Interview: Godwin Emefiele

What can the CBN do to help encourage private sector lending and financial intermediation?

GODWIN EMEFIELE: An important mandate of the CBN is the promotion of a sound financial system in Nigeria. Therefore, we recognise that efficient financial intermediation contributes to high levels of output, employment and efficient income distribution, which invariably help in improving the living standards of the population. In other words, the CBN, through financial intermediation, influences the savings-investment process, which helps accelerate the rate of economic growth and poverty reduction. To this end, the sector should be sound and stable, which is a key condition for effective banking intermediation.

Over the years, the CBN has been making concerted efforts to ensure a sound and stable banking system through effective surveillance and enforcement of various macroprudential guidelines. It should also be noted that through interest rates and banking credit channels of monetary transmission, the CBN ensures that banks continue to make credit available to the private sector to stimulate the economy and promote economic development. Also part of the effort to further increase and improve the level of financial intermediation is our financial inclusion strategy. The CBN is committed to reducing the percentage of the financially excluded adults to 20% by the year 2020.

What have been the positive and negative economic consequences of capital controls?

EMEFIELE: We have so far adopted a system of free capital mobility with minimal controls. Looking at the recent volatility of the exchange rate in the parallel market and the rapid decline in stock market capitalisation, one begins to wonder what alternatives exist to calm the demand pressure in the market. In this situation, lifting the barriers to entry and exit of capital could calm the market rapidly, which we saw when we ratified the restriction on cash deposits into domiciliary accounts. A major disadvantage with such controls is that foreign portfolio investors, keen to exit an economy at the slightest indication of problems, may avoid investing in markets where exit controls exist. As portfolio investors exit an economy in a rush, they instigate instability as asset values slump, the exchange rate comes under pressure and revenue cycles face distortions. In the case of Nigeria, we saw how the exit of portfolio investors between 2013 and 2015 led to excessive pressures on the exchange rate and a massive drawdown of reserves.

What considerations were taken into account prior to the introduction of the new FX regime?

EMEFIELE: The inter-bank foreign exchange regime recently replaced the Whole Sale Dutch Auction System and the exchange rate largely remained at a daily average of N197:$1, particularly between March 25, 2016 and May 13, when the idea of a flexible foreign exchange regime was mooted. Though the rate remained stable for the period, the Monetary Policy Committee (MPC) observed that the system had signalled the need for reform. An inquiry traced the scarcity of foreign reserves to low foreign exchange earnings, and it was obvious that the main challenge was how to increase the supply of foreign exchange. This has no easy fix, as supply remains largely a function of exports and the investment climate.

The MPC then began to contemplate an urgent need to review the inter-bank regime. That said, we are aware that a dynamic foreign exchange management framework will not replace the imperative for the economy to increase its stock of foreign exchange. It became critical for the committee to put in place a framework that will evolve to provide a basis for a radically improved investment climate. Accordingly, the MPC decided that the bank should embrace some level of flexibility in the foreign exchange market; thus the birth of the current flexible regime.