Emefiele’s Policy Options for a Strong Economy

The Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, in moving the economy moving forward, has proposed what needs to be done and how the CBN is taking the lead. In this report Nduka Nwosu reviews Emefiele’s policy options for a strong Nigerian economy

Rebuild Infrastructure

Investing in basic infrastructure including roads, bridges, airports, railways, and information technology is not only good in terms of immediate job creation, it also acts as a catalyst to the movement of goods and services across the country. Although Nigeria has relatively better infrastructure than many of its African peers, its core stock of infrastructure is estimated at about 25 percent of GDP. Given that most middle income countries of Nigeria’s size have core infrastructure of about 70 per cent of GDP, the African Development Bank estimates that the country has an infrastructure-funding gap of $300 billion.

Innovative Mechanisms and Ideas

Obviously, Nigeria’s fiscal resources alone would be inadequate to finance this gap. Therefore, it is critical that it begins to consider innovative mechanisms and ideas to do so. For example, Nigeria needs to attract private capital into this space and explore opportunities for public private partnerships for opportunities in infrastructure projects that could offer lucrative returns to investors and help drive economic growth across the country.

Pursue Growth-enhancing Fiscal Policy

More than ever before, it is now critical to concentrate its best efforts on ensuring that fiscal policy is targeted at improving productivity of labour, increasing disposable incomes for workers, and deploying resources to creating an enabling environment for investors. It needs to look at how fiscal policy can help household consumption and business investments. These two make up more than 85 per cent of Nigeria’s GDP by expenditure. It should also consider how to increase disposable income for households, cut red tape for businesses, create incentives for new investors, etc.

Pay Closer Attention to Agriculture and Agribusiness

Whatever Nigeria does to jumpstart growth in the economy, it just cannot afford to ignore this sector at all. Agriculture remains the largest employer of labour in Nigeria and contributes about 24.2 percent of our GDP. In addition, a good share of the demand for FX today goes directly to importing agricultural produce. So the CBN has both a direct and indirect rationale to ensure that this sector is revived in a significant way. In this regard, many Nigerians are gratified that the CBN’s Anchor Borrowers’ Programme, together with other initiatives like the Commercial Agriculture Credit Scheme and NIRSAL, are proving to be successful in several states.

The bank has committed close to N23 billion in the Anchor Borrowers’ Programme with active participation across 14 states of the Federation. In Kebbi State, over 78,000 smallholders are now cultivating about 100,000 hectares of rice farms. It is expected that over one million metric tonnes of rice will be produced in that state alone this year. When considered against the backdrop that Nigeria consumes about 6.1 million tonnes annually and only produces 2.5 million metric tonnes, this will go a long way to make rice available on our tables. The CBN remains committed to do more in the identified crops such as rice, maize, sorghum, tomatoes, cassava, cocoa, cotton, dairy, and groundnut.

Following President Muhammadu Buhari’s directive, the minister of agriculture and rural development, the governor of Kebbi State, and I have been on an assessment tour of wet season rice output across the country.

Attract private sector investors in agriculture

In addition to the actions of the CBN, we also have to consider attracting selected private sector leaders who will commit themselves to invest in certain agricultural produce on a large scale while government may need to give some incentives to encourage them to invest. We also need to find ways to make land titling much easier especially for smallholder farmers.

This can immediately result in converting “dead” land assets of these farmers into valuable, tradable and exchangeable assets that will unlock the flow of finance to the rural agricultural economy that absorbs 60-70 percent of Nigeria’s population including largely the youth.

Explore Opportunities for More Revenue

There are several ways we can raise additional revenue to finance the increased expenditure that is needed to engender fast and sustainable growth in the economy. I think we can consider introducing a negligible telecom surcharge to be entirely borne by the initiator of a call. In order to protect the poor and vulnerable amongst us, we could structure it to only take effect after the third minute of talk. Some analyses have indicated that the government could earn about N100 billion per annum from this alone. Obviously this surcharge will mainly be borne by middle and upper class people since I do not know many poor people who make calls for more than 3 minutes!

We could also consider introducing minimal property taxes across the country. This not only raises money for the government but also could be a veritable weapon against corruption since it creates a database of who really owns homes in this country.

Another option to consider would be to fully implement the 2003 Cabotage Act for increased revenue, job creation, capacity building, and significant backward integration.

Though the Act stipulates all cargoes and passengers in the inland and coastal waters be transported by ships and ferries built, owned, crewed and manned by Nigerians of about 600 ships that operate within our waters, only about 60 of them are owned by Nigerians. Industry sources suggest Nigeria may be losing as much as N2 trillion annually from this anomaly

Pursue Non-oil Exports

Nigeria can benefit significantly from tapping into the market for certain goods, which are in high demand. For example, the demand for Halal meat and sesame across the Gulf Cooperation Council (GCC) Countries is huge. In fact, we have credible information that the Saudis may need up to 120,000 heads of frozen goat/sheep per week from Nigeria. Similarly, the demand for cashew nuts and shea nut butter across the world is rising. Nigeria has comparative advantage in all these products and can quickly tap into the vacuum created from the sharp fall in supply of these products from their erstwhile major suppliers. From these, we can earn foreign exchange to bolster our Reserves while also creating jobs and engendering broad based economic growth.

