Just over a year ago, Godwin Emefiele was appointed governor of the central bank of Nigeria, CBN. In a wide ranging interview with Frank Aigbogun, the governor looks back at the last one year and how the bank is responding to the changing global economic environment.
How are you dealing with the pressures of the office?
In the life of any man or institution, and as you take on challenges, there will be issues to deal with. These issues are meant to be solved. As managers we are in a situation where we sometimes have to manage crisis because we are also problem solvers. So I can say we are coping well.
The truth is that my two immediate predecessors did an excellent job. Prof. Soludo did a great job through consolidation. Through Soludo’s efforts, we saw Nigerian banks reaching the very top in West Africa and ranking among the biggest in Africa. Today we see Nigerian banks being among the top 500 in the world by asset size and sometimes profitability depending on how strong the currency is. My immediate predecessor, Sanusi Lamido Sanusi, now the Emir of Kano, came on and in 2009 when we saw the global financial crisis, he did his best. He came up with the reforms that helped to stabilize the financial system and the banking industry. He helped to the extent that the Central Bank could beat its chest and say that during that period no bank depositor lost one naira, and this is because of the brilliant work done by the CBN under Sanusi’s leadership. The CBN naturally has a mandate for price and monetary stability, building reserves and making sure the exchange rate of the country remains very strong.
We are in an era where immediately I came in crude oil prices began to drop. By June 2014 when I took office, the oil price averaged about $114 a barrel and Nigeria’s reserves were around $37bn. By March 2015, however, oil price had dropped to below $50.
What has been the Impact of steep oil price drop on the Naira?
Once the oil price dropped, we saw a situation where people began to make their own prognosis as to what direction they think the country’s exchange rate should go. We have done our best in the circumstance. We saw depreciation in the value of the naira from about N155 to the dollar to about N197 at present, which is almost about 22 percent devaluation. We think that is just right, that it is just appropriate at this time. If you have devalued your currency by about 22 percent in the time period, then you need to begin to look at the question: what else is there to cause of all this, especially at a time or in an era in which you are not optimistic that supply will build because oil prices are still dropping? And if that is the case, that you have adjusted your currency by 22 percent, you have looked at your supply, then what you can only do is what we are trying to do right now, blocking leakages in the system, which is why we have seen our reserves at over $31bn right now.
The third aspect that you have to look at is the demand side because as you well know, price is a result of the interplay between demand and supply. We have depreciated the currency, so if demand remains high then you need to look at it. That is why we started to say: what are the items that we import into Nigeria at this time? Perhaps if the reserve level was as high as $60-80bn at this time, we would not need to look at the issue of currency adjustment. Or if there was the possibility that oil price would rise, you would not have had the need to begin to ask what items we are importing into the country.
How is the importation of petrol feeding into forex demand?
Today we have no choice but to ask: what are we as a nation spending our foreign exchange to import into Nigeria? And yes, our investigation has shown that the importation of petrol products constitutes a significant drag and that is why Mr. President has insisted the refineries must work. Luckily, the plants in Port Harcourt and Warri are beginning to produce and we are also hoping that this month, the one in Kaduna will also begin to work. As this happens, we will begin to refine our products locally and then we can see petroleum products being produced locally. Thus, we expect that from importing about 30-35 million litres daily, we can reduce our import requirement to, say, 15-20 million litres a day. I am also aware that the Federal Government is doing everything possible to see that we completely stop the importation of petroleum products. For instance, I am aware that the issue of 445,000 barrels per day is being addressed to ensure that if we actually do swap, the products going into the swap arrangement are credible and that petroleum products actually come into Nigeria. This will reduce the propensity for foreign exchange demand. If this propensity reduces, it helps our position by reducing demand pressures and helping reserves build up.
But it does not stop at that.
How did the CBN get to the point of putting our a list of items banned from access to forex?
