There should be policy reset at the CBN – Economists

Article summary

  • Economists the CBN should consider policy reset to unify the country’s currency exchange rate
  • If the policies are clear and open the dollars will flow in
  • For manufacturers. She said for the manufacturing sector, the major issue is that the monetary authorities keep changing policies
  • Oil and all the other sectors that depend on the oil industry constitute about 62% of Nigeria’s GDP

Economists have said that the Central Bank of Nigeria (CBN) should consider a policy reset to unify the country’s currency exchange rate.

The economists said this at the recently held First American Business Council (ABC) Economic Update themed: Nigeria’s Debt Overhang and Strategies to Create Economic Growth, hosted by the American Business Council in Lagos.

Dapo Olagunju, MD, JP Morgan West Africa, and Mokutima Ajileye, MD, P&G Nigeria were among other economists who said this during the recently-held ABC Economic Update.

Muddled up policies 

Olagunju, in a panel discussion, said the CBN needs to be more orthodox in its approach to monetary policies as the apex bank currently has too many objectives it is following, hence, things are muddled up.

Citing an example, he said the N23 trillion Ways and Means from the CBN mean the bank is creating money and lending it to the government, which ends up in the financial system, a policy that he called ‘accommodative monetary policy’.

He said at the same time, the CBN says it wants to have a tight monetary policy to increase cash reserves, stressing that the two cannot go hand in hand.

He said the apex bank has to choose one policy and work with it.

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 panellists. Professor Adi urged the Tinubu administration to employ technocrats to stabilize the system.

Economy’s dependence on oil 

Delivering the keynote address, the chief economist and partner, KPMG, and former statistician general, National Bureau of Statistics, Dr Yemi Kale, said that 62 per cent of the Nigerian economy relies on the oil industry, although the oil industry constitutes merely 7% to the country’s gross domestic product (GDP).

Dr Kale said although the oil industry merely contributes 7% to the country’s GDP, many other sectors depend on it for survival. He stressed that oil and all the other sectors that depend on the oil industry constitute about 62% of Nigeria’s GDP.

He stated that the services sector and others, such as the film and fintech industries, which do not depend on the oil industry, contribute only 38% to Nigeria’s GDP.  That is opposed to the popular perception that the oil industry contributes 7% to the country’s GDP, whereas all other sectors combined, contribute about 93% to GDP, which would mean that the economy is well diversified.

He noted that it would be difficult for the sectors that contribute the smaller portion of GDP to grow the economy out of the doldrums. He stressed that the oil industry has been producing sub-optimally due to the activities of oil thieves in the Niger Delta, which had reduced foreign investments into the country over the last decade.

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.

He said oil growth has been contracting for 24 of 36 quarters since 2015, an average of -5%. He added that we are going to need oil to diversify the economy because we need the oil revenues to invest and transform the economy.

He said in the government always tries to reduce the dependence on oil by reducing production, which is wrong. He said the oil sector is still going to grow but the non-oil sector should grow faster.

  • “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 and its members have long served as a vehicle to draw trade and investment in Nigeria and foster economic development through US/Nigeria partnerships, some of which include addressing critical economic issues including policy reforms and initiatives, providing expert support to the Presidential Enabling Council Committee and the Commercial Investment Dialogue.

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