PRESENTATION ON THE ROLE OF MONETARY POLICY IN ACHIEVING NIGERIA’S VISION 2020 AGENDA

1. PRESENTATION ON THE ROLE OF MONETARY POLICY IN ACHIEVING NIGERIA’S VISION 2020 AGENDA By C. M. ANYANWU DEPUTY DIRECTOR OF RESEARCH CENTRAL BANK OF NIGERIA, ABUJA

2. OUTLINE • Introduction • An Overview of the Nigerian Economy • CBN Mandate, Monetary Policy and Economic Development • Monetary Policy and the Achievement of Vision 2020 • Other Necessary Condition for the Attainment of Vision 2020 • Conclusion

3. INTRODUCTION Monetary policy is a package of actions carefully designed to manage the growth, value and cost of money with the bread goal of regulating economic conditions and activities during a given period. It can also be defined as a combination of measures designed to regulate the value, supply and cost of credit in an economy in consonance with the expected level of economic activity. In other words, it aims at achieving price stability, full employment and economic growth, exchange rate stability, low interest rates and balance of payments equilibrium. 3

4. INTRODUCTION Continued…. • The formulation and implementation of appropriate monetary policy is one of the major responsibilities of central banks worldwide. • Vision 2020 attempts to exploit Nigeria’s economic potentials and make her become one of the biggest twenty economies in the world by 2020. • The country has considerable resource endowment and coastal location for strong growth. • The financial sector has been identified as the DRIVER needed to pull other sectors of the economy towards the vision.

5. INTRODUCTION Continued…. • The Central Bank of Nigeria (CBN) and other regulatory bodies initiated the Financial System Strategy (FSS) 2020, to leverage on the on-going economic reforms to ensure that Nigeria becomes Africa’s Financial Hub and to promote economic development - top 20 economy by year 2020. • The paper sets out to discuss the fundamental role of monetary policy in achieving Nigeria’s vision 2020 agenda.

6. AN OVERVIEW OF THE NIGERIAN ECONOMY • Population of 140 million people, Nigeria is the most populous country in Africa • The country is blessed with vast land and abundant natural resources, including rivers & lakes, oil & gas, solid minerals • It has the potential to be a big centre of production and consumption, promise to be a big economy

7. Natural Factor Endowments and the Monocultural Characteristics • About 31.3% of total land area is arable. • Agricultural and oil production accounted for over 70% of GDP in 2006. • Oil reserve about 37 billion barrels, could last over 30 years, gas reserves of about 176 trillion cubic meters could be depleted in approximately 72 years.

8. Structure and Growth of GDP Gross Domestic Product (GDP) Nigeria’s GDP (at 1990 Constant Price) rose from N9.9 trillion in 2003 to N18.6 trillion in 2007 It was the 49th largest economy in the world in 2006. 8

10. Growth Rate of Selected Macroeconomic Indicators

12. Overall, there has been remarkable improvement in the economy in the last nine years, following the extensive reforms that were carried out by the government. Inflation Rate • Average inflation rate (Year-on-Year) averaged 24.4% for the decade 1980-1989, 30.2% for 1990-1999 and 13.06% during 2000-2007. • It fell persistently from 2004, recorded single digit in 2006 and 2007. • Attributed to fiscal prudence, tight monetary policy and good agricultural harvest.

13. However, the current annual GDP growth rate of 6.0 per cent is not adequate to substantially reduce poverty and lead Nigeria to become one of the twenty largest economies in the world. • A growth of no lower than 10-13% annually is requiredto lead Nigeria to her Vision.

14. Sectoral Characteristics • The Nigerian Agriculture is dualistic in structure, having both the formal and informal sectors, side-by –side. • An analysis on sub-sectoral basis showed that in 2006 crops production was predominant and accounted for 89.0 per cent of total production, followed by livestock (6.3%), fishery (3.3%) and forestry (1.1%). • The structure of the industrial sector is also dualistic and characterized by a large number of informal small enterprises and relatively few formal modern firms. • By size, the small and medium scale enterprises accounted for 65.5 and 32.0 per cent of industrial employment, while the LSEs contributed only 2.5 per cent.

