NIGERIA: Emefiele Vows to Slash Interest Rates Without Devaluation

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Following weeks of speculation on what to expect from the new Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, Thursday finally unveiled his monetary policy agenda, vowing to gradually slash interest rates.
His decision to lower interest rates signals a departure from the hawkish monetary stance of his predecessor, Sanusi Lamido Samido, who kept the Monetary Policy Rate (MPR) unchanged at 12 per cent for two years and cut inflation to single digits.
Speaking at a press briefing in Abuja on his five-year vision for the central bank, Emefiele said his policies would be people-centric and foreclosed on the devaluation of the naira, pledging to maintain exchange rate stability.
He said he was committed to running a central bank that is not only professional and apolitical but also people-focused and “which would spend its energy on building a resilient financial system that can serve the growth and development needs of our beloved country, Nigeria”.
On the lowering of interest rates, Emefiele said the policy would be aimed at seeking a reduction in overall lending rates to make it cheaper to invest, although he didn't give a time frame for doing so, leaving it open for him to hold off until the monetary conditions allow it.
Interest rates have been stuck at 12 per cent since late 2011, and several measures have been made to tighten liquidity, which has been credited with gradually bringing inflation down, but businesses had complained that lending rates were too punitive.
Also, in what could be considered a popular move, Emefiele tinkered with the cashless policy introduced by Sanusi by ordering the immediate suspension of all charges associated with limits imposed on cash deposits in commercial banks and called for a review of the ongoing practice where all fees associated with limits on withdrawals accrued to banks alone.
He said henceforth, the CBN would determine what percentage of fees charged on excess withdrawals would be redeemed by commercial banks while the rest would be remitted to the central bank.
Emefiele said this would help the CBN better to reflect its goal of having more cash under its control and discourage situations where customers devised various means to avoid the charges by opening multiple accounts among other disingenuous means aimed at undermining the objective of the cashless policy.
The newly appointed CBN boss, however, admitted that reducing the interest rate and maintaining the exchange rate were two difficult targets, adding that the central bank would work tirelessly with all stakeholders to devise countervailing measures that would ensure the actualisation of its objectives.
"There is no doubt that reducing interest rates and maintaining exchange rates are very daunting twin goals," he said, adding: "However the central bank will work assiduously to ensure that these goals are mutually achieved.”
Emefiele also promised to tackle the issue of unemployment by factoring it in monetary policy decisions going forward.
He said the CBN needed to do more to cater for existing and new job seekers as achieving price and exchange rate stability alone could be meaningless without an improvement in the lives of the people.
He added that the CBN would pursue policies targeted at making Nigeria’s treasury bill rates more comparable with other emerging markets and pursue a reduction in both deposit and lending rates in order to enhance access to finance and reduce the cost of funds.
According to him, while a reduction in deposit rates would encourage investment attitudes in savers, a reduction in lending rates would make credit cheaper for potential investors.
He said the CBN would in the meantime continue to maintain a monetary policy stance to reflect the liquidity conditions in the economy as well as the potential fiscal expansion in the run-up to the 2015 general election.
He said Nigeria currently had one of the highest treasury bill rates in comparison to emerging countries including South Africa, Brazil, India, China, Turkey, and Malaysia, a condition which according to him, “creates a perverse incentive for commercial banks to simply buy virtually risk-free government bonds rather than lend to the real sector”.
The new central bank chief, however, foreclosed the possibility of devaluing the nation’s currency in the near future since the country is still largely import dependent with considerable infrastructure challenges.
“It is not possible to consider depreciation at this time until we look into problems that shoot up import bills. At this time, it is not an option,” he said.
Referring to the country’s foreign reserves, he noted that the country still had “enough ammunition” to contain the exchange rate.
He said: “In view of the high import-dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the naira would literarily translate to considerable inflationary pressure with attendant effects on macroeconomic stability.
“Therefore, under my leadership, the Bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency. We will sustain the managed float regime in the management of the exchange rate, as this will allow the Bank to intervene when necessary to offset pressures on the exchange rate.”
However, he said the CBN would strive to maintain exchange rate stability and aggressively shore up foreign exchange reserves by maintaining a healthy external reserve position and ensure external balance.
He said the central bank would identify and work with specific sectors which have the potential to create jobs on a mass scale in order to reduce poverty in the economy.
Specifically, Emefiele said measures that would see a reduction in interest rates would soon be announced, including lots of policies that would create jobs for the youths and help them access finance and get them out of poverty.