Nigeria, in my view, is one country where, with over 160 million people, we depend entirely on importation. I cannot recall any other nation in the world with a population of over 100 million persons, which has to import everything. We have no food security and that is why the president has said we will focus on agriculture among others. We will focus on the economy.
For us at the CBN, the issue is this: if we are able to tackle importation of petroleum products, what are the other items? That is why the items we placed on foreign exchange exclusion list become potent at this time. Take rice, for instance. Why should we import rice when we know that we can grow it locally? Why should we import rice when we know that across the rice belt in the northern part of this country, hundreds of thousands of metric tonnes of paddy rice are piling up and cannot be sold? So why should we allow the importation of rice by people whose main interest is to plunder this economy, who, to all intents and purposes, are seeking to wreck this economy? Why should we allow the importation of palm oil? In the 1960s and up to the 70s, Nigeria was producing up to 40 percent of the total global volume of palm oil at the time. What happened? The palm trees are still there. Why should we allow palm oil to be dumped in our country?
We need to go back to the question: how do we create jobs? How do we build the entrepreneurial spirit of our people? Those days you had families that had 50 palm trees; there were some that had 100 and some had 200, and this was aside from those in Nigeria who took this as full time business. These 50 heads of palm trees were a source of livelihood to families in Nigeria. When the palm fruits became ripe, they harvested them, processed them and extracted the palm oil and palm kernel, which they sold. Men and children were gainfully engaged because we created jobs for our rural communities and empowered our villagers to feed themselves and send their children to school. Some of us benefitted from this. When the palm oil and palm kernel came to the cities, companies like UAC and PZ purchased them and created jobs and opportunities for the owners and ensured the young ones did not become street urchins. Today, all of that is gone.
So that is what we are saying. It is not just about exchange rate and reserves. It is about the reality that we have a growing rate of unemployment and so, what do we do as a nation? I spoke with the chief executive of a major company in Nigeria last week, who told me he has a younger brother working in one of the small banks in Nigeria. He asked his brother, “What are you doing in this bank? Let me give you some money.” And he advanced this younger brother N10 million. The younger brother went to Aba and bought N9 million worth of palm oil and transported it to Lagos. After selling the palm oil, the young man made a profit of N900,000. That is just one trip. If that young man can do even two trips in a month, that is N1.8m, and if he does two trips per month for one year, that will be a profit of about N22 million in one year. Now think of a profit of N22 million on an investment of N9 million! Can you imagine the way the wealth of this young man would have improved in just one year? That is the multiplier effect we are talking about.
And we once were a textiles giant
Yes, the textiles industry used to be the largest employer of labour in Nigeria. In Kano and Kaduna in the north, we had UNTL, Arewa Textile, Zamfara Textile. In Lagos, textiles giants dominated the entire stretch from Anthony to Oshodi and beyond heading to Apapa, to the right and left sides of the road. You had Afprint, NPEE, Ilupeju Textiles, Dalama Textiles, Aswani Textiles, and they adorned the landscape to our nation’s pride. At Iganmu we had President Textiles and they made the best Guinea brocade in the country in those days. In Ijora we had Sunflag and Spintext Mills. Go to those places today, they have been turned into warehouses for imported rice, imported textiles, imported palm oil, imported eggs, imported beef, imported tomatoes, and so on. Go to the countries where they import these items from and enter their supermarkets, you will not find made-in-Nigeria goods in their shops. It is only in Nigeria that you go to the shops and find made in China, made in South Africa, made in India. And as if that was not enough, they began to dump textiles on our country and we had no way to protect our own domestic industries. We lost those jobs and what did we create in their place? Miscreants on the streets of Nigeria. What you now see is that they not only import those textiles into Nigeria, those foreigners have now set up shops here. Go to Sabon Gari market, Balogun market, China Town market and you will find foreigners selling textiles. So Nigerians cannot even retail textiles anymore. Our young men get out of school and what they do is to become okada riders; university graduates are now Keke (tricycle) drivers. I have attacked and asked: what is toothpick? It is not just about toothpick. I want people to realize this: every item you import into this country from wherever, even if it is one dollar, has its impact on the reserves of the country. With the forests that abound in Nigeria, should we be importing toothpick? Why not bring in the machines they are using to produce this toothpick so we can produce it locally and create jobs? We need a total paradigm shift because we certainly cannot continue like this.
