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Saturday November 28, 2020 / 11:54 AM / by CBN/ Header Image
Credit: BNN Bloomberg
Being Gov. Godwin Emefiele's Address at
the 55th Annual Bankers Dinner held at Lagos, Nigeria on 27 November 2020
(Protocols)
It is indeed a pleasure to once again address the
banking community at the 55th Annual Bankers Dinner, being organized by the
Chartered Institute of Bankers of Nigeria (CIBN). Since I assumed office as the
Governor of the Central Bank of Nigeria in June 2014, I have attended 6
consecutive annual dinners by the CIBN. These dinners provide a significant
opportunity for me to engage with stakeholders in the banking and finance
community on events that are shaping our economy, and the policy measures being
embarked upon by the Central Bank of Nigeria to support greater economic growth
and continued stability of our financial system.
Let me, at this juncture, specially thank the
leadership of the Chartered Institute of Bankers of Nigeria led by its
President, Mr. Bayo Olugbemi. I appreciate Mr. Seye Awojobi and his team, for
their efforts in putting this event together. I want to also extend my
gratitude to the Managing Directors/Chief Executive Officers of our banks and
other financial institutions who have found time to attend the conference
despite their very busy schedules.
Likewise, I welcome my colleagues from the CBN,
especially the Deputy Governors, and other senior management of the Bank who
are present. And to everyone at this event whether in person or virtually, I
would like to thank you for attending.
This dinner comes at a challenging time for our
nation, taking into account the impact of COVID-19 on the global economy. In
Nigeria, we had to address the public health challenge, in addition to
implementing a variety of policy measures aimed at reversing the unprecedented
downturn in economic activities during the first half of the year.
The emerging reports on progress in developing a
vaccine by several firms is indeed reassuring, as it indicates that a solution
to the health challenge is in sight. It will also help to support growth in the
medium term, by aiding full restoration of economic activities particularly in
service related sectors such as education, aviation, hospitality and tourism.
In my remarks today, I hope to provide an assessment
of the measures taken by the Central Bank of Nigeria in addressing the impact
of the COVID-19 pandemic on the Nigerian economy, as well as our outlook on the
path ahead.
Pre-COVID-19 Economy
As we are all aware, 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. Our 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 above 15 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.
COVID-19
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. Some of the key constricting
factors were:
Crude Oil
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$45 per barrel in November
2020; 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.
Restrictions on Movement
GDP growth 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.
Global Supply Chains
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.
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 $100bn worth of funds from
emerging markets between February and April 2020. These funds were subsequently
invested in safe haven assets such as US treasury bills and the Japanese Yen.
The increase in outflows from emerging markets also led to a corresponding
depreciation in the currencies of several emerging market countries such as
Brazil (- 27.3%), Turkey(-35.1%), Argentina(-35%), Russia(-20%), Angola(-27%)
and South Africa(-9%) year to date.
Exchange Rate
Like other emerging market countries and countries
reliant on oil exports, the decline in crude oil earnings as well as the
retreat by foreign portfolio investors significantly affected the supply of
foreign exchange into Nigeria. In order to adjust for the decrease in supply of
foreign exchange, the naira depreciated from N305/$ to N360/$ and subsequently
to N380/$. With the decline in our foreign exchange earnings and successive
exchange rate adjustments, the CBN has continued to implement a demand management
framework, which is designed to bolster the production of items that can be
produced in Nigeria, and aid conservation of our external reserves. Due to the
unprecedented nature of the shock, we continued to favour a gradual
liberalization 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 7 months
of import of goods and services.
Inflation
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. 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.
Response by the Monetary and Fiscal
Authorities
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. Our first objective was to restore stability to the economy 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:
i.
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.
ii.
A 1-year extension of the
moratorium on principal repayments for CBN intervention facilities;
iii.
Regulatory Forbearance was
granted to banks to restructure loans given to sectors that were severely
affected by the pandemic
iv.
