CBN Governor, YEMI CARDOSO
Considering recent developments within our domestic economy, it is evident that we are facing significant macroeconomic and social challenges. These challenges stem from a variety of factors, including adverse global shocks, unfavorable domestic imbalances, structural and the unintended consequences of certain corrective policy measures implemented to restore and realign our macroeconomic landscape.
In recent years, the continuous decline in Nigeria’s crude oil production has further weakened our already inadequate economic diversification. This has led to a decline in government revenue and foreign exchange inflows, while simultaneously witnessing a growth in public expenditures and a deterioration in macroeconomic indicators, which has constrained our policy options. Consequently, we have seen the fiscal deficit and public debt increase, placing additional strain on external reserves and contributing to exchange rate instability.
The GDP growth rate has remained modest, declining to 3.1 percent in 2022 from 3.4 percent in 2021, and further dropping to 2.5 percent in the second quarter of 2023. The projection for 2023 stands at 2.9 percent. Despite this, the non-oil sector continues to be the main driver of growth, expanding by 3.58 percent in the second quarter of 2023 compared to 2.77 percent in the first quarter. This growth is attributed to the services, agriculture, and industrial sectors, which contributed 4.20 percent, 1.94 percent, and 1.50 percent, to overall output growth in Q2 2023. Looking ahead, a growth rate of 2.36 percent is expected in the third quarter of 2023, with an anticipated increase to 3.97 percent in the fourth quarter as various reforms take effect. The domestic factors affecting Nigeria’s economic performance span a wide range, encompassing both social and economic aspects. Insecurity remains a pressing issue, affecting the agricultural, industrial, nd services sectors simultaneously. The persistently high levels of insecurity have resulted in decreased national output and productivity, as many farmers have been unable to access their farmlands, disrupting supply chains and major economic activities. This has led to food shortages and inflation in various parts of the country.
Infrastructure constraints also pose significant challenges, undermining the production chain and distribution network of goods and services. Additionally, issues such as business bottlenecks and a culture of poor service delivery, particularly within the public sector, further hinder the fortunes of the Nigerian economy. Addressing these challenges requires a well-crafted structural policy, complemented by coordinated monetary and fiscal policies.
Permit me to pause here, and recognize the Hon. Minister of Finance and Coordinating Minister of the Economy, Mr. Olawale Edun who also emerged from the banking industry and with whom we are collaborating with on these critical issues on a continuous and regular basis.
A thorough assessment of the economy reveals significant challenges, including high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment. These challenges have led to increased interest rates, discouraging investments in productive activities. Within the banking system, high inflation has affected asset quality and solvency ratios. Additionally, the persistent depreciation of the naira poses a significant risk for domestic banks with foreign exchange exposures.
Distinguished Ladies and gentlemen, I understand that many of you have concerns about the current state of our economy. I want to assure you that while it is indeed a formidable challenge, it is not insurmountable. With the right policy measures, we can overcome these obstacles and pave the way for progress and prosperity. I am and optimistic that by taking appropriate corrective actions and strategic steps, we can restore macroeconomic stability and address fundamental flaws.
The removal of petrol subsidy and the adoption of a floating exchange rate, among other government policies, are anticipated to have positive effects on the economy in the medium-term. These measures are expected to enhance investor confidence, attract capital inflows, stimulate domestic investment, and ultimately improve the level of external reserves. Additionally, they are expected to contribute to the stabilization of the domestic currency.
Indeed, despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address.
In my recent speech at the 370th Bankers’ Committee meeting, I highlighted the economic agenda of President Bola Ahmed Tinubu’s administration. The administration, as outlined in the widely circulated Policy Advisory Council report on the national economy earlier this year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years, with clearly defined priority areas and strategies. Attaining this substantial target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. The administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidy and the unification of the foreign exchange market rate.
Esteemed guests, considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability. However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.
Technology will continue to play a critical role in delivering financial services and enhancing financial inclusion. However, recent developments in the payment services landscape have raised concerns regarding the use of technology and the existing licensing and regulatory framework. We have observed that some licensees are operating outside the approved activities, breaching the boundaries set for them. Any intentional or unintended non-compliance will be subject to sanctions, as operators have the responsibility to ensure that they are licensed for the activities they undertake.
Concurrently, as we conduct a comprehensive review of the licensing framework for payment services, we will engage in extensive consultations to develop a new regulatory and compliance framework that is suitable for the technology-driven payment services sector. Looking ahead for the industry, banks should reassess the responsible banking framework to ensure that the requirements are effectively integrated into their strategies. I am that some banks have made commendable progress in this regard. Furthermore, the Central Bank of Nigeria is taking steps to enhance its in-house capacity so that it can assist other banks that still have progress to make in implementing their sustainability principles.