Is is not the case that Nigeria is badly in need of better economic, monetary and fiscal policies in a co-ordinated approach?
Yes there is a place for better economic, monetary and fiscal policies. It is exactly for this reason that Mr. President has said government will address power, mining, and agriculture. The government is doing its best to address power etc. The CBN and the deposit money banks have also had to intervene in the matter of power. We got into a situation where we have legacy debts and some banks had lent money to investors who acquired some of these power distribution companies (Discos) and generation companies (Gencos), and that was how our interest came in. We said we would not allow those loans go bad. We then began to ask questions and found that of the 23 generating plants in Nigeria, 20 were gas-fired plants. So we asked the reason for low generation and they said the gas suppliers were being owed. We stepped in, with the regulators and the banks and NNPC and agreed to resolve the debt issue so we could clear the legacy debt along the value chain, and improve on gas supply and pricing and tariff for electricity. The idea is to work around the tariff to ensure that whereas the indigent population is protected by having their electricity tariff pegged, the well-to-dos who live in highbrow and opulent areas, instead of using generators, they can be supplied power and they then pay market rates for the power they consume. When you use a generator, it costs you a minimum of N80 per kilowatt-hour but if you use public electricity today, it will cost you about N20 per kilowatt-hour. So what are we saying? If we can improve on supply, even if you have to pay say N45-50 per kilowatt-hour and you take away the noise and pollution, you will still be saving N35 while enjoying constant electricity. I am aware that power generation and supply to homes and offices has improved significantly recently. We want to see how we can continue to encourage more people to come in to produce power by investing. Eko and Ikeja Discos, for instance, are exploring the option of embedded generation to improve supply. So, to the issue of fiscal and monetary policy, yes, there is coordination today and we are working together and we will get there.
Why has delay arisen in disbursing the power intervention fund?
What happened is that some companies have received their payment. Yes, the fund has not been fully disbursed but we have paid out about 20 percent (N56bn) of the total to some Gencos and Discos out of almost N213bn. The disbursement was slowed down by the reversal in the tariff and we are working and discussing this matter so we can fully disburse. The regulators, NERC, has told us they did not backtrack on the issue of tariff, that they have sent messages to the Discos to send them what is called a cost-reflective tariff, and once the Discos send this cost-reflective tariff, they will give the approval. We will be meeting with NERC so we can work to remove some of the hiccups along that chain. In matter of three weeks we should see these efforts resulting in total disbursement.
Is the CBN itself setting off alarm by too many policies too soon?
The issue is not as people say. If you are in a plane and you are about to face turbulence, they tell you to belt up. We are in a period that we can say that as a result of the drop in oil prices and fall in reserves, we do not have any other choice but to do what we are doing right now. What I have said is this: if you think you have alternatives, give us your advice as to what we should be doing. The reserves are coming under pressure, people just sit down in their homes and offices and begin to plot how to mount speculative attacks on the currency. People sit down in their homes and say they prefer to store their value in foreign currency rather than the local currency. The CBN has a mandate to ensure that people store value in the Naira which is the legal tender. The truth is that when you find people engaging in round-tripping, rent-seeking and speculative activities, you will not have any choice but to do what we are doing because as you block one loophole, they are finding another one.
The banks are no longer accepting foreign currency cash deposit. Is this another crisis?
