, any option you adopt will cause inflation, right? If we adjust our currency further, which is what I have heard people talking about, it will still lead to inflation, it will lead to an increase in prices. What we are saying is that those 41 items [the central bank in June banned importers from sourcing foreign exchange for 41 key goods] are items that can be produced in Nigeria. Having done an adjustment of the naira by almost 22 per cent, now we are also looking at the supply side, that is our reserves and our revenues. Yes we are constrained as a result of the drop in crude prices. But we are blocking leakages. And we are gradually, as a result of the commitment by the president, building our reserves gradually, and we are working very hard to avoid a scenario where the reserves are badly eroded.
Now, the third part is demand, with demand management which we are also working on. So the question is, are they working? My answer is yes. The demand management arising from the exclusion [the import restrictions], are they working? Yes. But let me tell you, these are not import restrictions, they are foreign exchange exclusion. Looking at the demand side, is it working? The president came on board and said that we will work very hard to reduce importation of petroleum products by ensuring that our refineries work. Our refineries are working now. Warri and Port Harcourt have started producing, they have not obtained the optimal capacity but they will. Kaduna refinery will start working this month.
Now, there are other actions that the presidency is putting in place to ensure that we reduce importation of petroleum products where the NNPC [the national oil company] will solely, almost solely be responsible for procuring refined petroleum so those who are importing petroleum products will only just need to go to the NNPC and pick up petroleum products. So in that area I would say that we are already moving in the direction of reducing the import of petroleum products. and we will achieve it. So you ask me if they are working, my answer is yes.
There are other major items on the 41-item list. We have rice, we have fish, we have textiles, we have tomato paste and we also have palm oil. What I’m saying is we have begun to get people to refocus and change their paradigm from the fact that the challenges of the dwindling reserves are making people change their paradigms. We are telling people our story and they are beginning to look inwards.
You mean manufacturers and those in industry?
Correct.
A lot of manufacturers have been quoted in the local press criticising this new policy and saying that they are not prepared for this and cannot manage scaling up production so quickly to compensate for reduced imports.
I just met this morning with the executives of the Manufacturers Association of Nigeria and after we explained everything to them, they agreed with us. Indeed they themselves commended the actions we have taken because it is favourable for the manufacturing industry.
Some analysts are saying that maybe this is straying into industrial policy and is outside the remit of the central bank.
No. I have always said that the mandate of the Central Bank of Nigeria, yes includes price and monetary stability, building reserves and achieving a strong exchange rate, but in the midst of it what is important is you want to see how you want to do whatever you can to control your inflation, to keep prices low, to stabilise prices and achieve macroeconomic stability. In an attempt to achieve macroeconomic stability, you must take action that impacts positively in the lives of your people. And any monetary or fiscal authority will do that. In the United States, everything is “jobs, jobs, jobs”. The Federal Reserve talks about jobs. Every month, Janet Yellen comes and talks about employment. So if you are saying that it is not within the mandate of the central bank governor to put in place policies that will increase job creation, reduce unemployment, increase economic growth and development then you are not right. So what we are doing is taking actions and decisions that will improve the lives of the people and that will make our people look inward. And those things we are importing right now, we are taking action to say produce them locally, and in the process you create jobs for our people and in the process you are growing the economy.
So your intention with the import restrictions is to encourage the local market to make up for that?
Absolutely. That’s the entire objective because we’ve done so before. In the 50s and 60s, Nigeria used to be the largest producer and exporter of palm oil, with 40 per cent of market share globally. Today we are an importer of palm oil. And when I met the Manufacturers’ Association of Nigeria this morning, I asked them: “All those palm trees, where are they?” They said: “They are still there.” I said: “Can we begin to go back to tap our own crude palm oil and refine our palm oil?” They agreed with us. It’s not that we are talking of something being rocket science - we’ve done [this] before.
Last month, inflation rose to 9.2, above your target band. How do you justify the bank’s recent policy moves given your mandate of price stability?
Let me explain something. If you are in our situation, you have created a band that is between 6 and 9 per cent. And you are faced with an attempt to either depreciate your currency that will lead to price increase or the alternative which you are adopting which is, we look inwards, where you’ve seen the evidence pointing to the rise in prices. Naturally, inflation will happen. But what we are doing, we are hoping and we are working very hard to say hopefully by the time productivity from this planting season begins to come up, we would be able to moderate prices and inflation, so that’s the direction. I’m not going to make any commitment to say that we are going to push inflation back to the 9 per cent high margin [the bank’s target band is 6 per cent to 9 per cent]. But we are going to work very hard to keep it at a level that people will still feel comfortable in the midst of the current challenges that we are facing.