While macroeconomic indicators are valuable in assessing performance, I am equally concerned about the well-being of the average citizen.
The plight of the hardworking masses in our urban centers and villages is a pressing concern. We must ask ourselves if there is a potential future where a brilliant and motivated teenager from anywhere in Nigeria could attend a future anniversary dinner instead of being drawn into outlawed militant groups or extremist ideologies. Likewise, recognizing the pivotal role that women play as critical players in the economy, one cannot overlook the significant impact that providing them with opportunities can have on Nigeria’s economic advancement. To address this, we need to develop stronger frameworks for measuring the human condition and ensure policymakers and business leaders pay as much attention to these measures as they do to macroeconomic indicators. This means tracking indicators such as access to food, shelter, and healthcare, as well as education and skills training opportunities.
We must also monitor daily wage rates in lower-income jobs, access to basic amenities like electricity, clean water, and sanitation facilities, and availability of public transportation. From a financial inclusion standpoint, we should track access to financial services, including consumer credit, and ultimately, the ability to finance home ownership on a large scale. By having accurate data on the human condition and implementing appropriate policies based on this data, we can expect inclusive economic growth that leads to tangible improvements in the lives of our citizens. It is crucial to give the same visibility to human condition data as we do to macroeconomic data to ensure that the expected economic progress benefits the masses and helps lift them out of their current dire conditions.
I recently met with a group of small business owners who expressed their concerns about the impact of inflation on their operations. They shared stories of struggling to maintain affordable prices for their while facing rising costs for raw materials and supplies. The instability caused by inflation not only affects their profit margins but also hampers their ability to plan for the future. These entrepreneurs stressed the need for price stability to create a conducive business environment that allows them to thrive and contribute to the economy.
In recent discussions with individuals from different walks of life, I encountered a young family trying to make ends meet in the face of rising prices. They shared their worries about the erosion of their purchasing power and the challenges of meeting basic needs within a tight budget. They emphasized the importance of stable prices to protect the well-being of ordinary citizens and ensure a fair distribution of resources. It is crucial that we prioritize price stability to safeguard the livelihoods of our fellow Nigerians.
Stabilizing the exchange rate is another critical aspect of our efforts to promote economic stability. I had the privilege of speaking with business owners engaged in international trade. They recounted the difficulties of navigating the fluctuations in the exchange rate, which often led to uncertainties and unexpected costs. The volatility in the foreign exchange market disrupted their planning and hindered their to make informed business decisions. It is imperative that we provide transparency and create a market environment that allows fair determination of exchange rates, ensuring stability for businesses and individuals alike.
To address these challenges, the Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the well-being of our citizens. Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.
This is what I, together with my team at the Central Bank have been focused on doing in the past two months. We hace critcally reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives. For quite some time, there has been a dislocation of our monetary transmission mechanisms rendering the MPC meetings largely ineffective.
For the avoidance of doubt, the Central Bank of Nigeria Act 2007 requires that the meeting of the Monetary Policy Committee of the Bank holds at least four times a year, and the Bank has satisfied this requirement for 2023. Our focus has been on ensuring these meetings are useful and effective. I am happy to report that our efforts over the past two months have begun to yield fruit.
Regular Open Market Operations (OMO) to mop up excess liquidity from the banking system. An OMO auction was recently held with a stop rate of 17.5% for the one-year tenor, attracting oversubscription of N350 billion. Another round of OMO has been approved to further reduce excess liquidity. Offering N108.1 billion worth of Treasury Bills with three tenors to the investing public, which can help reduce liquidity in the banking system and support government fundraising.
Removal of the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity.
Sustained Cash Reserve Requirement (CRR) debits, which have moderated liquidity in September and October 2023. Liquidity in the entire banking sector has been significantly reduced to under N100 billion in November.
Inauguration of a new liquidity management committee within the Bank that meets daily at 8am to assess liquidity conditions and ensure optimal levels.
These measures have already started to yield results, as excess liquidity in the banking system has significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased to a level consistent with the monetary policy program. Month-on-month inflation has also begun to decline, with a growth rate of 0.67% in October compared to 0.97% previously.
While absolute inflation is still rising, the declining rate of growth indicates progress. The CBN is confident that with continued tightening measures for the next two quarters, they will be able to effectively manage inflation.