Jan. 25, 2015

Godwin I. Emefiele


Godwin I. Emefiele

Governor, Central Bank of Nigeria (CBN)


Godwin I. Emefiele is currently Governor of the Central Bank of Nigeria (CBN). Prior to joining the CBN, he served as Group Managing Director and Chief Executive Officer of Zenith Bank PLC, one of Nigeria’s largest banks with over 7,000 staff, about $3.2 billion in shareholders’ funds, and subsidiaries in Ghana, Sierra Leone, Gambia, South Africa, China, and the UK. Prior to his banking career, he was a lecturer in Finance and Insurance at two Nigerian Universities. Mr. Emefiele holds degrees in Banking and Finance from the University of Nigeria, Nsukka.

The CBN has successfully kept inflation in Nigeria in the single digits in recent years operating within a 6% to 9% band. What instruments does the CBN have in place to achieve this?

You are correct that the bank has been able to bring inflation down to single digits over the past couple of months. Before I talk about potential instruments at our disposal, I should highlight that this achievement took a lot of hard work on the part of the bank to make it happen. Especially in light of the enormous amount of money that was injected into the system in the aftermath of the global crisis, by the fiscal, as well as the monetary authorities. Both parties had to do some heavy-lifting to ensure that inflation did not get out of control. With regard to instruments, we will continue to rely on our usual monetary policy instruments like the monetary policy rate (MPR), the Cash Reserve Requirement (CRR), and Open Market Operations (OMO). However, inflation in Nigeria has a structural side. A significant percentage of our imports are in food. Apart from being a drain on our foreign exchange reserves, this also means that we are susceptible to imported inflation. That is why we will also be acting as a financial catalyst to entrepreneurs who may be investing in certain food value chains like rice, sugar, wheat, and fish. Once we can significantly raise the domestic supply of these products, we should see inflation reducing even further.

Rates on treasury bills in Nigeria are relatively high compared to other emerging markets, providing no incentive for banks to stop buying these bills. How will you attempt to reverse this trend?

One of the ways to reverse this trend is to develop alternative investment instruments for the banks to invest in and to deepen the market. T-bill rates are high because of demand. If government were successful in building fiscal buffers and stopped borrowing to finance expenditure, rates would decline. Government is revamping tax administration and collection to increase revenue and reduce borrowing. All these efforts will help reverse the high rate of T-bills. On the monetary policy side, we are working to reduce the cost of funds through share-services initiatives that will reduce operating cost for banks, which will ultimately help to reduce the cost of accessing loans by the general public.

The CBN utilizes a managed float regime for the Nigerian exchange rate. What are the benefits of this, and will you adhere to this float regime in the future?

The CBN's exchange rate policy is based on the managed float regime that allows a movement of +/- 3% around the midpoint naira/dollar exchange rate of N155/$1. Whenever justifiable, the managed float exchange rate regime allows the bank to intervene when necessary to offset pressures on the exchange rate. These policy stances have served the bank well, since they have properly anchored expectations, created policy certainty in macroeconomic management, while offering a window of flexibility to respond to new information and developments. Over the past couple of years, we have broadly achieved our main objective of keeping the exchange rate stable, notwithstanding the intermittent pressures that have been experienced largely induced by speculative behavior. As the saying goes “if it isn't broken, why fix it?" Therefore, under my leadership, and to the extent that prevailing circumstances support, the managed float regime will continue to guide our exchange rate policy.

You have identified two main pillars in your quest to simultaneously reduce the interest rate and maintain the exchange rate: managing factors that create liquidity shocks, and zero tolerance on practices that undermine the health of financial institutions. What strategies are you putting in place to build these two pillars?

First, let me highlight that my goal of achieving a reduction in interest rates is a medium- to long-term goal, the timing of which would be dictated by prevailing macroeconomic developments. Having said this, let me state that one of the reasons that we have high interest rates in Nigeria has to do with the country's infrastructure, including power. Nigerian banks spend a significant amount of their operating cost on providing electricity to their offices. And of course, some of these costs are transferred to customers in the form of high interest rate. Fortunately, the present administration has rightly privatized a major part of that sector, allowing new investments and excellent management skills to flow into it. Given that the industry is still in its nascent stage, the CBN is supporting them with clearing legacy debts and ensuring a smooth take off of the Transitional Electricity Market. We are also facilitating investment in key parts of the value chain by providing funds at concessionary rates to targeted investments in the power sector. We are working to create a new Collateral Registry, in which banks would recognize movable assets like livestock and machinery as collateral for obtaining loans. And as you know, the less risky a loan is, the lower the interest rate should be. With regard to the exchange rate, we have put in place several critical measures to gradually reduce demand for foreign exchange, namely the reform of operational guidelines of BDCs and a reduction in the weekly amount they can buy from us from $50,000 to $15,000. In addition to the reduction (from 3,200 to about 2,800) in the number of BDCs (following recapitalization), we believe that this could save more than $6 billion per year. We have also started outbound money transfer services, which allows customers to simply pay naira to Western Union agents and in return, the recipient gets foreign currency abroad. Although this was launched only months ago, customers have already sent over NGN1.3 billion, or $8.2 million abroad using this service. You can imagine how much foreign exchange this will save the CBN once the other two agents take off and more banks join Western Union.

What measures have you put in place to ensure banking sector stability?

The CBN takes financial system stability extremely importantly, which is why we are continually striving to sustain the effective management of potential threats and avoid systemic crisis. In fact, my vision in this respect is to effectively manage potential threats to financial stability, and create a strong governance regime conducive to financial intermediation, innovative finance and inclusiveness. Some of the actions we have taken in recent times include a more rigorous risk-based and consolidated supervision, adoption of international best practice within the Basel III framework, introduction of a revised code of corporate governance, extensive human capital development, and pursuing zero tolerance on fraudulent borrowers in the banking system.