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Why We Opted For Gradual Liberalisation Of Forex Market – CBN

The Central Bank of Nigeria, CBN, has explained why it opted for a gradual liberalization of the foreign exchange market, saying that the monetary policy step is adopted in view of the unprecedented shock suffered by the nation’s economy from the ravaging impact of the COVID-19 pandemic on international oil prices last year.

Despite the disruptions to foreign exchange inflow, the apex bank said that its prudent management of the inflows had kept the country’s foreign exchange reserves at current level of about USD35 billion would cover seven months import needs of the economy.

These disclosures are contained in the apex bank’s just published ‘2020 Economy Review and 2021 Outlook’ report.

In the report, the CBN clarified that with the significant drop in the nation’s foreign exchange earnings and successive exchange rate adjustments occasioned largely by the volatility of the international oil prices, it was compelled to implement a demand management framework as a desirable option to bolster the production of items that can be produced in Nigeria, and aid conservation of external reserves.

It stated: ‘‘Due to the unprecedented nature of the shock, we continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which rapid changes in the exchange rate could have on key macro-economic variables. This, we believe, is in line with international best practices in countries where managed float arrangements are in operation.

“At the same time, measures are being taken by the authorities to improve our non-oil exports and other sources of foreign exchange. These measures have helped to prevent a significant decline in our reserves. Our external reserves currently stand above $35 billion and are sufficient to cover seven months of import of goods and services”, the apex bank added

On the inflationary considerations for its monetary policy measures, the apex bank stated: “Inflationary pressure persisted during the year due to several factors. In addition to the disruption to global and domestic supply chains as a result of COVID-19, inflation was exacerbated by the increase in VAT rate, petroleum prices, electricity price adjustments, farmer-herder clashes, exchange rate adjustment, and flooding that occurred in many parts of our farm belt areas. Inflation in October 2020 stood at 14.2 percent.

It projected: “We, however, expect inflation to begin to moderate by the first half of 2021 as efforts are being made to enable significant cultivation and production of key staple items in the dry season.”

In addition, the bank stated on the key issues that affected the economy in 2020 that ‘‘prior to the onset of the virus in December 2019, the Nigerian economy was on a positive growth trajectory, having made a significant recovery from the 2016-2017 recession, which was triggered by the drop-in commodity prices in 2016.

“Following the recession, we witnessed 12 consecutive quarters of economic expansion, and GDP growth in the fourth quarter of 2019 stood at 2.55 percent. The naira/$ exchange rate remained stable for over two years at N360/$ and our external reserve witnessed significant accretions from the sale of crude oil and continued inflows from foreign investors.

“Our banking system remained strong as key indicators reflected improvements across several areas. Capital adequacy ratio for the banking industry was above15 percent, surpassing the prudential requirement. The ratio of non-performing loans declined from 11 percent in April 2019 to less than 6.1 percent by January 2020.

“Our intervention efforts in the agriculture and manufacturing sectors continued to support employment generating activities and improved local production of goods that can be produced in Nigeria. The onset of the COVID-19 pandemic in the first half of 2020, and the lockdown measures put in place to contain the spread of the virus, caused an unprecedented shock to the global economy.

“Global economic downturn, which was particularly significant in the second quarter of the year, saw declines in growth in advanced and emerging market countries, such as the United States (-9.5 percent), United Kingdom (-20 percent), India (-24 percent) and South Africa (-17 percent). As a result, far-reaching measures were taken by fiscal and monetary authorities in advanced and emerging markets to stabilize their respective economies.

“Like other economies, the Nigerian economy was not immune from the COVID-19 shock in 2020. Nigeria’s gross domestic product, GDP, contracted by-3.4 percent in the third quarter, a welcome improvement from the -6.1 percent recorded in the second quarter. The negative rate of growth was due to a series of external factors in addition to the lockdown measures, imposed in order to curtail the spread of the virus.

The apex bank identified some of the key constraining factors as including “restriction on global travel by land and air; along with the slowdown in commercial activities, led to a significant reduction in the demand for crude oil, which contributed to a 65 percent decline in crude oil prices between January and May 2020.

“The drop in crude prices, along with OPEC reduction of Nigeria’s production quota led to a significant decline in our foreign exchange earnings, along with a more than 60 percent decline in revenues due to the federation account.

“Today, crude oil prices have recovered from its low of US$19 per barrel in April 2020 to US$51per barrel in January 2021; but it is yet to return to pre-pandemic levels of over US$60 per barrel as at January 2020. GDP growth in the oil sector in the third quarter remained subdued due to the OPEC restrictions on oil output.

“GDP growth in 2020 particularly in the manufacturing sector was significantly impacted by the restrictions on movement as many factories and businesses operated at limited capacity, in addition to a decline in demand for service-related activities, which require extensive in person contact, such as transportation, hospitality and tourism.

