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Emefiele and the 2015 economic gragh (1)  


Godwin-Emefiele-Bella-NaijaTHE footprints of Godwin Ifeanyi Emefiele are visible on the economic policies and developments, which have had the most impact on Nigerians in the year 2015.  With little talk or drama, the governor of the Central Bank of Nigeria has against all odds, effectively led clear-sighted efforts that have defined the economic landscape in 2015.

Emefiele assumed duty at the onset of reversal in the economic fortunes of the country and has been in the forefront of efforts to contain the disruptive effects of the oil price shock, which hit Nigeria and other oil dependent economies from mid-2014. He has also taken advantage of the crisis to champion fundamental initiatives – to diversify the economy through strategic policies – to build a solid foundation for a post-oil Nigerian economy.
Into the storm: Confronting the impact of the Oil price Crash

The CBN governor took office just as the worst economic crisis of the current democratic era was starting. Nominated for the position in March 2014, he was confirmed by the Senate and assumed duties three months later in June, the very month that the steep decline in global oil prices began.

The immediate challenge was managing the foreign exchange supply and demand dynamics. National revenues had shrunk due to the sharp decline in foreign exchange earnings as a result of the steep fall in global oil prices but increasing demand for foreign exchange was putting pressure on reserves. From a high of $114 per barrel, oil prices fell sharply in the second half of 2014 to a low of $48, bringing to an end a four-year period of stability around $105 per barrel. This was devastating because oil accounts for about 90 per cent of exports and 70 per cent of national revenues. This situation was further complicated by shrinking foreign reserves and low savings with barely $3.5billion in the Excess Crude Account. Worse, foreign investors were stripping their investments from the capital market due to fears of post 2015 election violence and a military campaign against Boko Haram in the northeast.

Emefiele responded with a series of proactive measures. The most central of these was using the reserves to maintain exchange rate stability. This effort was successful in the first three months. But it soon became clear that with declining inflows, it was futile to rely solely on foreign reserves to achieve Naira stability. CBN’s initial efforts to maintain and stabilize the exchange rate at N157.31/US$ resulted in the depletion of the reserves from US$40.7 billion in September 2014 to $36.75 billion at the end of October 2014. The situation was clearly unsustainable.

The CBN responded with a series of foreign exchange demand management measures to ensure only persons and companies with legitimate demand for forex get access to official sources of forex. The aim was to reduce pressure on the Naira by drastically reducing artificial and speculative demand which was the major reason for its weakening. First, CBN pegged foreign currency borrowing by banks to 75% of shareholders’ funds. Then the sale of intervention foreign exchange in the interbank market and to bureau de change (BDCs) was stopped in order to eliminate cases of currency substitution.

The CBN also ended the funding of import items like electronics, finished products, telecommunications equipment, Information technology, generators and invisible transactions from forex purchased from the Retail Dutch Auction System (RDAS) sessions. Thus, a huge portion of the demand for foreign exchange from the official market was transferred to the interbank market for better clarity on the source of the demand.

A Notch Higher: Managing the Fallouts of initial measures
Despite these measures, the high demand for foreign exchange did not abate. In November 2014, Emefiele decided to raise the notch higher with a cocktail of policies designed to mitigate the effects of the crisis. First, to contain inflation, he tightened the Monetary Policy Rate (MPR), moving it from 12 to 13 per cent.

Second, he increased the Cash Reserve Requirement (CRR) on private sector deposits from 15 to 20 per cent to reduce the amount of excess liquidity available for speculative and arbitrage activities and to moderate the pressure in the foreign exchange market.

Third, he shifted the mid-point of the official exchange rate from ₦155/US$ to ₦168/US$. This move was to realign the value of the naira with the already depreciated rates in the Interbank and BDC segments, reduce the extant premium and discourage arbitrage tendencies in the market. It was also meant to naturally provide a critical opportunity for entrepreneurs to take steps toward replacing costly imports with cheaper locally made goods and services.

Fourth, he reduced to 0.5 per cent the amount of forex that commercial banks could hold at the close of each business day. It became mandatory for banks to render daily accounts on foreign exchange transactions. This effectively closed the time lag unscrupulous bank executives exploited to create unnecessary forex demand and helped to reduce pressure on declining foreign reserves.

The CBN governor also closed the rDAS/wDAS foreign exchange window and ordered all demand for foreign exchange be routed via the interbank market. This put paid to the sharp practices of unscrupulous elements engaging in round tripping, speculative and fictitious demands for foreign exchange.

From crisis to strength: Giving muscle to local industry
Another bold step that Emefiele took is the forex ban on forty-one items that could be produced locally. In addition to helping curb forex demand, the move was designed to encourage growth of local industry, create jobs and reduce poverty by making the imports of these items difficult. The affected items include rice, cement, margarine, palm oil, poultry and roofing sheets. Also on the list were items like toothpicks, Indian incense, kitchen utensils, and tomato paste amongst others.
To be continued tomorrow.
*Adeleke is a public policy analyst.

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