Reduction of the interest
rate on CBN intervention loans from 9 to 5 percent
v.
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.
vi.
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.
vii.
The Bank also disbursed
AgriBusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS) (N92.90
billion to 24,702 beneficiaries), Anchor Borrowers Program (ABP) by the sum of
N164.91 billion to 954,279 beneficiaries.
viii.
Mobilization of key
stakeholders in the Nigerian economy through the Coalition against
COVID19(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.
ix.
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; so far 60 health care related projects are being funded to the
tune of over N60 billion as a result of the intervention.
x.
Creation of a research
fund, which is designed to support the development of vaccines in Nigeria.
xi.
Establishment of a N1
trillion facility in loans to boost local manufacturing and production across
critical sectors; 53 major manufacturing projects, 21 agriculture related
projects and 13 service projects are being funded to the tune of over N360
billion from this facility.
Results of our interventions
The impact of 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 sanitize activities in the
foreign exchange market. In addition, the Nigerian Stock Exchange All Share
index rose by 65 percent between April and November 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.
Financial System Stability
With the decline in economic activities, the CBN
instituted measures in the banking system, in order to prevent an economic
crisis from spilling over into a financial crisis. Inaction on our part would
have led to a wave of bankruptcies by firms along with rising unemployment,
which would ultimately have a significant impact on the balance sheet of banks.
As a result, we ensured that;
I.
Banks made adequate
capital provisions to cover for unexpected losses
II.
We supported viable
businesses that had been affected by the pandemic through access to our
intervention funds
III.
We enabled banks to
restructure loans granted to sectors affected by the pandemic.
As a result of these measures, NPL ratios has remained
low at 5.7 percent. The capital adequacy ratio of the banking industry, at 15.5
percent, remains above the prudential requirement percent. In addition, return
on earnings in the banking sector was over 21 percent as at October 2020.
Similarly, Other Financial Institutions (OFIs) recorded a remarkable
improvement as aggregate assets grew by N582 billion, or 16.94 per cent
(year-on-year), to N4.02 trillion as at end-September 2020.
While the news of the continued growth in the banking
and finance sector in the third quarter of the year is encouraging, the
ultimate strength of our financial system would depend on three key factors;
I.
Ensuring that banks have
adequate capital buffers to withstand similar pandemics.
II.
Developing adequate
internal controls that will be able to identify potential risks to banks, such
as cyber threats, as well as putting in place measures to contain these risks.
III.
Being able to adapt your
business model to changes taking place in the business environment.
This last point is vital as COVID-19 has demonstrated
the impact externally induced disruptions could have on the Nigerian economy.
It is therefore imperative from an economic as well as a security perspective,
that the banking and financial system works to support growth in sectors that
have significant growth potential, and can enhance the resilience of the
Nigerian economy, in the face of external shocks.
Outlook
With sustained implementation of our intervention
measures, we do expect that the Nigerian economy could emerge from the
recession by the first quarter of 2021. We also expect that growth in 2021
would attain 2.0 percent. However, downside risks remain, as restoration of
full economic activities, particularly in service related sectors, remains
uncertain until a COVID vaccine is produced and made available to millions of
people across the world.
Second, with the significant rise in cases in advanced
markets and the imposition of lockdowns in parts of Europe, concerns remain on
the impact this could have on growth in advanced economies, commodity prices
and the financial markets.
We must therefore find ways to insulate our economy
from the impact of these shocks through our diversification efforts, while also
working to ensure that we adhere to safety protocols in order to prevent a
surge in COVID-19 related cases, as this could further cripple economic
activities.
Our actions in 2021 would be guided by the
considerations that emerged from the Monetary Policy Committee meeting of
November 23 & 24, 2020, which sought to address the major headwinds
exerting downward pressure on output growth and upward pressure on domestic prices.
