Charles C Soludo: Strategic Agenda for the Naira
Briefing by Professor Charles C Soludo, Governor of the Central Bank of Nigeria, on the
"Strategic Agenda of the Naira", Abuja, 14 August 2007.
* * *
I: Introduction
It is my pleasure to welcome everyone to this important briefing on the "Strategic Agenda for
the Naira". As you may recall, it is about three years since we launched (in this very
Auditorium on July 6, 2004) the 13-point reform agenda designed to restructure, refocus and
strengthen the Nigerian banking and financial system. At that meeting, I observed that the
agenda constituted "Phase One" of the reforms. We have since introduced other
complementary reforms designed to stabilize the exchange rate, reduce inflation, reform
microfinance, restructure the lower denominations of our currency and re-introduce coins, as
well as promote the efficiency of the payments system. We have also launched the design of
a comprehensive long-term reform agenda for the financial system (the Financial System
Strategy 2020 - FSS 2020).
All these reforms are driven by our medium and long-term objectives to ensure economic
prosperity of Nigeria, and for Nigeria to become the Africa's financial hub by the year 2020.
Only a sustained stable macroeconomic environment and a sound and vibrant financial
system can propel the economy to achieve our national desire to become one of the 20
largest economies in the world by the year 2020.
The Strategic Agenda for the Naira is therefore being launched today as "Phase Two" of our
reform agenda, and as a necessary complement to the 13-point agenda of Phase One and
other reforms. Phase Two of the reforms has become all the more imperative given the
progress so far on Phase One, as well as the emphasis of the new Central Bank of Nigeria
Act on ensuring monetary and price stability. According to the "Central Bank of Nigeria Act,
2007", (Section 2) the key objects of the Central Bank shall be to: (a) ensure monetary and
price stability; (b) issue legal tender currency in Nigeria; (c) maintain external reserves to
safeguard the international value of the legal tender currency; (d) promote a sound financial
system in Nigeria; and (e) act as banker and provide economic and financial advice to the
Federal Government. The Phase Two, by focusing on the Naira, means that the Central
Bank intends to give greater emphasis to the most important function of central banks
everywhere in the world namely, to issue legal tender currency and to defend its value
(domestically by ensuring low inflation and externally by ensuring appropriate and stable
exchange rate regime). Our specific objective in Phase Two of the reforms is to make the
Naira the currency of reference in Africa, and thus a strategic catalyst for achieving the goal
of an international financial centre as well as promoting Nigeria's rapid economic
development. We also need the Phase Two to ensure that the results being achieved under
Phase One are deepened and sustained.
II: Overview of the reforms since 2004 and outcomes
Before we outline the elements of the Strategic Agenda, it is germane to briefly review our
progress so far. As you are aware, most of our reforms have focused on structural and
institutional reforms, and have included the following:
•
Strengthened the institutional framework for the conduct of monetary policy
•
Bank recapitalization/consolidation
•
Programme to possibly eliminate or reduce government ownership of any bank (to
no more than 10 percent)
•
Improved transparency and corporate governance
•
Zero tolerance to misreporting and data rendition, and strict adherence to the
Anti-money laundering regulations
•
Implementation of Basel II Principles and Risk-based supervision
•
Payments system reforms for efficiency - especially the e-payment
•
Reforming the Exchange rate management system - adoption of the Wholesale
Dutch Auction System (WDAS) and increased liberalization of the forex market
(which since 2006 led to the convergence of the parallel and official exchange rates
for the first time in 20 years).
•
Restructuring the Nigerian Security Printing and Minting, Plc;
•
Addressing issues of technology and skills in the banking industry especially in risk
management and ICT.
•
Launching of a new Micro finance policy and regulatory framework to serve the
unserved 65 percent of the bankable public
•
Ongoing Pension, Consumer credit, and Mortgage system reforms
•
Forging strategic alliances and partnerships between Nigerian banks and foreign
financial institutions especially in the area of reserve/asset management
•
Establishment of Africa Finance Corporation (AFC), as first private-sector led African
Investment Bank
•
Encouragement of Nigerian banks to go global, leading to more than doubling of
branch network in West Africa since 2004; setting up of subsidiaries in London as
well as Nigerian banks successfully issuing Eurobonds and getting listed on the
London Stock Exchange.
