Godwin Emefiele, Governor, Central Bank of Nigeria (CBN)

On the future of foreign reserves and investment in Nigeria’s economy

How do you expect Nigeria’s foreign reserves to evolve in the short to medium term?

GODWIN EMEFIELE: There are several factors that we believe will shape developments regarding the outlook for our reserves over the short to medium-term. Though apprehension around the forthcoming elections in 2019 may trigger capital outflows, we are of the view that the associated political risks have already been priced in by investors.  The developments in the oil industry and the international oil market, hence, continue to be of immense interest to the CBN. This is because proceeds from Nigeria’s crude oil sales remain a critical source of growth for our foreign reserves. 

With developments in the oil market, which has seen a tightening of supply from major suppliers such as Venezuela and Libya, and economic sanctions being applied against Iranian crude oil, we believe a supply gap may continue to exist in the oil market over the short term. This is regardless of the increase in production to 11m barrels per day by the US. These factors will put upward pressure on oil prices and, by extension, increase foreign reserves. Nevertheless, as a country we are working hard to grow other sectors of the economy in order to reduce dependence on crude oil. Besides, the imminent take-off of large scale domestic refining of crude oil is expected to reduce Nigeria’s import bill and impact positively on reserves.

As part of the Economic Recovery and Growth Plan, the federal government is working to grow non-oil export revenues by improving the environment for businesses. This measure is expected to have a positive impact on the outlook for reserves in the medium term. Other areas of importance are foreign direct investment and foreign portfolio investment, which will be encouraged by the stable currency, declining inflation and the large market size of 190m people.

Notwithstanding the crises in emerging markets such as Argentina, Turkey, Indonesia and South Africa, all of whom have witnessed significant depreciation in their currency, the naira has been relatively stable due to the measures put in place to support the buildup of reserves. Investors are not concerned about whether we are able to meet their commitments whenever they wish to exit from Nigeria’s bond and equities market. The yields on Nigerian bonds in terms of US dollars are strong for an emerging market when the stability of the naira and the ease of entry and exit are taken into consideration. This has helped in sustaining investors’ confidence. As we continue to progress, we believe that reserves will remain fairly stable in the short term.

To what extent can foreign borrowing benefit private sector funding?

EMEFIELE: The federal government is very much committed to funding the domestic private sector. President Muhammadu Buhari signed the approved 2018 budget of N9.1trn ($29.4bn) with the expectation of an additional supplementary budget. Analyses of the budget indicate a total budget deficit of nearly N2trn ($6.5bn) to be financed through foreign borrowing of N849.7bn ($2.7bn) and domestic borrowing of N793.8trn ($2.6trn). The size of the deficit is such that a complete financing from domestic sources could affect the economy in terms of its inflationary impact and the crowding-out effect of the private sector. In its borrowing plan for 2018 the federal government indicated that money released from foreign borrowing would be used to finance critical infrastructure in the economy, such as power and transportation, including roads, rails and waterways.

Foreign borrowing will reduce the dominance of the federal government in the domestic debt market and therefore reduce the crowding-out effects of such borrowing. With a substantial amount of financing coming from foreign borrowing, private sector investors can enjoy competitive borrowing from the domestic debt market. It is hoped that the country will benefit from foreign borrowing in two ways. On the one hand, the federal government will leverage on such borrowing to supplement domestic revenue and be able to execute more development projects. On the other, the private sector will be able to compete in the domestic debt market for improved funding to drive economic growth.

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