Why CBN introduce flexible exchange regime – Emefiele

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The CBN explained why it recently introduced the flexible foreign exchange regime with FOREX restrictions placed on the importation of 41 items.

In a Keynote Address By Godwin Emefiele, the Governor, Central Bank of Nigeria –CBN-at the 24th Seminar For Finance Correspondents And Business Editors Awka, Anambra State September 13 – 15th, 2017 said this became inevitable in order to curtail fast depleting foreign reserves, occasioned by the significant demand for imports in Nigeria.

The CBN Governor was represented at the event by Isaac Okoroafor, the acting director of the corporate communications of the apex bank that the Bank has consistently supported the economy with robust supply of foreign exchange to deposit money banks (DMBs) particularly to meet demands for invisibles such as school fees, medical tourism and personal travelling allowance. This has led to stability in the Naira exchange rate against the US Dollar, Emefiele added.

He said the foregoing presents quite useful references to the activities of the CBN in recent times. The Bank has consistently sought to formulate interest and exchange rate policies that are conducive to the development of domestic private industrial activities, while taking due cognizance of other macroeconomic variables. A major challenge has been structurally-induced inflation, which has presented a dilemma to policy makers on whether to align the rates with socially desired or policy consistent outcomes.


The theme selected for this year seminar: “Import Substitution and the Dynamics of Interest and Exchange Rates Management in Nigeria” is indeed topical, given recent collaborative efforts to stimulate real sector activities in Nigeria and bolster economic growth. This is quite significant for the Central Bank of Nigeria (CBN) in view of its various interventions, mainly to provide cheap financing for critical sectors and to enhance domestic production.

“While the imperative of cross-national exchange of goods and services may not be disputed, it is also important that an economy does not lose itself to the vagaries of international trade. This has been typified by recent episodes where challenges in advanced economies have spilled across borders, and posed severe implications for far flung economies (especially developing countries). It has led organizations like the International Monetary Fund (IMF) to recommend that economies should tilt towards – and be driven by, domestic demand.


CBN pointed out that there is a need to establish appropriate structures that support robust domestic production while imports are used to supplement shortfalls of inputs or final products.  And this has been a major thrust of developmental efforts within the country in recent times – largely premised on the realization that the widespread and high level dependence on importation to meet domestic consumption needs is not sustainable.


Strategies to increase domestic production, especially of basic commodities, are necessarily accompanied by industrialization while citing how the previous strategy of policy circles in Nigeria after the tragic events of 1967 – 1970, with the indigenization decree of 1972 which marked the beginning of deliberate measures to tailor government spending towards self-sufficiency and industrialization.


Emefiele cited that the Government’s attention at then was focused on key industries that were expected to become the driving force to sustainable development of the Nigerian economy. Some of these industries include; the three petrol chemical plants in Nigeria, Ajaokuta steel, Delta steel, Itakpe iron ore plants, metal and tools in Oshogbo among others, while state governments where involved in all manner of cottage industries. But the government of the day instituted a program to boost domestic agricultural production, boost food sufficiency and curtail imports, he added.


By the early 1980s when the country witnessed its first major economic crisis, further measures were enacted to curtail other imports and these were extended to all imported products by end-1983. This was also a period when most developing countries set out to industrialize, irrespective of their comparative advantage. It culminated in the adoption of IMF-sponsored Structural Adjustment Programme (SAP), with the major objective to reduce Nigeria’s dependence on foreign produced goods. An evaluation of the performance of SAP may be beyond the scope of this presentation.


It is, however, recognized that administrative measures to reduce imports may not be compatible with current trends in economic management that lean towards free markets.

CBN governor was of the opinion that fundamentals of the domestic environment need to be promoted to support domestic production and invariably curtail imports. Therefore, CBN recognizes these challenges in its role provide economic advice and support the Federal Government’s aspirations economic growth and development. Within the core remit of formulating and implementing monetary policy, the interest and exchange rates serve as major instruments for CBN’s support for import substitution.


In Emefiele’s word, interest rates are a major incentive (or disincentive) to carry on industrial production activities. They are the key price for capital and largely determine the ability to engage in profitable domestic economic ventures. Economic theory dictates that low interest rate will boost incentives to procure loans to engage in production, and vice 6 versa. It is, therefore, imperative that authorities endeavour to keep interest rates at reasonably low levels. More also, the rate of inflation is a major determinant of the level of interest rates. Inflation erodes the real returns on financial assets (denominated by interest rates) and it is necessarily required that such rates should be above the price index in other to guarantee real positive returns. The lower the monetary authority is able to keep inflations rates using monetary policy, therefore, the lower it can force down interest rates and make it more attractive for users of funds to access credit.


Furthermore, the exchange rate is also another essential determinant that may support local production efforts. Most domestically-produced goods have foreign substitutes, and the exchange rate serves to allocate the comparative prices of domestic and foreign goods. It, therefore, determines the attractiveness of domestic production to support import substitution.

In Nigeria, The governor referred to the first attempt to deregulate the foreign exchange market was aimed at stimulating export and industrialization through import substitution, during the implementation of SAP. It was a cardinal requirement for monetary management in Nigeria that required the removal of administrative controls and led to the emergence of a second-tier foreign exchange market. The basic line of thought was that exchange rate flexibility would expose domestic production activities to international competitiveness.


Indeed, the CBN has embarked on massive monetary stimulus through direct interventions in sectors that hold immense benefits for the broader economy. Such interventions have been in agriculture, micro, medium and small scale enterprises (MSMEs), power sector, aviation and youth entrepreneurship, among others. These measures were necessitated by the liquidity (and credit) crunch that followed the global financial crises.


CBN governor reiterated that, the Anchor Borrowers’ Programme (ABP) was established to boost local production of rice, wheat and other agricultural products. It serves to create economic linkage between smallholder farmers and reputable large scale processors, with a view to increasing agricultural output and significantly improving capacity utilization of processors. The ABP was initiated as a policy option to create an ecosystem that connects smallholder farmers to big processors, thereby creating increased income for the farer, jobs for the unemployed, and steady input supply for agro-businesses. I am happy to note that the scheme has already boosted agricultural production and non-oil exports in the face of unpredictable crude oil prices and its resultant effect on the revenue profile of Nigeria. These have also helped to moderate volatility in the foreign exchange rate from anticipated decreases to demand for FOREX from increased domestic production of such hitherto imported commodities.


The CBN will continue to explore further avenues to ensure that interest rates are supportive of domestic production needs. The Bank will continually fine tune measures to ensure and guarantee a stable exchange rate regime. With on-going recovery in economic performance, I am hugely optimistic that improved outcomes will be recorded in our work towards taming inflation, bringing down interest rates and guaranteeing exchange rate stability. We are consistently devising ingenious approaches to solve our peculiar challenges and will continue to learn from the experiences of other countries, particularly developing nations.


What is required at this point in our economic history is the understanding and support of the citizens. It is at this juncture that I enjoin you as participants in the fourth realm of the estate to objectively report on the CBN’s efforts towards aligning its monetary policy objectives with broader economic policy, in efforts to generate significant domestic industrial activities that support import-substitution industrialization. With the assemblage of resource persons drawn from the Bank and the academia, I have no doubt that you will all have fruitful deliberations. I also urge participants to take out time to explore the beautiful and rich heritage of Awka and its environs, and obtained a better understanding of a culture that may be different from your respective locations.

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