How Emefiele’s policies drove the economy out of recession

Amidst a number of positive developments in the global economy, the Nigerian economy improved in the first half of 2017, H1’17, compared to a contractionary 2016 which saw a relatively worse economic performance, and economy and financial analysts have given a huge credit to the Central Bank of Nigeria, CBN, under the leadership of Mr. Godwin Emefiele, who had incidentally, taken many knocks over the initial failings in the economy.


Nigeria officially exited recession as data released by the National Bureau of Statistics (NBS) early last week revealed that real gross domestic product (GDP) grew by 0.55% year-on-year (YoY) in the second quarter of 2017, Q2’17, after five consecutive quarters of negative growth.

This development followed support from improved crude oil production due to relative calm in the Niger Delta as well as relatively higher crude oil prices. Economy analysts and industry leaders welcomed CBN’s measures aimed at improved foreign exchange supply, relatively lower foreign exchange rates, improved confidence levels and moderation in inflation rate amongst others, as key catalysts in the recent developments in the economy.

As part of efforts to diversify the economy, the manufacturing and agricultural sectors were given priority by both monetary and fiscal authorities. Improvements in real sector and financial sector activities also attested to increasing return of confidence, especially of both local and foreign investors.

Improved business confidence

Businesses were less pessimistic about macroeconomic conditions in reported quarter, Q2 2017, at -1.5 points (compared to Q1 2017, at -27.7) and more optimistic about conditions in the current quarter, Q3 2017, at 47.5 points (compared to Q1 2017, at 28.2).

The financial intermediation sector was most optimistic in Q2‘17, at 20.9 points and for the current quarter, at 71.2. Instructively, the business confidence report indicated that most businesses expect the Naira to appreciate in the current quarter on the back of the sustained policy intervention in the foreign exchange market by the CBN, as the confidence index stood at 18.4 points; while inflation rate and borrowing rates were expected to decline in the current quarter.

Meanwhile as a result of the various pro-real sector measures CBN put in the forex market as well as some of its special borrowing windows, the manufacturing sector witnessed expansion throughout the second quarter of 2017 as Purchasing Managers Index (PMI) trended above 50.0 points. The Manufacturing sector PMI rebounded to 52.9 in June 2017 (from a contraction point of 48.2 in January 2017). Similarly output/production level expanded at 58.7 in June 2017 (stronger than 51.3 in January 2017).

Similarly, as businesses had more access to foreign exchange and other monetary policy induced supports, the non-manufacturing sector rebounded into expansion territory dented in May having recorded a PMI of 52.7 points, strengthening further to June at 54.2 point. The expansion was driven by growth in business activity, incoming business and inventory, among other things.

Inflation Rate Moderates on Improved Foreign Exchange

Inflation rate moderated in the first half 2017 to 16.10% in June from 18.72% in January; also lower than 16.48% registered in June 2016. Analysts at Cowry Assets Management, a Lagos based investment house, said “this development was partly due to the improvement in foreign exchange supply following favourable foreign exchange policies as well as reduced base effects.”

Given the benefit of reduced pressure of the foreign exchange market coupled with reduced demand for imported food, core inflation slowed y-o-y to 12.50% in June 2017 (lower than 17.9% in January 2017) while imported food inflation moderated to 14.19% in June 2017 (lower than 17.82% in January 2017).

Remarkably, in H1’17 the monetary authority remained preoccupied with foreign exchange management and the need to curtail cost push inflationary pressure. The Monetary Policy Committee (MPC) retained its policy rates all through H1‘17. Specifically, the Monetary Policy Rate (MPR) was retained at 14%. In the same vein, Cash Reserve Ratio requirement and liquidity ratio were retained at 22.5% and 30% respectively while the Standing Lending Facility (SLFR) Rate and Standing Deposit Facility Rate (SDFR) maintained at +2% and -5% respectively.

The Forex strategies

In February, CBN reviewed its foreign exchange rate policy in order to increase the availability of Foreign Exchange in the economy. The apex bank stated that it began the supply of direct additional funding to banks to meet foreign exchange (forex) demand of specified end users at settlement rates not exceeding 20% above the interbank market rate.

Areas where CBN increased forex supply include: Travel Allowances (personal travel allowances and business travel allowances); School and Medical Fees; Reduction of Forward Sales Tenor (CBN reduced the tenor of its forward sales from a maximum cycle of 180 days, to no more than 60 days from the date of transaction); and Sales of foreign exchange at major airports (CBN directed all banks to open forex retail outlets at major airports as soon as logistics permit).

In addition the apex bank moved for Increase Efficiency of Forex Market by: (1) clearing all the unfilled orders in the interbank forex market, (2) ending the imposition of allocation/utilization rules on commercial banks, (3) implementation of an effective intervention programme to support the inter-bank market and ensure adequate liquidity necessary to deliver an efficient FX market, and (4) advising the FMDQ to promptly activate its forex order-book systems and also accelerate the on-boarding of forex clients on the forex relationship systems to ensure total transparency of the FX market.

