CBN Governor, Godwin Emefiele
EHIME ALEX, Lagos
Nigeria’s Central Bank Governor, Godwin Emefiele, on Tuesday, elaborated on the impact of the COVID-19 pandemic on the nation’s economy and the measures being taken by the monetary and fiscal authorities to mitigate the effect, while also drawing special attention to some of the significant roles the banking community can further play in restoring stability to the economy as well as in supporting investments in key sectors that could bring about multiplier effect on growth.
These were contained in a speech delivered by the CBN governor at the 13th Annual Banking & Finance Conference, organised by the Chartered Institute of Bankers of Nigeria (CIBN) on ‘Facilitating a Sustainable Future: The role of Banking and Finance’.
According to Emefiele, the COVID-19 pandemic has had a profound effect on the Nigerian economy in both the first and second quarter of the year, and as a result created a dual challenge for policy makers to chew.
He said the downturn in economic activity particularly as witnessed in Q2 2020 was driven by a series of external factors, in addition to the lockdown measures imposed to curtail the spread of the virus.
Consequently, Emefiele said, the Nigerian economy contracted by 6.1 per cent in Q2 2020, down from a positive growth of 1.87 per cent recorded in Q1 2020.
“While these results were not positive, it was well below the forecast of many analysts, who had projected a steeper contraction of 7.4 percent. It was also better than contractions witnessed in other advanced and emerging market countries, such as Great Britain (-20 percent), India (-24 percent) and South Africa (-51 percent) in the 2nd quarter of 2020. The less than expected downturn in the economy was due to collaborative efforts between the monetary and fiscal authorities,” he said.
Elaborating on some of the sectors impacted by the COVID-19 pandemic, the CBN governor said, “First, the closure of schools, hotels and restrictions on movement led to contractions in the Transportation (-49%), Accommodation (-40%), Construction (-32%) and Education (-24%) sectors.
On the contrary, he said, financial services grew by 28 per cent while telecommunications by 18 per cent, respectively.
“These sectors which have the ability to leverage on digital channels witnessed strong growth, as Nigerians relied on these tools to communicate, and to conduct business and financial transactions.
“The Agricultural sector continued to record positive growth (1.6%), supported by productivity gains in the sector, interventions by the government, and improved demand for local produce,” he said.
Continuing, Emefiele noted that restrictions 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.
He said these factors contributed to the 65 per cent decline in crude oil prices between January and May 2020.
“This decline in prices, along with OPEC reduction of our 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 $19 in April 2020, but it is yet to return to pre-pandemic levels of over $60 in January 2020,” he said.
He noted that global supply chains in key markets in Asia and Europe between March and May 2020 were also disrupted, and by extension affected delivery of inputs and machinery to firms in Nigeria, which ultimately contributed to a negative slowdown of 8.8 per cent in manufacturing activities.
This resultant slowdown in economic activity significantly affected the outflow of funds from emerging market economies.
He said, “Uncertainties on the scale at which the virus could spread, and the impact it could have on economic activity, in the absence of a vaccine, led investors to 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 drop-in flows between February and April 2020 was unprecedented and surpassed the decline in flows witnessed during the Global Financial Crisis in 2008.
“Nigeria was not exempted from the drop-in flows, as capital importation into the country declined from $6bn in Q2 of 2019 to $1.2bn in Q2 of 2020.”
Emefiele, who also addressed issues on the exchange rate, said, “In order to adjust for the decrease in supply of foreign exchange, the naira depreciated at the official window from N305/$ to N360/$ and to N380/$. These adjustments along with increased efforts to restrict undue speculative activities, has led to a growing unification of rates across all the fx market segments. In addition, the band between the parallel market and the official exchange rate over the past month, has narrowed recently due to some of the measures taken by the CBN to curb illegal fx transactions,” he further elaborated.
To conserve the nation’s external reserves, Emefiele said, the CBN has continued to implement a demand management framework, which have helped to prevent a significant decline.
“Our external reserves currently stand at $36 billion and are sufficient to cover 8 months of import of goods and services,” he said.
He noted also that, besides COVID-19, inflation was further exacerbated by the increase in VAT rate, exchange rate adjustment and seasonal food supply shocks due to the onset of the farming season and other structural bottlenecks.
“Inflation in July 2020 stood at 12.8 percent. We however expect inflation to begin to moderate towards the end of the 4th quarter, as we approach the harvest season, along with the phased withdrawal on the restrictions of movement and other restrictions imposed as a result of COVID-19,” he said.
Emefiele also noted some combined monetary and fiscal measure being put in place to restore stability to the nation’s economy.
These include reduction of the interest rate on CBN intervention loans from 9 to 5 per cent, creation of N100 billion target credit facility for affected households and small and medium enterprises through the Nirsal Microfinance Bank and a N1 trillion facility in loans to boost local manufacturing and production across critical sectors.
To stimulate growth of the nation’s economy, Emefiele said the strength of the apex bank would be to ensuring that banks have adequate capital buffers to withstand similar pandemics, developing adequate internal controls that will be able to identify potential risks and putting in place measures to contain that risk, as well as being able to adapt their business model to changes taking place in the business environment.
He emphasised that agriculture remains a key area of focus the banking sector should increase its support for and explore.
Some of the low hanging agriculture value chains, he said, are storage centers, transport logistics, and technology platforms, which can enable rural farmers to sell their produce directly to the markets.
More importantly, Emefiele said the agricultural sector offers significant opportunity for the nation to earn foreign exchange through the exports of processed agricultural products, urging that banks should consider supporting agro processing companies that are export oriented.
“These measures would help to improve productivity of farmers, increase our foreign exchange earnings, reduce post-harvest losses, while supporting the growth of other sectors of our economy such as manufacturing, and transportation,” he said.
Elaborating on ICT, he said, “In the second quarter of 2020, the ICT sector made contributions of over 17.8 percent to GDP growth, 20 percent higher than its contributions a year earlier. It is important that we leverage ICT as an enabler for growth in key sectors of the economy. ICT start-ups are emerging to support SMEs, farmers, and in providing quality learning to students affected by the shutdown in schools. It is important that the banking sector consider viable IT firms in these areas that have the potential to not only serve the needs of the local market but are also able to export ICT related services to countries across the world.
“India for example exports close to a $100bn worth of ICT related services every year and I believe that our ICT industry has the potential to make significant contributions to our export earnings.”
He hinted that President Muhammadu Buhari has approved the establishment of a CBN led Infrastructure Company.
“Working in partnership with the African Finance Corporation and the Nigerian Sovereign Investment Authority, Infra-Corp would enable the use of private and public capital to support infrastructure investment that will have a multiplier effect on growth across critical sectors,” he said.
Further noting that the COVID-19 has brought several challenges to the nation economy and indeed the banking sector, the CBN governor, he however added that “it offers a unique opportunity for us to build a more resilient economy that is better able to contain external shocks, whilst supporting growth and wealth creation in key sectors of our economy. Proactive steps on the part of stakeholders in the banking and financial system in supporting the growth of sectors such as Agriculture, ICT and Infrastructure, will strengthen our ability to deal with the challenges that have been brought on by COVID-19, and stimulate the growth of our economy.”