I really wonder why people will not have faith in their country; why people will want to take advantage of the situation we are in as a nation to begin to speculatively attack the currency. If you and I and all other Nigerians prefer to store our value in the dollar or pound, and 170 million people store up their value in dollars, pounds, Yuan, the Chinese currency, there will be chaos. It means you will have spiralling exchange rate, it means you will not have any reserves, and when you do not have reserves, you will have to come and do what we are doing today. In any case, if you go to the UK, you can keep your pound sterling account as a customer, but you cannot carry bags of euro or dollars and say you want to deposit it into your account in the UK; they will arrest you. You cannot go to China to open an account and you are carrying dollars in cash, not wired money into your bank account, because they will arrest you. Similarly, you cannot go to the United States and say you do not want to store your value in dollars and you begin to carry pound sterling in cash all over the place in the name of maintaining an account; they will arrest you. So why should Nigeria have or encourage a policy where people want to store their value in the country in currencies other than the naira? That is the question we need to ask and find answers to.
I am not so sure how the policy of domiciliary accounts came about in Nigeria, but I do know that this was meant to target exporters; it was meant to encourage exporters to receive and repatriate their foreign exchange proceeds. But today, we have seen people, everybody, go to their banks, open a naira account and at the same time open a domiciliary account. What is the purpose? It is for them to convert naira into dollar cash and begin to store them or to collect illicit money, and they think the best way to hide it is to open a domiciliary account.
Will the CBN intervene?
The Central Bank has no hand in whether or not a bank decides to receive cash into domiciliary accounts. The truth, however, is that we support it. In the past banks accepted dollar cash, but they handled small volumes; so they could manage this because it was what they could handle in their daily operations. But what we have started to see is that as a result of the speculative activities, as a result of round-tripping activities, people have resorted to just the business of converting their naira into dollar, this is what we call currency substitution. Today, there is a large volume of foreign currency sitting in the vaults of the banks and the banks cannot handle it. If a bank has a large volume of naira in its vault, what it is allowed to do legally is to bring it to the Central Bank and we credit their account. But if a Nigerian bank today is awash with dollar cash, it cannot bring it to the Central Bank because if it brings it to us, what are we going to do with piles of dollar cash? So the banks have reached the limit of what they can accept and handle and they have started to say they do not need dollar again because this is a non-earning asset; it is useless in their vaults. If they now say they do not want dollar cash, we support them.
What should Nigerians who have to send small sums to children at school abroad now do?
You do not need a domiciliary account to do this. First, it is a shame we got our educational system to the point where our children have to go abroad. If you do the numbers you will be shocked by the amount of money we spend on servicing school fees abroad. The number is obscene and we are working on putting data together. In those days when you wanted to travel and you applied for travel allowance, you got it. That is still in existence. What we are trying to encourage now is to have that money wired into your card instead of giving you traveller’s cheques so you can go and conduct your business.
For the point raised about sending small sums to children in school abroad, such parents are entitled under the current policies to send allowances to their children through the banks. We are not here talking about fees or allowance for a school student here and there; we are talking about those who are stealing or set out to steal and are looking for where to hide their loot. We are currently studying it and I know that today you have more than $1bn in cash sitting in the vaults of the banks, useless paper. I have spoken to some of the banks and what I encourage them to do is to return the money to whoever gave it to them in the first place because it is useless asset and the banks themselves know it. In finance language we call it non-earning asset.
How do you to take out the panic in the banking system today?
I do not think the banks need to panic. It may take them time to manage it, but they will gradually look for ways to empty their vaults of this useless asset. For some it could take up to a year, but in the end they will cope. It is not a general or systemic problem because there are quite a number of the banks that have been very good at treasury management that had a good way of determining the optimal level of foreign currency cash they need for their operations. However, maybe in an attempt to be seen to be receiving deposit from customers, some banks have overdone it and that is why they are going to feel the heat.