While also announcing a zero-tolerance policy on fraudulent borrowers in the financial system, he said the CBN would collaborate with commercial banks to significantly improve the credit culture in the Nigerian banking system.
He explained that CBN’s focus would be directed at serial debtors who access loans from different banks and default on all of them even when they have the means to pay.
To this effect, he said the sanction system would be strengthened to among other things blacklist companies and individuals that had been found to be serial loan defaulters as well as implement stringent loan provisions and penalties for banks that lend to blacklisted persons and companies.
“Indeed, these names would be circulated in the banking system to guide banks in identifying bad borrowers and denying them access to credit in the banking system,” he said.
He warned that though the CBN would be fair and just in policy decisions, it would be firm on implementation, as “policies must be adhered to”.
He said the CBN planned to boost funding to small and medium enterprises through a business approach, which would demand greater private sector participation.
To this effect, he unfolded plans to have a scheme where individuals could access up to N50,000 loans from the banking system without collateral.
On his plans for the agricultural sector, he said the CBN would revisit the goals and implementation of its intervention programmes in the sector with a view to ensuring that high value addition is obtained from funds provided.
He said interventions in agriculture would now be directed at improving productivity in areas with high domestic demand and where opportunities exist, to improve domestic supply such as in rice, fish, wheat and sugar to conserve foreign exchange, given that the four commodities accounted for N1.3 trillion in food import bill in 2013.
Emefiele said the risk-based supervision (RBS) mechanism of Nigerian banks would be strengthened to ensure the overall health and financial system stability, adding that banks would be asked to proffer remedial actions where weaknesses are observed in RBS examination reports so as to avoid further a build up of non-performing loans (NPLs).
He warned that where banks provided inadequate remedies, the CBN would advance its own solutions and insist on compliance.
He also said the CBN supervisory purview over the banking system would be strengthened.
On the power sector, he said the central bank would among other things facilitate investment in key parts of the value chain by providing funds at concessionary rates to targeted investments in the sector as well as encourage investment in the gas-to-power infrastructure to improve the reliability of supply of gas to the existing and new power plants.
He also said there would be support for investment in renewable energy in rural areas through matching funding schemes and provision of first loss guarantees.
In addition, for the oil and gas sector, Emefiele said the CBN would through a number of initiatives support efforts at domesticating oil and gas resources to ensure that much of the resources are produced and used in the country, a plan which according to him would stimulate inclusive growth, create jobs and reduce the pressure on the exchange rate occasioned by the demand for imports of finished petroleum products.
He also unveiled his plans for the health sector, which according to him, is currently bedevilled by a myriad of issues that had led to a huge bill of foreign exchange utilisation for medical travels overseas.
He said the CBN planned to play a facilitating role by unlocking the potential that exists for the private sector to invest at various points along the health care value chain including hospital services, health insurance, pharmaceuticals, supply chain and financing.
He said the bank would maintain a keen interest in supporting the development of institutions, create an enabling environment to trigger private sector investment and curb the growing trend of medical tourism.
He also said the central bank would work to support the Primary Mortgage Institutions (PMIs) to help unlock the huge potential in the housing sector as well as assist the Nigerian Security Printing and Minting Company (NSPMC) to improve on its infrastructure in order to undertake most of its currency printing locally.
When asked what he would like to be remembered for after his tenure, he said he would allow Nigerians to judge his performance and decide on the legacy he would have left behind.
He said: “We must by now grown tired of hearing people talk about the ‘potential’ of Nigeria. Now is the time to live that dream. I truly believe that by working together, we can achieve our goals and give Nigerians the chance to live longer, better and more fulfilled lives.”
In reaction to Emefiele’s policy stance, Reuters reported that treasury bill yields fell 20 basis points across the board yesterday to an average of 11.3 per cent, as buyers snapped up short dated debt in anticipation of lower yields down the line.
Nigeria's benchmark 10-year bond yield was trading flat yesterday at 12.52 per cent, after initially falling seven basis points on Emefiele's remarks on interest rates. The three-year bond yield was also down 16 basis points to 11.71 per cent.
Similarly, the naira hit a one-month low on Emefiele's remarks, easing 0.69 per cent to N163.85 to the dollar and remaining outside the bank's preferred 150-160 band that it had spent billions of dollars of forex reserves this year trying but failing to keep.
“Although Emefiele's comments were qualified with the statement that it is a ‘daunting’ task… the very fact that lower interest rates were mentioned, have sent a strong signal to the markets," said Standard Chartered's Razia Khan.
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