Furthermore, the apex bank, with effect from Monday, 10 April 2017, also declared intervention measures to supply foreign exchange to SMEs for importation of eligible goods not exceeding USD20,000 per customer per quarter.

Also in April, CBN, created a special window, the Investors & Exporters Foreign Exchange Window (I&E FXW) to further boost foreign exchange liquidity and to ensure timely execution and settlement for eligible invisible transactions, such as loan repayments, loan interest payments, dividend/income remittances, capital repatriation, management services fees, consultancy fees, etc.

The eligible participants include portfolio investors, exporters, authorized dealers, other parties with foreign exchange to exchange to Naira, and the CBN for promoting liquidity and professional market conduct. In the new arrangement, foreign exchange rates are determined by market forces which we believe will improve investor confidence, particularly foreign portfolio investors as the market-determined rates are expected to result in rates convergence with the alternative market segments. From its Inception in April to June ending, a total of USD3.13 billion came into the foreign exchange market through the I&E FXW.   In the current quarter the inflow is said to be coming up to USD6 billion.

In furtherance of its liberalization of the interbank foreign exchange market, the CBN issued new rules in order to improve the interbank market liquidity and depth. It permitted authorized dealers to defease their excess foreign currency trading positions to other authorized dealers without seeking prior approval of the apex bank. In addition, the apex bank sanctioned a maximum spread of N1.00 for interbank transactions and directed that funds purchased by an authorized dealer from another authorized dealer shall neither be held in position overnight by the buyer nor sold to another authorized dealer except to its customers for eligible transactions. Finally, to deepen the market, the bank advised authorized dealers to encourage their corporate clients to on-board the FMDQ-advised forex trading system in order to fast track the migration of the activities of Investors & Exporters Foreign Exchange Window unto to advised foreign exchange trading system.

External Reserves Rise in H1 2017

In the first half of the year, Nigeria’s external reserves increased year-to-date by 17.2% to USD30.29 billion as at June ending amid boost in average global crude oil prices coming with a prudent management strategy of the apex bank.

Managing Director of Fidelity Bank Plc, Nnamdi Okonkwo, had told some select financial journalists last week that the decisive stand of Emefiele on reserve management was responsible for the build-up which ended in a stringer Naira. He said that the same foreign investors that wanted the Naira to float and expected the exchange rate at over N500/ USD1 are now coming in at far lower exchange rate of about N365/ USD1, indicating that they lost the argument to Emefiele’s Naira defence foreign exchange strategy.

Analysts at Cowrey Assets stated: “The improvement recorded in the foreign sector partly resulted from the effect of foreign exchange policies of the Central Bank of Nigeria on external trade volumes. Specifically, value of imports were negatively impacted by the devaluation of the Naira since June 2016 occasioned by introduction of a more flexible exchange rate regime coupled with banning of 41 items from the eligible import list of the apex bank. On the other hand, value of exports improved partly due to improved global crude oil prices coupled with improvement on non-oil exports occasioned by the devaluation of the Naira.

“The various foreign exchange market segments in H1’17 tended towards convergence on the back of afore-mentioned foreign exchange policies. Specifically, the introduction of the I&E FX Window, which recorded inflows worth USD3.13 billion between April and June, absorbed some of pressure from the alternative market segments, resulting in the strengthening of the Naira against the USD in those market segments. This is in addition to the apex bank’s daily foreign exchange sales to deposit taking banks and weekly supply interventions for wholesale Secondary Market Intervention Sales (SMIS), Small and Medium Scale Enterprises and for invisibles.

“As a result of the favourable foreign exchange policies, the Nigerian Naira strengthened against the United States Dollar at the alternative market segments – on a year-to-date basis, the Naira appreciated at the Bureau De Change and parallel (black) market segments by 24.48% and 24.90% to N364/USD and N368/USD respectively. Year-on-year, the Naira also appreciated by 2.93% and 3.16% at the respective market segments.”

Stock market also benefited

The CBN policies also impacted the stock market positively. In H1’17, overall stock market performance indicator – the NSE All Share Index – increased year-to-date by 23.23% to 33,117.48 points as at 30th June 2017 (from 26,874.62 points as at 30th December 2016).

On this, Samson Amedu, Managing Director/CEO, Alangrande Securities Limited, stated:   “If you look at it, even as at March ending and early April, the market was still at a loss, but immediately the CBN came up with the FX window, it became very easy for foreign investors, who before the introduction of the new window could not take out their money, to resume investment in the market and also take out their money with ease. So, suddenly, there was a huge increase in portfolio investment. So, that inflow that came in led to a sudden rise in the market.”


( Vanguard)