Our grand objective in the banking sector reforms was to re-engineer and fast-track a system
that will engender confidence and power a new economy. So far, the grand objectives of that
policy are being achieved, and our consolidation programme has been adjudged about the
most successful and at least cost to the tax payers in the world. The total deposits trapped in
the failed banks as percentage of GDP is about 0.7% (the lowest in the world), and no
private sector depositor would lose a kobo of his/her deposit. The banking system is the
safest and soundest it has ever been in history. Deposits and credits have more than
doubled, and non-performing loans as percentage of total loans have gone down from about
23% before consolidation to about 7% currently. Individual banks now finance big projects
valued at hundreds of millions of dollars and also operate in the oil and gas sector - a feat
they never could do before now. Interest rates are gradually coming down (with average
lending rate at about 16.9%, down from 25%). Currently, commercial bank branches have
gone up from about 3,200 before reforms to over 4,100, and total employment in the sector
has gone up from about 55,000 before reforms to over 61,000 currently. The world is
celebrating Nigeria's success, and over $1.5 billion of foreign investment has gone into the
sector since 2005. By end 2007, there will be about 7 or more banks with shareholders fund
in excess of $1 billion and over 10 banks with market capitalization of over $2 billion each
(there was none in 2004). In 2004, there was no Nigerian bank in the top 1000 banks in the
world. As at the end of 2006, there were 12 banks in the top 1000, with one ranked 355th
(top 500 in the world). Our banking system is powering the Nigerian Stock Exchange. Today,
Nigeria has the fastest growing banking system in Africa, and one of the fastest in the world.
As seasoned commentators have observed, it has taken Nigeria less than three years to
achieve what it took South Africa 20 years to achieve in the area of banking. To put it
succinctly, a new banking system has emerged, and will only get stronger for the benefit of
the Nigerian economy. We firmly believe that with the sustenance of the reforms as the CBN
is determined to do, the best is yet to come.
On the macroeconomic front, double-digit and volatile inflation rate (which used to be the
norm) have been subdued as inflation rate has remained at single-digit since last year.
However, inflation risks remain high. The Naira/US dollar exchange rate has remained stable
(with steady appreciation of Naira against the dollar) since 2004, and the GDP has
maintained a robust growth rate of over 6% per annum since 2003.
III: Matters arising and challenges ahead
Despite progress on a number of fronts, there are still enormous challenges and unfinished
business. At the economy-wide level, there are still chronic challenges of insecurity of lives
and property, infrastructure deficiency (especially power and transportation), education crisis,
among others.
At the level of the financial system, we have the huge task of effectively implementing the
FSS 2020. There is still the risk of fiscal dominance and volatility in the fiscal operations of
government. Evolving Fiscal Responsibility arrangements and framework for managing
highly volatile oil revenues will be critical. Other unfinished business in the reforms includes:
•
Risk-based, consolidated and strengthened banking supervision
•
Mortgage, SME, and consumer credit reforms
•
Adherence of States and LGs to the requirement under the Micro Finance policy to
devote at least 1 percent of their annual budget to micro credit
•
Continued reform of the payments system, especially the e-payments system and
enforcement of the Dud cheque offences Act.
Efforts will continue to be made to address these unfinished issues.
IV: The Strategic Agenda
The thrust of the agenda focuses on the Naira as our national currency - to realign its
denominations, ensure its stability and global integration. These will help to deepen the
reforms of the financial system and national economy, and make the Naira the currency of
reference in Africa thereby facilitating our quest for international financial status.
The new focus is an extension of our previous currency redesign and re-issuance of the
lower denominations and attempt to re-introduce coins. Our goals were to redesign the
currencies after 23 years (contrary to the international norm of currency redesign after 6-8
years), drive down the cost of currency printing and experiment with the polymer substrate.