On the impact of the pandemic on global supply chains and the implications for the economy, the CBN noted that “significant disruptions in domestic and global supply chains as a result of lockdown measures in key markets in Asia and Europe between March and May 2020, affected delivery of inputs and machinery to firms in Nigeria and this contributed to a slowdown in manufacturing activities. Some countries such as India and Vietnam imposed restrictions on the exports of vital materials in order to meet the needs of their local market. This challenge reinforces the need to build more resilient systems that can support our production needs in times of crisis.

Similarly, it reported that in terms of capital flows, “the impact of the pandemic and the resulting slowdown in economic activity led to a significant outflow of funds from emerging market economies. Foreign investors withdrew over $100bn worth of funds from emerging markets between February and April 2020. These funds were subsequently invested in safe haven assets such as US treasury bills and the Japanese Yen.

“The increase in outflows from emerging markets also led to a corresponding depreciation in the currencies of several emerging market countries such as Brazil (-27.3%),Turkey(-35.1%), Argentina(-35%), Russia(-20%), Angola(-27%)and South Africa(-9%)in 2020.” Response by the monetary and fiscal authorities: The apex bank report also harped

Expatiating on its efforts of using monetary policies to address other bottlenecks in the economy, the apex bank reported that ‘‘given the impact on COVID-19 on key economic variables earlier mentioned, the fiscal and monetary authorities took unprecedented measures to prevent any long-term damage to the growth prospects of our economy.”

It explained that its first objective of restoring stability to the economy was “by providing assistance to households and businesses that had been severely affected by the pandemic. In addition, we sought to stimulate economy activity through targeted interventions in critical sectors such as agriculture, manufacturing, electricity and construction.

“Cumulatively our intervention efforts represent about 3.5 percent of Nigeria’s GDP. Some of these measures we took include: A cumulative reduction of the monetary policy rate from 13.5 to 11.5 percent between May and September 2020 in order to spur lending to the economy; A 1-year extension of the moratorium on principal repayments for CBN intervention facilities; Regulatory Forbearance was granted to banks to restructure loans given to sectors that were severely affected by the pandemic; Reduction of the interest rate on CBN intervention loans from 9 to 5 percent.

Others include, “strengthening of the Loan to Deposit ratio policy, which has resulted in a significant rise in loans provided by financial institutions to banking customers. Total gross credit rose by over 21 percent over the past year, from N15.5 trillion to N19.54 trillion.

“In addition, over N738 billion has been provided as credit to manufacturing-related activities by the banks; Creation of N150 billion Targeted Credit Facility(TCF) for affected households and small and medium enterprises through the NIRSAL Microfinance Bank. Already,N149.21 billion has been disbursed to 316,869 beneficiaries.

“Given the resounding success of this program and its positive impact on output growth, we have decided to double this fund to about N300 billion, so as to accommodate many more beneficiaries and boost consumer expenditure which should positively impact output growth.”

The Bank also reported its Agri-Business/Small and Medium Enterprise Investment Scheme, AGSMEIS, (N92.90 billion to 24,702 beneficiaries), Anchor Borrowers Programme, ABP, by the sum of N164.91 billion to 954,279 beneficiaries; Mobilisation of key stakeholders in the Nigerian economy through the Coalition against COVID-19,CACOVID, which led to the provision of over N28bn in relief materials to affected households, and the set-up of 39 isolation centers across the country; Creation of a NGN100 billion intervention fund in loans to pharmaceutical companies and healthcare practitioners intending to expand and strengthen the capacity of our healthcare institutions; among others

On the impact of the monetary measures, the CBN stated: “These measures along with the removal of restrictions on movement and resumption of international travel led to improvement in key indicators of the economy as several economic activities returned to positive growth.

“A sectoral assessment of economic activities in the third quarter indicates that the economy witnessed positive growth in key sectors such as Information and Communications Technology, Agriculture, Health, Construction, Finance and Insurance and Public Administration. The Agricultural sector continued to record positive growth supported by productivity gains in the sector, interventions by the government, and improved demand for local produce.

“The Manufacturing Purchasing Managers Index, in the month of November stood at 50.2 points, indicating an expansion in manufacturing activities after six months of contraction. A total of 18 sectors recorded positive growth in the third quarter relative to 13 sectors in the second quarter, which reflects significant improvement in economic activity.
Furthermore, 36 out of the 46 economic activities tracked by NBS, reflected positive improvements in growth, which includes activities that recorded negative growth.

“In the Investors and Exporters Window, close to $150m is being traded daily as a result of our measures to sanitise activities in the foreign exchange market. In addition, the Nigerian Stock Exchange All Share index rose by 65 percent between April and December 2020, reflecting improved sentiments by investors on the fundamentals of publicly listed companies.

“As a result of these measures, GDP growth in the third quarter, improved to -3.6 percent from -6.1 percent in quarter two, even though the economy fell back into a recession. We however expect that Nigeria would emerge from the recession by the first quarter of 2021, due to high frequency data that indicates continued improvements in the non-oil sector of our economy”, it added.

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