Given the fact that the rise in inflation is not due
to monetary factors but rather the prevalence of structural rigidities and
supply shocks, traditional tools of monetary policy may not be helpful in
addressing current inflationary pressures. Rather, a more useful policy will be
the supply-side measures implemented by the Bank. As a result, emphasis will be
placed on strengthening the development finance initiatives of the CBN in order
to stimulate greater production and reduce unemployment.
We intend to increase our support for measures that
will aid improved cultivation of local produce in Nigeria, with particular
emphasis on improving our yield levels, as food inflation continues to remain
the key driver of inflationary trends.
The banking sector therefore has a significant role to
play as a facilitator of growth in the agriculture sector, through its
intermediation function. Some of the opportunities in the agriculture sector
that banks should explore include ways to address some of the existing gaps in
the agriculture value chains, such as storage centers, transport logistics, and
technology platforms, that can enable rural farmers to sell their produce
directly to the markets.
These measures would help to improve productivity of
farmers, reduce post-harvest losses, increase access to finance for farmers and
improve sourcing of local raw materials for processing by manufacturing and
industrial firms. It will also aid improved production of local goods, enable
the creation of jobs, while supporting the growth of other sectors of our
economy such as manufacturing, and transportation.
Information Communication Technology
Another sector which has emerged as a significant
source of resilience in mitigating the impact of COVID-19 on the economy, has
been Information and Communications Technology (ICT). In the third quarter of
2020, the ICT sector made contributions of over 17.8 percent to GDP growth, 47
percent higher than its contributions a year earlier. The growth of startups in
the fintech and health care space rose in response to the pandemic. 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. 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 can make significant contributions to our export earnings.
The Central Bank recently issued Payment Service Banks
licenses to 3 firms as part of our efforts to drive financial inclusion and
ensure that majority of Nigerian citizens are banked. The Payment Service
Banks, along with Mobile Money Operators and Banks are expected to leverage ICT
channels in improving penetration of digital financial services and products to
Nigerians. Driving sustainable growth of our economy would require that the
banking industry, support the growth of ICT firms that are inclined to improve
productivity across key sectors in the economy.
Infrastructure Finance
Another critical area that the banking sector ought to
consider for stable growth of our economy is Infrastructure Finance. With the
decline in revenues due to federal and state government as a result of the drop
in crude oil prices, alternative ways of funding infrastructure are critical if
we are to generate sustained growth of our economy. As we are all aware, the
cost of logistics is often seen as a significant impediment to the growth of
businesses in the country.
A well-built infrastructure system, comprising hard
infrastructure such as roads and ports, and soft infrastructure such as
broadband penetration, can have a multiplier effect on growth by enabling the
expansion of business activities in the country. We believe that a
well-structured infrastructure fund can act as a catalyst for growth in the
medium and the long run. The support of the banking community will be important
in achieving this objective.
Conclusion
Distinguished ladies and gentlemen, in concluding my
remarks, let me assure all Nigerians that the Monetary and Fiscal authorities
are alive to their responsibilities to restore the economy back to recovery. At
this point , I also seize this opportunity to appeal Nigerians, particularly
our Media Economic analysts. We confess that the problem we face today is of a
global dimension.
The Global Economy is challenged , just like the
Nigerian economy. My appeal to our media analysts is that in the course of
conducting their analysis of the Nigerian economy, they should realise that
their public comments particularly if they are alarmist could create panic in
our environment. We cherish their counsel , but urge that they be more
constructive in their pungent criticism as this could hamper our efforts to
return our country and economy back to recovery. When you over dramatize a
problem you create panic that slows the process of recovery.
Although the 2016 /2017 recession was challenging for
the authorities, Nigeria exited that recession in after 5 quarters.
Nothwithstanding the challenges posed by the current crisis , we are optimistic
that Nigeria will surmount this challenge and recovery is in sight. Let me also
, add that while COVID-19 has brought on several challenges to our economy and
indeed the banking sector, 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, while enabling the growth of our economy in general.
I thank you for your attention.
Godwin I. Emefiele (CON)
Governor Central Bank of Nigeria
27th November 2020
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