Tuesday, 20 September 2016

How government is tackling recession, by Emefiele

CBN governor

In the concluding part of the interactive session started yesterday, the Central Bank Governor, Godwin Emefiele, explained that not only did the Federal Government want to streamline banks accounts operated by its Ministries, Departments and Agencies (MDAs) by introducing the Single Treasury Account (TSA), it also wanted to check the excesses of Nigerian banks in using governments money to buy its products.

The budget, like you know, was approved in May 2016, and of course, by that time, we have started to see signs of what will happen. Unfortunately, the procurement process is such a long one in the public service, and you dare not breach the rule on procurement process. I give you an example, when you start a procurement process for an item, what happens is that you first advertise for bids in the newspapers, that process of advertisement and calling for bids requires at least 12 weeks, which is three months.

Imagine starting a procurement process in say May or June, you will agree with me that by now, you will be opening the bids. When you open the bids, you now see the numbers, you begin to negotiate prices, after that you go to Bureau for Public Procurement (BPP), get the approval, may be after that you go to the Federal Executive Council (FEC), get approval and you find that almost six months would have elapsed. This is why government is saying, we must shorten this process; shortening the process means that we need to have an emergency spending bill, which I am aware is now ready before the National Assembly to take on for approval. What that does is to remove all the bottlenecks that are involved in the process of procurement so that government can go directly to procure items and spend money to stimulate the economy.


Unfortunately, at the time, budget was being approved, we started also to see reduction in revenues, the avengers started agitating, and I must confess to you at this time that revenues from export is less than $500miliion dollars from a peak of $3.5billion sometime in 2015 on monthly basis. You can imagine a situation where from the oil you’ve seen a drastic depletion or reduction in revenue. From the non-oil side, revenues unfortunately, have also dropped. But of course, government remains undaunted; monetary and fiscal authorities also remained undaunted.



We’ve also had a budget deficit of N1.8trillion. About N900billion was to be sourced locally, another N900billion, which came to about $4billion was to be sourced in foreign currency. Because the foreign currency is yet to come in, what the monetary and fiscal authorities are doing and saying is that we will provide. If the need arises, the monetary and fiscal authorities will provide bridge funding for the fiscal authority so that they can go ahead and spend. When the foreign loans kick in, we can use that to clear the bridge funding that was done, that is allowed because at this time, we do not need to wait.
You may have read in the newspapers that the Minister of Finance came out to say that so far, we have spent about N420billion, and in fact, by this coming week alone, another N370billion to N400billion would be injected into the economy to stimulate it. The social spending will kick in; other payments for capital expenditure will also kick in. These are some of the things government is doing and I must confess to you that I’m optimistic that we have turned the bend, and going forward, you will see spending that will stimulate the economy.

On our side at the CBN, what have we done? When we found out that there was a likelihood this was going to happen, we started to advise that there was the need for spending. In March, we reduced the CRR from 30.5 to 25 and we told the banks that what we will do is as we give you this cash, because the inflation has also started to rise astronomically beyond our expectation, because it had already burst our targets. We said to banks: this cash we are giving you, of about N1trillion, please lend this money to agriculture; lend them to the manufacturing sector so that this can help moderate interest rate. It will also improve industrial capacity or manufacturing capacity that will raise productivity and then correct and moderate prices effectively.

I must confess unfortunately, this didn’t happen and because it didn’t happen, during the subsequent meetings, we said: okay, we will reduce CRR (cash reserve ratio). Again, by reducing CRR, what we want to do is that we will not give you the cash, but when you find primary agriculture project or you find new manufacturing project, send them to us in CBN, we will disburse those funds/CRR to you and so you can loan this money at nine per cent.
I must confess that till date, the result has not been very encouraging. That is the reason why the CBN continues to remain determined to ensuring that its interventions directly through agriculture, either for its Anchore Borrowing programme or its intervention through to the Micro Small and Medium Enterprise (MSME). Here, we have about N220billion, which would kick in a more aggressive manner to ensure that from outside, there is an addition injection of liquidity that will help spur agricultural productivity, industrial capacity, as well as also help the market people. Part of the plans that had been projected in 2016 is that one million market women will benefit from loans at subsidised rates that will come from Micro Small and Medium Enterprise loan.