Our objectives are largely achieved and we have learnt a lot from the exercise. However, in
the light of the new mandate by the CBN Act (2007) to "ensure monetary and price stability",
as well as the vision articulated under the FSS 2020, it has become imperative for us to
evolve a more comprehensive strategy for the Naira as a reference currency.
Currency redenomination and liberalization are not without risks especially for small open
economies such as Nigeria. However, we believe that the time is auspicious for such reforms
especially in the light of the following enabling conditions:
• Overall commitment of the Federal Government under Alhaji Umaru Musa Yar'Adua
(GCFR) to sustaining macroeconomic and other structural reforms
• A robust external reserves to meet almost 20 months of foreign exchange
disbursements and 25 months of imports
•
Stronger banking system powering a new economy and capital market
•
Inflation down to single digit, and robust GDP growth of about 6% and above
•
Exchange rate stability and elimination of multiple currency practices that had been
prevalent before now
•
Strong capital inflows (with Central Bank as increasingly marginal player in the forex
market)
•
Debt relief: Nigeria without a debt burden
•
Non-oil exports growing strongly (24% in 2006)
• Nigeria de-listed from the FATF list
•
New CBN Act not permitting CBN to grant ways and means advances to
Government exceeding 5% of previous year's revenue provided such financing is
retired before end of the financial year. Indeed, CBN is not positively disposed to
granting any ways and means advances.
It is in the view of the foregoing enabling conditions, and our vision for a Naira that is the
currency of reference in Africa that the Board of Directors of the Central Bank of Nigeria has
approved the following agenda for the Naira:
A: Currency re-denomination
Here, we intend to restructure the entire currency by dropping two zeroes or moving two
decimal points to the left from the currency, and issuing more coin denominations. This
would entail a total currency exchange and phasing-out of all the existing denominations
from August 1, 2008. Effectively, at the current exchange rate, this policy would mean that
the Naira/US dollar exchange rate would be around N1.25 to US$1 then. All Naira assets,
prices and contracts will be re-denominated by dropping two zeroes or two decimal points to
the left with effect from this date.
The proposed currency structure is as follows:
•
Coins:
•
1 kobo
•
2 kobo
•
5 kobo
• 10 kobo
•
20 kobo
•
Notes:
•
50 kobo
•
1 Naira
• 5 Naira
•
10 Naira
•
20 Naira
Effectively, our plan will restore the value of the Naira (in the short-term) close to what it was
in 1985 before the commencement of the Structural Adjustment Programme (SAP) in 1986.
Re-denomination and re-introduction of totally new currency structure (notes and coins)
following the progress so far with other reforms and the enabling conditions in the economy
today are designed to better anchor inflationary expectations, strengthen public confidence in
the Naira, make for easier conversion to other currencies, reverse tendency for currency
substitution, eliminate higher denomination notes with lower value, reduce the cost of
production, distribution and processing of currency, promote the usage of coins and thus a
more efficient pricing and payments system, and lay the foundation for the convertibility of
the Naira as well as make it the "Reference currency" in Africa. The African Union has
granted Nigeria the right to host the Headquarters of the African Central Bank when the
common currency in Africa materializes. We must therefore lead the way in terms of properly
aligned currency structure and sound monetary policy framework.
Several countries in the world have undertaken currency re-denomination at various times
and for different reasons, including: Afghanistan (2002); Germany (1923, 1948); Argentina
(1970; 1983; 1985; 1992); Bolivia (1963, 1987); Brazil (1967, 1970, 1986, 1989, 1990, 1993,
1994); China (1955); South Korea (1962); Mexico (1993, 1996); Ghana (2007); Israel (1948,
1960, 1980, 1985); Turkey (2005); Angola (1995, 1999); and others. Evidently, many
countries have had to undertake the re-denomination more than once. In the case of Brazil, it
had to do it many times before it got it right. The major challenge is to undertake other
complementary reforms, particularly macroeconomic reforms that will underpin price stability
and continuing confidence in the economy. This is where we believe Nigeria's experience is
likely to be different from others, having learnt from the experiences of other countries.