Many analysts say that another depreciation is inevitable. Will you devalue the naira again anytime soon?
What I’ve always said is that everybody is entitled to their views. And what I’m saying is that we have adjusted our currency by 22 per cent. We are looking at the supply side. We are at this point looking at the demand management. When we come out of demand management, we are optimistic that the level of demand, by the time we look at it effectively, will match supply. And that is why we are saying at this time, the way we are, that the currency is appropriately priced. That’s where I am right now.
There is a lot of volatility in the parallel market. Last week, the dollar was going for 240 naira and now it is below 210.
I’ve always said that the parallel market is a shallow market. The parallel market constitutes just about 5 per cent of the market. It should not be a basis or a benchmark for determining the real value of Nigeria’s currency. And you see what happened. A situation where the bank vaults are full with cash and then banks on their own said, we don’t want the dollar cash, because we don’t know how to get real value for those dollars sitting in our vault . . . because they don’t want it, the market has crashed, from about 240 to as low as 210, 208. That shows you how shallow that market is.
A lot of people say that the policies you introduced in June are actually growing the parallel market.
It’s not the policy we introduced in June or February that is causing it. It is because of the speculative activities, the round-tripping and rent-seeking activities of certain people in the economy, that are creating this.
Did it come from the banks or more from your side?
The banks made the decision themselves after my statement [last week, on illicit financial flows in Nigeria]. They said: “Look, we are not going to take that cash.”
Also, physically, banks are full of dollars. Literally they do not have room for more dollars, is what I’ve heard - is that true?
Correct.
And you see that as a result of harmful speculation, or?
I think so. Partly.
Some say the parallel market is growing as a result of the new restrictions?
No, the parallel market is not growing as a result of any restrictions because we’ve said that those items are excluded from foreign exchange. By their exclusion, you cannot get foreign exchange from the CBN, from the interbank or from the parallel market so if you have your own funds somewhere in the UK or US you can use that to import the items, we are not going to stop you. But we don’t want you to access those funds here.
Is the solution to problems in Nigeria’s FX market really to close it down and dry up the dollar supplies?
No it will not. What we’re trying to say is that we need to encourage people other than the central bank who earn foreign exchange, other exporters, or people who are bringing in capital to come in and deepen the market better. Those flows will be used for eligible transactions, you cannot use them for ineligible transactions [the import of the 41 specified items]. But we are insisting that those items are ineligible because they can be produced locally and our people must focus - I mean Nigerians or foreigners who reside in country - must learn to respect our laws and our policies and do what we want, which is for them to produce locally because we know they can be produced locally and they are available locally.
So the way you are talking about this policy change, about the 41 ineligible goods, this seems to be a policy move that you would like to be permanent. This is your hope in the future, that Nigeria will not need to import any of these goods?
GE: Absolutely. That’s our view.
So this is sustainable?
It is absolutely sustainable. It was done before and can be done again.
What is your vision and strategy for monetary policy in the years to come?
We will keep monitoring the liquidity situation and based on our assessment of the situation we will either relax or tighten, but at this time we are still at a monetary tightening stance. In an attempt to achieve macroeocnomic stability, hopefully over time we will be able to overcome the challenges facing us now. We’re saying, “cut your coat according to the size of the cloth you have”, where there will be fiscal discipline and responsibility. Once we have all that, we will see a situation where we as the monetary authorities will be in a position to keep inflation under check, moderate inflation at the level we want, and we will also do our best to see how we can moderate and keep our exchange rate stable.
What is the central bank’s role going to be in supporting President Buhari’s effort to recoup stolen oil revenues which he this week said were deposited in banks?
At this time it’s still being looked at and we will be happy to play a role once we find the opportunity. Naturally as the central bank we will also assist in drilling them once we get to that stage, and we will be happy to have that money back because it will improve our reserves.
Has any money been returned yet, that you are aware of?
GE: Not from that angle, no, but there are other leakages that are being blocked that are said to improve our reserve position.
Could you specify what those leakages are?
The Treasury Single Account is a policy that was being pursued even before President Buhari came on, but this is being pursued more vigorously at this time, and what does that mean? It means that all revenue-generating agencies are compelled that once they receive the revenues, the revenues must come to the centre, and that means those revenues will come to the Central Bank of Nigeria. We had instances where some of those revenues were trapped outside the central bank. The president came on and he insisted that all revenues come to the centre and that’s what we are saying, and it’s the reason why you are seeing some improvements in the reserve position.