The CBN is in discussion with the fiscal authorities, the Office of the Vice President that handles social spending is already in discussion with the CBN to see to it that we put this in place as soon as possible so that market women across the country can enjoy the MSME loan at subsidised prices. Those are some of the actions we have taken and I’m optimistic that going forward you are going to see more actions that will stimulate the economy and turn around the country again.

What will be the impact of this spending on inflation, which is at 17.6per cent,?
Like we said, in a time of recession you must spend to achieve growth. However, on the other hand, you have to be very careful so that excessive spending does not result in skyrocketing inflation. You can imagine that in December, the inflation rate was just about nine per cent, but below 10per cent. Between March and now, it has risen from 10 to 17.6 per cent at this time. That is the reason the CBN considers its mandate of price stability as core and that was why at the last Monetary Policy Committee Meeting, the MPC members were trying to weigh the balance between growth and inflation.

We said, if we allow the inflation to grow at a rate that is so astronomical and uncontrollable, it could be a problem. That was why we decided at that meeting to alter the rate a little, but by the primary reason why we altered the rate in upward direction was to see whether we could achieve an increase in foreign investor flows. We did that to achieve a higher yield for growth and we had already adjusted to a level that we thought will encourage the foreign investors.

This is why I’m saying that I’m happy that the flows have started to come, and we will try to see how to maintain the balance by seeing to it that the flows come because this happens, you will get the dollars you need to fund the manufacturing activities. As it is doing this, it boosts industrial productivity activity, and also helps to moderate inflation. From the other side, you will also see the fiscal authorities spending to jumpstart the growth and also control inflation.

We’ve heard a lot of criticisms that, why should the MPC be pushing rate when it was supposed to pursue growth?

This is an objective we are very keen to achieve, and we try as much as possible to maintain some balance whereby as you are achieving growth, you do not spend to a point where you have too much money chasing too few goods, and also push inflation up. That is why we ask, what can you do to boost industrial capacity?


In Nigeria today, one major item that can boost industrial capacity is availability of foreign exchange (FX) and the only way you can ensure availability of FX is to take the action that we took to improve yield and since we have adjusted the currency to attract the foreign investors. This is precisely what we‘ve done. But we will see, going forward, how we can ease the system by allowing some liquidity into the system, which will encourage the banks to also improve their lending activity and moderate interest rate. Those are the kinds of actions that you will see going forward.



Nigerians seem not to be very optimistic that we will be out of recession very soon. Can you tell us so that we can tell Nigerians that in the very short term these are what we are likely to see?
Let me confess that I wasn’t that optimistic that the inflow was going to come in initially, but from what we’ve seen in three months, almost close to $1billion came in. I feel confident that if we continue the way we’re going, managing the situation in a way that encourages foreign investors and all those who have foreign currencies to bring them in to support our economy, I’m very sure there will be more inflows of foreign exchange into the system. Also, more people will have FX available for them to do their business that will improve the industrial capacity. The rate may look a little bit high now, but there is the high possibility that as we see more inflow of foreign exchange, the rates will come down, and I’m very optimistic this will happen.

Now in the short run, what other actions have we taken? I’ve talked about encouraging flows to come in; I’ve talked about the fiscal authority trying to aggressively pull in liquidity to stimulate consumption demand, and consumption expenditure. Of course, when the consumption expenditure is stimulated, what you find is the demand for food and goods will rise, and if this increase in demand is merged with industrial capacity and productivity then you will see more economic activities. That’s why I’m telling you that the situation will come to an end; we will turn around the corner very soon.

Naturally, we need more revenue, we need more money to come in not just in Naira, but we also need more money in dollars. You will recall that in April 2015, even before this government came on board at the end of May, 2015, in an interview with a foreign media, I recommended that there was the need for the government to consider to scale down on some of its investments in the oil and gas particularly, the NNPC and NLNG at that time.