As I have already said, the banks have no business receiving foreign currency cash. The legal tender in the US is the dollar. The legal tender in the UK is the pound sterling. In Nigeria we all know we have one legal tender and that is the naira. Nigeria cannot be an exception. We must conduct our business in naira. In the spirit of cashless, the idea of carrying foreign currency cash must stop. It needs to stop. Let us carry out our transactions in a transparent and corrupt-free manner that can be monitored and tracked. I can assure you the CBN will do everything it has to do to very quickly bring about an era in which the dollar or pound sterling cash is no longer being hawked all around Nigeria.
How do you respond to private sector concerns over CBN foreign exchange management?
The Central Bank has a responsibility to do what it is doing. I do not have to seek their approval to do what we are doing simply because Nigeria has no business continuing in what we have been doing that has turned the country into a dumping ground rather than a production economy. I have read some of these concerns you alluded to. They have written to me and I am going to invite them for a meeting so we can engage. But will that engagement lead to a reversal so we can return to our old ways? My answer is no. To repeat, I cannot understand why someone will tell me that palm oil is an intermediate product and so we should allow it come in. I cannot understand why somebody will tell me that cold roll steel is an intermediate product when we know that there are firms in Nigeria producing and converting hot roll steel into cold roll steel, and people want us to continue to import cold roll steel? That will not happen because we will say no, let them go those companies in Nigeria which are already converting the hot roll steel, which they can import, into cold roll steel. Don’t tell me it is an intermediate product. What will it take to import a machine that can convert your hot roll steel into cold roll steel and you create jobs locally for our people? That is what we are saying.
How is the CBN managing to build-up of reserves?
Since President Buhari took office, the government has been saying all leakages must be blocked. Plugging these leakages has to do with the treasury single account. What we are saying is that if you are a revenue-collecting agency of government and you receive naira or dollars, that money should come to the centre, the single treasury account. If you have expenses to incur based on the budget that has been approved for you, the centre will pass on that back to you. It is no longer that you will receive the revenue, keep it, spend it as you wish, exceed your budgetary allocation, and then hand the small change or balance to the government. That is what the pronouncement by the president means and we have benefitted immensely from that. We are beginning to see a change in the way the issue of single treasury account is being handled. Our reserves today stand at $31.5bn and we are working to take them higher as we work to control the appetite of our people for frivolous imports. We see the reserves position improving as we work to turn our country from being so heavily import-dependent to a producing economy.
How is the CBN resolving the issues with the JP Morgan index and the threat?
We have substantially addressed the issues they raised with us but whether they agree with us or not is a different thing. We remain committed to remaining on the index. The twin issues they raised are liquidity and transparency. We have tried as much as possible to be transparent in our dealings in the foreign exchange market. Recall that we closed the official Central Bank foreign exchange window and all transactions that happen today on the foreign exchange window are reflected on Reuters for the whole world to see who is buying and who is selling. We have tried as much as possible within the limits of available resources to provide liquidity for the market. That is why sometime ago we encouraged our people who are doing export to bring in their exports proceeds to deepen the market so that it will not be just the Central Bank supplying the market. So when you ask, I can say to the best of our ability we have met their requirements but whether they agree with us not is the issue.
Many say the situation today is encouraging the banks to engage in round-tripping .
We are watching the banks very closely, conducting investigations, and if we catch any of them round-tripping, the hammer will fall heavily. No bank has been caught yet but our teams of examiners will be going to the banks without them knowing we are coming. We will overcome this and customers should report any banks involved.
Will the lull in the economy result in impairment of bank loans?
I am not happy that people say there is some slowdown in the economy but before responding, let me say that what is happening in Nigeria is not uncommon as most economies in the world are going through the same, except for the US economy and to some extent the UK economy with some fragile recoveries. So, be that as it may, Nigeria is not alone and we are doing our best to provide the condition for more economic activity that will lead to more economic growth. That is why we are saying, let us do things that create jobs here in Nigeria and not to export our jobs abroad.
Now about the banking system and the lull in the economy, we continue to examine the banks. The bank system is perhaps one of the most regulated industries in the world. I am not worried because of the kind of risk-mitigating measures that have been put in place here.