CBN needs policy reset to address challenges: Economists

Economists have called on the Central Bank of Nigeria (CBN) to unify the country’s currency exchange rate. They made the call at the recently held First American Business Council (ABC) Economic Update, which was themed: “Nigeria’s Debt Overhang and Strategies to Create Economic Growth.”

The economists, who included Dapo Olagunju, Managing Director of JP Morgan West Africa, and Mokutima Ajileye, Managing Director of P&G Nigeria, argued that unifying the exchange rate would help to reduce the cost of doing business in Nigeria and make the country more competitive.

They also said that unifying the exchange rate would help to improve transparency and accountability in the foreign exchange market. The CBN has been criticized for maintaining a dual exchange rate system, which has made it difficult for businesses to get the foreign exchange they need to import goods and services.

The economists’ call for a unified exchange rate comes at a time when Nigeria is facing a number of economic challenges, including high inflation, a rising debt burden, and a slowdown in economic growth.

Muddled up policies 

Dapo Olagunju, Managing Director of JP Morgan West Africa, has said that the Central Bank of Nigeria (CBN) needs to be more orthodox in its approach to monetary policy.

Olagunju, who spoke at a panel discussion on Nigeria’s debt overhang and strategies to create economic growth, said that the CBN is currently following too many objectives, which is leading to confusion.

He cited the example of the CBN’s Ways and Means (WM) bill, which is a form of treasury bill that the CBN issues to the government to raise money. Olagunju said that the WM bill is a form of accommodative monetary policy, which is a policy that is designed to increase the money supply and stimulate economic growth.

However, Olagunju said that the CBN is also pursuing a tight monetary policy, which is a policy that is designed to reduce the money supply and control inflation. He said that these two policies cannot go hand-in-hand and that the CBN needs to choose one policy and stick with it.

Olagunju said that the CBN’s current approach to monetary policy is “muddling through” and that it is not sustainable. He said that the CBN needs to take a more orthodox approach to monetary policy and focus on a single objective, such as price stability.

He said,

“There should be a reset at the CBN. One key way will be the unification of exchange rates.”
Speaking further, he said international investors don’t mind whether the rate is N400 or N700 to the dollar because there are specialists who know how to manage market risks daily.

“What is always difficult to model is government’s interference and ambiguity of monetary policy – if the policies are clear and open the dollars will flow in – it does not matter the exchange rate,” he said.

Olagunju noted that between 2008 and 2014, the CBN’s participation in the forex market was just 20% because every other person was sourcing his forex from the market. He stated that because of the forex subsidy now, 90% of investors want to source forex from the CBN.

Mokutima Ajileye, who represented the manufacturing sector, concurred that it is not about the rate, but predictability for manufacturers. She said for the manufacturing sector, the major issue is that the monetary authorities keep changing policies.

Citing example, she said for some of the inputs for localization there is no capacity to meet the needs of the sector.

Other panelists, including Professor Bongo Adi of Lagos Business School, and the chief financial officer at ATC, Afolabi Oladunjoye, were prominent panelists. Professor Adi urged the Tinubu administration to employ technocrats to stabilize the system.

Economy’s dependence on oil 

Dr. Yemi Kale, chief economist and partner at KPMG and a former director general of the National Bureau of Statistics, gave the keynote address. He noted that while the oil sector only accounts for 7% of the country’s GDP, it accounts for 62% of the Nigerian economy.

Even while the oil sector only makes up 7% of the nation’s GDP, many other industries rely on it to survive, according to Dr. Kale. He emphasized that the oil industry and all the other sectors that rely on it account for around 62% of Nigeria’s GDP.

He said that just 38% of Nigeria’s GDP comes from the services sector and other sectors, such as the fintech and film industries, which are not reliant on the oil business. Contrary to common belief, which holds that the oil sector only contributes 7% of the nation’s GDP while all other sectors combined account for around 93% of GDP, indicating that the economy is well diversified.

He said it would be challenging for the industries that make up a smaller percentage of the GDP to pull the economy out of its rut. He emphasized that the Niger Delta oil thieves’ operations, which have decreased foreign investment in the nation over the past ten years, are to blame for the oil industry’s subpar production.

Nigeria’s three-pillar economy 

He said one can categorize the Nigerian economy as a house sitting on three pillars, namely: the oil sector, accounting for 7% of the economy, the non-oil sector which depends on the oil sector, accounting for 55% of the economy, and another segment of the economy that has zero dependence on the oil sector, which represents 38% of the GDP.

• “In reality, 62% of the economy depends on whatever happens in the oil sector, and that is why we keep remaining in that challenging situation,” he said.

Citing an example, he said the manufacturing sector depends on the oil sector to get foreign exchange for their inputs because if they cannot get the dollars to buy the inputs they are technically hampered. He said it applies to a lot of sectors, including agriculture as the sector uses government revenues to buy fertilizers.

• “The 38% of the economy that has little or no dependence on the oil industry includes telecommunications, Nollywood, and other services. That is the most important sector of the economy, but it’s very small, and it is the reason the Nigerian economy has been growing by an average of 1% since 2015, although the population has been growing by 3%. 

49% drop in per capita income  

• “Between 2015 and now there has been a 49% drop in per capita income and because of this dysfunctional sector, we have been unable to take off. When you go through a recession and get out of it and get your positive growth, then you start to recover, and after that, you take off but we can’t take off because 38% of the economy is actually what is driving the economy.
• “After all, the oil sector has been in recession for virtually the entire period,” he said.

According to him, oil growth has decreased for 24 out of the last 36 quarters, on average, by -5%. He continued by saying that oil will be necessary for economic diversification because we depend on oil earnings for investments and economic transformation.

He said that the government consistently attempts to lessen its reliance on oil by cutting production, which is incorrect. He claimed that while the oil industry would continue to expand, other industries should expand more quickly.

• “The last thing I heard from the government was that the oil sector only represents 20% of the government income, so we have diversified. We have not diversified; the reason why the percentage of oil to GDP has reduced is because production has dropped.  
• “The share of oil has dropped from 11% to 6%. That’s not success. The reason it has declined is because of disruptions in the sector, not because we are growing the non-oil sector”.
• “That dysfunctional sector is what has led us to where we are now, affecting virtually every sector of the macroeconomy”. 

About ABC

The American Business Council (ABC) is a non-profit organization that promotes trade and investment between the United States and Nigeria. ABC has over 80 member companies, including some of the largest and most successful businesses in the world.

ABC works to foster economic development in Nigeria through a variety of initiatives, including:

• Advocating for policy reforms: ABC works with the Nigerian government to identify and implement reforms that will improve the business environment in Nigeria.
• Providing expert support: ABC provides expert advice and support to the Presidential Enabling Council Committee and the Commercial Investment Dialogue.
• Fostering partnerships: ABC fosters partnerships between American and Nigerian businesses.

ABC’s work has helped to attract billions of dollars in investment to Nigeria and create thousands of jobs. ABC is committed to continuing its work to promote trade and investment between the United States and Nigeria.

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