The Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso recently at the Chartered Institute of Bankers of Nigeria (CIBN) 58th Annual Bankers’ Dinner and Grand Finale of the Institute’s 60th Anniversary in Lagos unveiled his Economic Blueprint for the apex bank and the nation’s economy.
Although ambitious, Cardoso is determined to address the burning issues affecting the banking and financial services sector, and the economy in general.
He said, a thorough assessment of the economy reveals significant challenges, including high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment.
These challenges, according to him, have led to increased interest rates, discouraging investments in productive activities.
“Within the banking system, high inflation has affected asset quality and solvency ratios. Additionally, the persistent depreciation of the naira poses a significant risk for domestic banks with foreign exchange exposures.
“Addressing the challenges requires a well-crafted structural policy, complemented by coordinated monetary and fiscal policies”, he said.
His blueprint is focusing on the following:
1. Bank Recapitalisation:
Cardoso while speaking at the Annual Bankers’ Dinner said, the banks would be directed to increase their capital.
He said, despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks.
He said, “the stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address.
“In my recent speech at the 370th Bankers’ Committee meeting, I highlighted the economic agenda of President Bola Ahmed Tinubu’s administration. The administration, as outlined in the widely circulated Policy Advisory Council report on the national economy earlier this year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1 trillion over the next seven years, with clearly defined priority areas and strategies.
“Attaining this substantial target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. The administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidy and the unification of the foreign exchange market rate.
“Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.
“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital”, he said.
2. Building a $1trillion Economy in Seven Years
Cardoso is working to help President Bola Tinubu’s administration actualise its ambitious goal of achieving a Gross Domestic Product (GDP) of $1 trillion over the next seven years,
Tinubu, in a goodwill message at the 40th anniversary of The Guardian Newspapers in Lagos, said that the bank recapitalisation was crucial to achieving a $1 trillion economy.
He said, “amidst the general lull in global economy, our ambition to attain a $1 trillion economy appears daunting. But we believe it is achievable, with God on our side and our collective determination.
“This explains why the Vice President and I have been on the road, trying to attract huge investments in various facets of our economy: agriculture, oil and gas, renewable energy and others.
“To arrive at the $1 trillion economic destination, we believe that we must address the capital adequacy of our banks that will provide the fuel for the journey,” the President stated.
3 Leveraging Technology To Deliver Financial Services
Cardoso said, technology would continue to play a critical role in delivering financial services and enhancing financial inclusion. However, recent developments in the payment services landscape have raised concerns regarding the use of technology and the existing licensing and regulatory framework.
“We have observed that some licensees are operating outside the approved activities, breaching the boundaries set for them. Any intentional or unintended noncompliance will be subject to sanctions, as operators have the responsibility to ensure that they are licensed for the activities they undertake.
“Concurrently, as we conduct a comprehensive review of the licensing framework for payment services, we will engage in extensive consultations to develop a new regulatory and compliance framework that is suitable for the technology-driven payment services sector. Looking ahead for the industry, banks should reassess the responsible banking framework to ensure that the requirements are effectively integrated into their strategies.
“I am aware that some banks have made commendable progress in this regard. Furthermore, the Central Bank of Nigeria is taking steps to enhance its in-house capacity so that it can assist other banks that still have progress to make in implementing their sustainability principles”, he said.
4. Fx Market
He said, “stabilizing the exchange rate is another critical aspect of our efforts to promote economic stability. I had the privilege of speaking with business owners engaged in international trade.
“They recounted the difficulties of navigating the fluctuations in the exchange rate, which often led to uncertainties and unexpected costs.
“The volatility in the foreign exchange market disrupted their planning and hindered their ability to make informed business decisions.
“It is imperative that we provide transparency and create a market environment that allows fair determination of exchange rates, ensuring stability for businesses and individuals alike.
“We have already witnessed improvements in FX market liquidity in recent weeks, as the market responded positively to tranche payments which have been made to 31 banks to clear the backlog of FX forward obligations. We have been subjecting these payments to detailed verification to ensure only valid transactions are honored.
“In a properly functioning market, it is reasonable to expect significant
FX liquidity, with daily trade potentially exceeding $1.0 billion.
“We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies”, he said.
5. Refocus CBN To Core Mandate
“I am aware that events over the past few years have also put the CBN in bad light. These issues can be attributed to various factors, such as corporate governance failures, diminished institutional autonomy of the Central Bank of Nigeria, a deviation from the core mandate of the Bank, unorthodox use of monetary tools, an inefficient and opaque foreign exchange market that hindered clear access, a foray into fiscal activities under the cover of development finance activities. There was also a lack of clarity in the relationship between fiscal and monetary policies, among other challenges.
“Hitherto, the CBN had strayed from its core mandates and was engaged in quasi-fiscal activities that pumped over 10 trillion naira in the economy through almost different initiatives in sectors ranging from agriculture, aviation, power, youth and many others. These clearly distracted the Bank from achieving its own objectives and took it into areas where it clearly had limited expertise.
“Under my leadership, the Central Bank of Nigeria will vigorously address these issues. We will tackle institutional deficiencies, restore corporate governance, strengthen regulations, and implement prudent policies. We assure investors and the business community that the economy will experience significant stability in the short-to-medium term as we recalibrate our policy toolkits and implement far-reaching measures.
“The primary mandate of the CBN is to ensure price stability, in addition to other objectives such as issuing legal tender currency, safeguarding external reserves, promoting a sound financial system, and providing economic and financial advice to the government.
“In line with our strategy to refocus on our core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy.
“As part of this refocus, the CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy. The details and requirements for this framework are currently being finalized alongside the fiscal authorities”, he said.
6. MPC Meeting
“We have critically reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives. For quite some time, there has been a dislocation of our monetary transmission mechanisms rendering the MPC meetings largely ineffective.
“For the avoidance of doubt, the Central Bank of Nigeria Act 2007 requires that the meeting of the Monetary Policy Committee of the Bank holds at least four times a year, and the Bank has satisfied this requirement for 2023. Our focus has been on ensuring these meetings are useful and effective”, he said.