Pursue Import-reducing Policies

If oil prices remain low, FX revenue inflows will remain low, with relatively low FX Reserves. Therefore, we need to take bold and decisive actions at fundamentally changing the structure of our economy. Of course, Monetary Policy alone cannot achieve this but it must do its part.

The CBN believes it is high time we started looking inwards and stopped supporting the importation of items that we can produce locally using Nigeria’s hard earned Foreign Exchange. This implies that importers who may want to bring in such goods or services will have to source their Foreign Exchange outside banks or BDCs. It is important to remind everyone that the exchange rate is simply a price that is determined by the forces of demand and supply. Having adjusted the currency in response to supply shortfalls, we believe that it is critical to ensure that the demand side bears some burden of the adjustment.

In this regard, I must hasten to add that while they may seem controversial, variants of this policy have proven to be highly effective in other climes and even here in Nigeria. For example, throughout the early days of South Korea’s economic renaissance, the government intermittently used excessively stiff tariffs, quantitative restrictions and prohibitive inland taxes to effectively ban many items with potential for high imports, and simultaneously, offered generous and subsidised loans to firms for export promotion causes.

In the case of Taiwan, the government applied a range of non-tariff barriers including the tying of import licenses to export performance, strict restrictions on which countries can bring in goods into Taiwan, and which companies can import them. It is therefore not a coincidence that both South Korea and Taiwan experienced the fastest growth and development surge in the history of capitalism between 1960 and 1990.

The U.S. prohibits imports of generic Canadian drugs that are way cheaper than but just as effective as those locally made. In the last Presidential election the major reason Donald Trump won is his consistent vow to protect American manufacturing and jobs against China and Mexico.

On 11th June 2011, taxi drivers across major European cities staged coordinated and highly disruptive demonstrations against the new, less costly, and more efficient American taxi company, Uber while Indian retailers have been waging a war against their government’s proposal to open up the retail sector to more efficient global players like WalMart.

And here at home, variants of this policy were used to achieve significant sufficiency in cement, a product whose importation could have been costing us over US$3.2 billion in FX Reserves annually. In effect, therefore, this policy needs to be supported not just in response to the pressure on the Naira but as an opportunity to change the economy’s structure, resuscitate local manufacturing, and expand job creation for our citizens.

Implications for a Changing World

These two events and the trends of public discourse raging in France and Germany are bound to change or alter trade policies and international economic cooperation between the countries and the world at large.

Two very key issues in the British referendum-BREXIT and the USA elections were Immigration and Economy in particular free trade, both affecting trends of public discourse raging in France and Germany.

The outcome of the referendum and elections centered on the desire of the citizens to take back their sovereignty, which they believe had been concessioned away by their past leaders. As for the USA election, the President elect promised to be tough on immigration and to protect US industries to ensure that US jobs are no longer exported to other countries; while , for those industries that had left the US, they would be given incentives and encouraged to return the industries back to the US.

Also the former Chair of the US FED had signaled that interest rate hike would come sooner than later on the back of a strong US economic report. These two countries have no doubt set a tone which may be followed by other countries. The main issue for us as a country is to examine the implications of these actions on not only Free trade and dumping in Emerging and Frontier markets but also on the entire world order. For Nigeria, the question is how prepared are we to shield our teaming masses and our country to manage the ultimate fallout.

Let me state that we must critically analyse the implications of the anticipated changes and prepare strategies as to the best ways to tap into the opportunities that may be thrown up or minimise the challenges that may arise therefrom. In order to tackle inflation, we must first understand what kind of inflation we have in Nigeria. Is it demand-pull, with too much money chasing few goods, or cost-push where supply constraints result in few goods in marketplace? Our analyses at the CBN suggest that we have cost-push inflation in Nigeria. Indeed, we currently have several supply constraints that can be christened “Three Problematic Fs”: • FOOD: Low harvest, disease outbreak, northeast crisis, etc • FUELS: High electricity, PMS, and Kerosene prices • FOREIGN EXCHANGE: High demand and low supply of FX

Given this analyses, it is easy to see why the CBN is doing a lot to ease these supply constraints. In response to recent calls by notable persons and groups on the Central Bank to reduce the country’s high lending rates, I think it is important that I share my views on this issue. Let me first state that I have long been a believer in low interest rates. In fact, when I unveiled my vision for the CBN on resumption as Governor in June 2014, reducing interest rates was one of my cardinal missions. Yet, it is important that we discuss this issue based on facts, rather than politics and/or emotions.

First, interest rates are a veritable tool for curtailing inflation and with inflation at over 18 percent; the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at 35 this time. Second, for those who say we need a rate cut to spur growth, we need to remind them that high inflation is highly inimical to economic growth. Indeed, many empirical studies have estimated the threshold level at which inflation becomes significantly growth retarding to be 11 percent for developing countries. With ours at 18.3 percent, one must question the judgment of cutting interest rates at this time.

It is important to underscore that interest rates reflect not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender. Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates. Notwithstanding these facts, we will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers.

One of the reasons the CBN ventured into development banking was to minimize the effects of high interest rates on customers. This push started in 1977 with the Agricultural Credit Guarantee Scheme, and since then, the Bank has intervened through various developmental programmes, all at single digit interest rates disbursing N393 billion in 490 projects under the Commercial Agriculture Credit Scheme, N23 billion under the Anchor Borrowers Programme, N79.8billion under the MSME Scheme, and N236.4billion under the Power and Aviation Intervention Fund with 6.7million direct jobs and a lot more indirect jobs.