Consequently, as necessary complements to the currency re-denomination, we intend to
introduce three additional measures:
•
Adoption of Inflation-Targeting Framework for the conduct of monetary policy
•
Sharing Part of the Federation Account in US Dollars to deepen the Forex Market
and for Liquidity Management
•
Current Account Liberalization/Convertibility and Accession to Article VIII of the IMF.
B: Adoption of inflation-targeting framework for the conduct of monetary policy:
to commence from January 1, 2009
In the light of the new mandate as contained in the new CBN Act (2007) urging the CBN to
"ensure monetary and price stability" as well as the need to provide a transparent,
credible framework to lock-in inflationary expectations, the CBN will adopt inflation target
as the for monetary policy with effect from January 1, 2009. Low and stable
nominal anchor
inflation will be our monetary policy's primary long-term goal. Focusing on inflation targeting
does not mean that the CBN will not be interested in other broader objectives of
macroeconomic policy - output growth, employment, exchange rate, and balance of
payments. Rather, an inflation-targeting framework will enable CBN to pursue these
objectives in a more disciplined and consistent manner rather than the ad-hoc processes of
the past. Locking-in inflationary expectations is one effective way of ensuring that the
currency re-denomination will be sustainable. The outcome of this new framework will greatly
improve the credibility of the CBN as the Monetary Authority, as well as deepen the financial
markets and promote rapid development of a private sector-led economy.
We will use the next 16 months to fully prepare for the introduction of this framework
especially in the light of the deep technical issues involved. The CBN would collaborate with
the National Bureau of Statistics in significantly improving the availability of high frequency
and reliable data especially those of the GDP and more robust measures of the price indices.
C: Sharing part of the federation account allocation in US dollars to deepen the
forex market and for liquidity management: to commence from September
2007
Given the structure and development of the financial system, the underdeveloped nature of
the Forex markets, as well as the restrictions on foreign exchange transactions, the CBN has
traditionally fully monetized the foreign currency receipts in the Federation Accounts, to be
shared by the three tiers of government. Initially, the CBN also maintained the accounts for
all the tiers of government - as part of the liquidity management framework. Subsequently,
as the banking system developed, the CBN allowed the share of the states and LGs to be
deposited with the commercial banks.
Recently, following the reforms in the banking sector and the further liberalization of the
Forex market, both the financial system and the forex market have deepened and become
increasingly sophisticated. Since 2006, the CBN adopted the Wholesale Dutch Auction
System (WDAS) in the forex market and significantly liberalized the forex market.
Furthermore, Nigeria has exited the debt trap, built up significant external reserves, and the
autonomous inflows into the Forex market are such that the CBN has become a marginal
player in the forex market. The forex market has become so efficient that Nigeria no longer
has multiple currency practices (as defined by the IMF). In the last two years also, the CBN
has consistently intervened in the forex market through the increased sale of foreign
exchange as an instrument of liquidity management (the so-called special auctions). In
December 2006, the CBN introduced the Monetary Policy Rate (MPR) with the corridor, and
this has eliminated the high volatility in the money market interest rates. The money market
is deepening, and the bond market is also evolving.
The above conditions indicate that the private financial markets are getting deeper and
sophisticated enough to warrant further steps on the part of the Central Bank to gradually
withdraw as a dominant player in the forex market. The inter-bank forex market is now the
dominant segment of the market, and needs to be deepened.
Consequently, the Monetary Policy Committee (MPC) of the CBN has approved the sharing
of part of the Federation Account allocation to the Federal Government and the State
Governments in US dollars. The Local Governments are excluded in this phase. For the
Central Bank, this could also provide an additional instrument for effective liquidity
management as we migrate to inflation-targeting framework.
The proportion of the Federation Account to be distributed in dollars will be determined from
time to time, but largely dependent on the assessment of the forex market as well as the
liquidity management requirements of the CBN. Both the States and Federal Government will
be required to open "Special Domiciliary Accounts" with commercial banks of their choice.