At that time, price around May, was between $50 and $55/barrel and government had actually commissioned some consultants that conducted a survey. At the end they said, if we sold between 15 and 20 per cent of our holdings in the oil and gas sector, that we could realise between $30 and $40 billion. Unfortunately, the market has gone subtle now, but if we still want to do it, I’m optimistic that we could get between $10 and $15billion or even $20billion. If we get that kind of liquidity, it will make it easy for us to be able to stimulate the economy and also assist in turning the country around. That proposal is still on the table, because after I made that recommendation, a couple of colleagues in the cabinet have talked about and I’m optimistic that if we took that option, we will realise some inflow of foreign currency that we can use to really kick start or stimulate the economy.
Don’t forget that even in the U.S. in 2009, when the mortgage crisis started; in one blow, the US government stimulated the economy, about $900billion was injected into the economy and subsequently when the period of quantitative reasoning resumed, $85billion was being injected into the economy on a monthly basis. The same is happening today in Japan, and in Europe.

The difference between those countries and ours is that those countries have low rate of inflation, in fact they have negative inflation, they have very low inflation rate. So when you stimulate their countries with liquidity, even if it pushes inflation up, the level of push will not be so bad to the point where it adversely affect prices. This is why we have a sort of delicate position where we’re pursuing growth to get out of recession, and we’re doing whatever we can to contain inflation so that it does not go too high to the point where it becomes extremely injurious to the people.

There are no chief executives in most of the government agencies where the spending actually takes place. Doesn’t it worry you that some inaction in some of these areas may not complement your efforts to get us out of recession?
I don’t agree with you because we have cabinet members, and these agencies of government are headed by ministers, and we have people who are working in there in acting capacities. There are other people there as executive directors and executive members of management. I do know, and I’m aware that once we are able to shun the procurement process, certainly not having substantive chief executives will not hamper the operations or the spending or procurement process in these agencies.

At the fiscal end, government is talking about increasing taxes and actually driving at neck-breaking speed to get more revenue. From all the scenarios you’ve painted you’re concerned about lessening the burden on the people. How do you align the monetary policy with the fiscal end such that you can have a common purpose?
Let me assure you that both the monetary and fiscal authorities are working together. This is why you see a situation where today, even where you have revenue shortages or revenue deficits, the monetary authorities, will say, we will give you a bridge, go ahead and spend. When your revenue flow improves, you can repay the bridge that we created for you just for you to stimulate spending. That is a practical case of collaboration between the fiscal and monetary authorities.

Now, when you talk about increasing taxes, I know there have been lots of proposals presented to the federal government that for instance, the VAT should go up, and truly speaking, I must confess that the VAT rate in Nigeria is among the lowest in the world. But in spite of that government has been very reluctant to increase the VAT rate because it really understands the sufferings and yearnings of the Nigerian people. But what government knows and you and I know also, is that there are so many people that are sidetracking and avoiding the payment of the VAT. The government is looking at ways to horizontally widen the tax net so as to capture more people to pay their taxes that is what I’m aware government is doing, and not at this time to be pushing for increase in VAT rate.


I’ve not heard from government, including you, admitting that there were some internal issues that had to do with the delays in taking the necessary structural adjustments that may have slowed the onset of this recession. Secondly, if you said you want to reflate the economy, shouldn’t you have told the President to have a rethink of the Treasure Single Account (TSA)?
The TSA as far as I’m concern is the programme that several governments in the past had attempted to implement, but they did not have, unfortunately, the will to implement it. I will give you an example, is it fair for the government allows its ministries or agencies to release its money to the ministries and to the banks and those banks do not pay anything in interest to the government? At best, if they paid, may be one or two per cent.



But at the same time, when government wants to borrow money by selling treasure bills, government still goes back to these banks, these banks, with the same liquidity that the federal government gave to them through the ministries, these banks pass that liquidity back to government at 12, 13 and 14 per cent. That is a colossal waste of resources on the part of the government. So when people say TSA is sitting in CBN and that is what is causing the crunch, it is not true because when government wanted to withdraw the TSA, the CBN MPC also looked for its own way to release some funds into the system through the CRR that was held so that the money goes back through the CBN, so that government gets its money back. So I do not agree the TSA is a major issue here.

Secondly, the delay in taking necessary action on structural adjustments, again, it is unfair to blame this government for not taking decisions on structural adjustment. Normally, when there is an adjustment in currency worldwide, those adjustments must be followed by structural reforms. Just as the Senate President talked about in 1984, currency was $1 to N3, after that we went into SAP (structural adjustment programme). SAP was meant to go with a lot of structural reforms. Once the crude price started to improve, everybody stopped structural reforms, and that was why we could not seem to effectively diversify the economy.

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