Nigeria Economy Commentary: Second Term – Economic Growth in Focus

MDAS Nigeria's total public debt increased by ₦2.4 trillion in Q2 2020 - NBS

In a letter read on the floor of the Senate late last week, President Buhari has noted that having completed his first term in office, current CBN governor, Godwin Emefiele, has been nominated for a second term. If approved by the Senate, it would make him the first Governor to serve two terms since Nigeria’s return to democracy in 1999. With the Nigerian economy entering a downturn at the start of Emefiele’s first tenure, the past five years were rife with challenges from many angles for the Governor to tackle, most of which revolved around foreign currency, price levels (CPI) and growth.

Here, we analyze some of the governor’s major policy actions and reactions through his first stint as CBN Governor.

FX policy: Initial turbulence ended with a successful “stop-gap”

In the wake of the oil price crash in 2014 which drove sizable pressure on the Naira-USD exchange rate, external reserves and dollar liquidity, monetary authorities were faced with the trilemma of when, how and if it should allow a devaluation of the currency noting Nigeria’s substantial dependence on imports. As such, in its bid to reduce capital outflows, drive convergence in official and parallel market rates and ultimately attain a more market-reflective rate, the CBN devalued the currency marginally in 2015 (initially pegging the exchange rate at a fixed point of ₦198/USD) before eventually moving to a managed floating rate system in June 2016. The apex bank also imposed capital controls in 2015, publishing a list of 41-items (now 44) ineligible for sourcing FX from official channels. However, rather than moderating demand for FX and possibly stemming foreign outflows, demand shifted to a parallel (black) market, giving rise to further arbitrage and an even higher black-market rate (peaked at ₦495 in 2016).

By 2017, faced with pressure from investors and amid some improvements in crude price, the CBN began to tackle currency illiquidity by conducting regular currency auctions as well as making USD available for PTA and BTA activities. In April 2017, the bank created the Investor’s & Exporter’s (I&E) FX window, an autonomous foreign exchange window, with market determined prices which was very well accepted by the market. Further supported by progressive improvements in other economic factors, the creation of the I&E FX Window successfully supported currency liquidity, improved price discovery and eventually led to a convergence between multiple rates in the FX market.

Market reaction: FX policy direction between 2015 and early 2017 left economic stakeholders less than enthusiastic as investors (particularly foreign investors) sold-off on Nigerian securities amid perceived overvaluation of the currency and an illiquid FX market. Notably, the equity market contracted 6% in 2016, while the S&P Nigeria bond index also contracted 4.2%. More so, in the period inflation rose rapidly, with the CPI rising 15.6% y/y in 2016 even as the economy entered its first recession in 25 years. Post the I&E FX window implementation, market sentiment improved notably, with the NSE ASI gaining 42.3% y/y and the S&P Nigeria bond index rising 26.3% y/y in 2017.

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Policy Catch-22: Price stability vs Economic growth

Apart from defending the currency, the CBN governor – and Chairman of the Monetary Policy Committee – was also faced with the task of deciding the path of monetary policy in an economy experiencing stagflation. While the Federal Government enacted on expansionary fiscal policy measures to stimulate the economy, the MPC was unable to adequately adopt complementary expansionary monetary policy amid a decision to prioritize price stability. As such, the apex bank maintained a tight monetary and liquidity environment for the majority of the Governor’s first tenure. High frequency of Open Market Operations and harsher cash reserve requirements in the banking system characterized the 2016 – 2018 period.

Nonetheless, we highlight the CBN Governor’s relentless efforts to drive loan expansion to the real sector. Policies meant to incentivize low-interest lending to the real sector such as the anchor borrower’s program, differentiated cash reserves requirements for deposit money banks willing to grow loans, and other initiatives were enacted in the period.

Market reaction: While the market recognized the need for economic stimulus, stakeholder consensus was that a looser monetary policy environment would be less prudent amid the tight economic predicament and would not have had the desired effect. Meanwhile, the credit expansion initiatives implemented by the Governor were perceived as insufficient and redundant given much tougher structural credit problems that remain in play.

The second term: Expect the stronger pro-growth focus

While Emefiele’s first term was dominated by conversations around price and currency stability and reactionary policies to properly navigate the economic conundrum, we believe in his second term, economic growth stimulation will take centre stage. The country exited a 5-quarter recession in 2017 but has endured weak growth in the time, hampered by seemingly unstimulating fiscal policies and a tough external environment. Indicating the change in focus, we highlight the 50bps Monetary Policy Rate cut in March 2019 (the first cut since June 2016), with the committee citing declining inflationary and currency pressures as rationales. While external economic factors such as the US-Federal Reserve’s monetary path and crude oil market dynamics will remain important determinants of monetary posture, we expect the CBN Governor to use all the tools available to drive and prioritize a more pro-growth agenda, supporting cohesion between fiscal and monetary positions in Nigeria.