Do you see your role as the same as your predecessor’s role - to stem corruption wherever you find it and hold the government to account?
I try as much as possible not to discuss my predecessors. They did a very excellent job, but what I’m saying is as the central bank we have our mandate. We have our responsibilities and we will continue to work in line with what our mandate dictates. And if we find anything that is not appropriate in the course of our work we will talk about it, but the point is we will do our work.
But it seems there is confusion both in Nigeria and abroad among investors about your recent foreign exchange management policy steps.
We are closing the gap between the parallel market and the interbank rate. The gap is closing and I imagine that foreign investors should be happy that we are doing everything possible to close the gap. Based on that, they will believe us when we say that the parallel market is a shallow market, and that there is no need to use the parallel market as the benchmark for determining the real value of our currency.
The head of the Association of Bureaus de Change of Nigeria recently said that your policy was not sustainable and that the firming we have seen of the naira in recent days is only temporary and that we will see weakening again on the parallel market if your policies are not reversed.
That is his view. I am doing my work and with time we will know whether they are correct or whether I am correct. We will know with time.
So what is your philosophy in terms of the role of the market?
GE: When you talk about a free market, every country would love to have a free market, but you cannot have an entirely free market without some form of intervention to avoid a situation where you can if you are supposed to move in a direction and it’s not moving in the direction you want - you intervene to keep it in the direction you want. So the free market, which is what I also believe in, does not mean that we just allow the market to be open and allow every person to speculate and be attacking the currency to the detriment of the economy. Every free market economy, whether in the US or Europe, they have their own ways to intervene in the economy to ensure that growth or their objectives are achieved. That’s precisely what we’re doing. So we believe in free market economy as well.
But in terms of controls and restrictions . . .
There are no controls as far as I’m concerned. What we are trying to say is, if you say restrictions. What I’m trying to say is there are items that can be produced locally, and we are doing demand management and saying let’s produce them locally rather than import than. I don’t know why that is really of so much concern even when government itself will say, we will not import petroleum products. So why is it a problem we telling our people you can’t import rice - produce it in Nigeria, because it can be produced, or buy our locally made rice or buy our palm oil produced locally. I don’t see how that is a restriction.
Are electricity supplies adequate to produce even enough tomato paste, for example, to meet local demand?
There is, I would say, electricity, but it cannot be enough so our government is doing its best to improve electricity generation and distribution.
And in the meantime, you are hoping for the best, that there will not be shortages of goods?
Indeed. We are praying that there will not be shortages. But when there is a shortage, that shortage provides business opportunity for Nigerians and foreigners to come and jump in and fill the gap. That’s what we are saying. You find that it’s only when you are facing such type of adversity that you are compelled to look inwards and work hard to fill that gap.
So it might be bad times before good ones but it’s a shifting of the economy in a big way?
Either way, both ways, it will be bad times. Because of the drop in crude price and drop in revenues, what a sort of market friendly economist would say is, “oh, allow the currency to fall, let the currency find its value”. That will result in inflation. So that would be bad times. The option we’re adopting is, we’ve done adjustments to the level that we think is appropriate, we’re doing demand management, adopting demand management strategies to cut importation so that demand drops. It will also be bad initially but with time when we embrace the policy, the good time will come.
So you do not see yourself depreciating the currency again this year?
At this time the currency is appropriately priced.
And in a few months from now . . . ?
I don’t want to talk about that.
Do you think there’s enough liquidity in the market?
We think there is enough liquidity in the market. and those demands you find are indeed speculative demand. Substantially speculative. And with time we will prove again that these are speculative.
How?
You will find out, we are going to prove it.
How concerned are you about the strengthening of the US dollar and potential rise in US interest rates this year?
The possibility of a rise in interest rates in the United States will naturally create its own problems, not only for the Nigerian economy but for other emerging market economies that are dependent on the flows from America as well as from other areas. But that is why we are saying, we need to prepare for it, we need to prepare for a situation where the interest rate strengthens in the United States and as its strengthens there will still be outflows from Nigeria into the United States, so the possibility for even those foreign flows coming in is not even there. So why can’t we look inwards? Why can’t we continue to adopt the demand management strategies we are adopting right now, to compel people to look inwards and say, manage what we have and live with what we have. No doubt supply is constrained, you look at demand, you want to make sure you get your equilibrium prices appropriate and right. You want to tell people, look inwards, to cut demand [by producing more locally].
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