The special account can only be accessed by monetizing the balances into Naira. In other
words, the Governments cannot withdraw dollar cash but may also utilize part of their
domiciliary accounts for settlement of external obligations (e.g. opening of letters of credit).
From September 2007, the exchange rate that will be applied in the monetization of
Federation Account as well as the "Special Domiciliary Accounts" will be the inter-bank rate
on that day.
As the market deepens, the CBN will gradually withdraw from the WDAS, and only intervene
in the market (buy or sell forex) as may be required to achieve defined policy objectives.
This new policy thrust is expected to deepen the forex market, promote financial market
development, and improve the degree of integration among the domestic markets and with
international markets. This policy will complement the ongoing programme of allowing
Nigerian banks to manage part of our external reserves in collaboration with foreign asset
managers. The net effect of these will be to create and deepen capacity within our banks. All
these will also provide important building blocks for the external current account convertibility
and attainment of the IMF Article VIII status. The challenge here is that both the CBN and the
commercial banks would have to manage the risks inherent in foreign exchange trading and
deploy a sound system of monitoring foreign asset-liability matching. The CBN in particular,
would need to sharpen its skills to monitor and regulate the use of domiciliary accounts in
accordance with the international best practices as well as the rules and guidelines
governing the anti-money laundering laws and regulations. The Governments too would
need to be on top of the risk management techniques for optimal management of their
portfolios.
The CBN is conscious of the risks of dollarization of the economy and will take steps to avoid
such. Also, we are conscious of the dangers of the Dutch Disease and hence the need to
avoid the repeat of history in terms of high overvaluation of the Naira in real effective terms
as happened during the 1970s until early 1980s. Non-oil exports have begun to recover and
grew by 24% in 2006. Also, capital inflows have been growing rapidly and highly overvalued
exchange rate would hurt these trends. More fundamentally, without a currency
redenomination/realignment, a significant appreciation of the Naira/dollar exchange rate would
lead to fiscal crisis given that much of the revenue is dollar denominated, and such
appreciation would also significantly deplete our external reserves. Thus, while we deepen
the forex market and effectively manage our liquidity, we would not lose focus on ensuring
appropriate exchange rate regime for macroeconomic balance.
D: Current account liberalization/convertibility and accession to Article VIII of the
IMF: to commence January 1, 2009
As a necessary complement to the foregoing policy initiatives, and to further deepen the
integration of our financial system and economy into the global economy, we intend to
embark upon full current account liberalization/convertibility by January 1, 2009. This would
entail that Nigeria eliminates all restrictions on current account transactions, and accession
to Article VIII of the IMF means that the policy is not easily reversible. Out of the 185 member
countries of the IMF, 167 have acceded to the Article VIII on current account convertibility. It
is our belief that the conditions are right for Nigeria to now join the world league. The timing
is proposed to coincide with the commencement of the inflation-targeting framework.
V: Conclusion
These measures constitute a key component of the FSS 2020 agenda: our quest to become
an international financial centre and Africa's financial hub. They will complement and deepen
the ongoing financial system reforms. The conditions are now right, and despite the
challenges, we are determined to ensure effective design and implementation.
Furthermore, we are working towards greater transparency in the formulation and
implementation of our monetary policy. A new Monetary Policy Committee (MPC) will soon
be reconstituted in accordance with the new CBN Act, and Minutes of the MPC shall be
made public. We also intend to undertake greater public education about what we do and
why we do them the way we do.
Are these policies consistent with the drive towards a single currency in West Africa? Yes:
Nigeria remains committed towards the ECOWAS goal. Currently, the Nigerian economy
constitutes about 70 percent of the entire ECOWAS economy and accounts for about 80
percent of the total external reserves. It therefore goes without saying that if the Naira is
properly aligned and can become the "Reference Currency", the goal of a monetary union
becomes all the more credible and sustainable. Nigeria has met all the primary convergence
criteria and hopes that the other countries will do same on a sustained basis. In the
meantime, Nigeria must continue to make progress.
I thank you all for listening.