15. In the last five years, manufacturing capacity utilization rate has averaged 54.8 per cent but fell persistently from 56.5 per cent in 2003 to 53.5 per cent in 2007. • The decline capacity utilisation is due to inconsistent government policy, overdependence on the external sector, low level technology and poor infrastructure. • Nigeria is a major producer of oil and a member of the OPEC, with a production quota of 2.16 million barrels per day (mbd). • Oil revenue accounted for 26.2 per cent of GDP, 89.8 per cent of foreign exchange receipts and 83.0 per cent of government revenue in the last five years. 15

16. Major infrastructural inadequacies exist in power supply, road and rail transportation, port’s operations, etc. • The length of roads in Nigeria is about 195,200 kilometres out of which about 15.3% is paved. About 28% of these paved roads are bad and un-motorable . • Electricity generation remained almost static averaging about 2,607.4 megawatts per day between 2003 and 2007, as against the average requirement of 6,000 megawatts needed for the current level of economic activities. • The services sub-sector has fared better. • The transformation in the telecommunications service sub-sector has led to increases in the number of telephone lines, subscribers and services providers, and created massive employment within the country.

17. The airline industry has also improved in service delivery, following keen competition among operators. • Educational sector is dominated by primary and secondary school, with less emphasis on vocational and technical education capable of imparting entrepreneurial skills. • The health indicators showed relative improvement between 2000 and 2005. Population per physician improved from 24,020 in 2000 to 3,059 in 2005, while population per hospital bed declined from 3,104 to 1,806 during the same period.

18. Fiscal Operations • Government revenues in Nigeria are classified into oil and non-oil. • Since the 1970s, oil revenue has been the dominant source of government revenue, contributing over 70 per cent to federally-collected revenue. • The current revenue allocation formula which became operational in 2004 allocates: • 52.7% of the revenue of the Federation Account to the Federal Government, • States 26.7% and, • Local Government 20.6%. 18

19. Fiscal Operations • The following deductions are made from source before the federally collected revenue is distributed: • Joint Venture Cash Calls, • Excess crude/PPT/royalties, and • 13.0% derivation for the oil producing states. • In addition, the Federal Inland Revenue Services (FIRS) 4.0% • The Nigeria Customs Services (NCS) 7.0%. • The Value-Added Tax (VAT) system was introduced in Nigeria in 1994, and currently shared in the ratio 20:50:30 per cent to federal, states and local governments, respectively. 19

20. External Sector External sector monitored through the Balance of Payments (BOP) account BOP divided into current, capital and financial accounts The total reserve position doubled from $7,467.80 million at end 2003 to $16,955.02 million in 2004, rising rapidly to $28,279.06 million in 2005, $42, 298.11 million in 2006 and closing 2007 at $51,333.15 million. This trend is explained by the high and continually rising oil prices in the international market. 20

21. Financial Sector • The financial system consists of the formal and informal segments. • The informal segment is characterised by: • Small scale deposit mobilisation and lending, • Little or no record-keeping, • Dominance of cash transactions, • Ease of entry and exit, • Lending based on personal recognition, and • Higher interest rates than the formal sector, among others. • The formal segment dominate the financial system and consist of the regulatory authorities, the financial markets, the development finance institutions, and other financial institutions. 21

22. Financial Sector The regulatory authorities include the CBN, Ministry of Finance, the Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission, the National Insurance Commission (NAICOM) and the Pensions Commission (PENCOM). The financial markets comprise of the money market (deposit money banks (DMBs) and discount houses) and capital market. Development finance institutions include the Urban Development Bank, Federal Mortgage Bank of Nigeria (FMBN), Bank of Industry (BOI), Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB) and the Nigerian Export Import Bank (NEXIM). 22

23. Other financial institutions include insurance companies, finance companies, community banks, microfinance banks and primary mortgage institutions (PMI). • Various economic and structural reforms were introduced from 2003 under the National Economic Empowerment and Development strategy (NEEDS). • The financial sector reforms started with the re-engineering of the processes and realignment of the manpower in the CBN, code named project EAGLES (acronym for Efficiency, Accountability, Goal-orientation, Leadership, Effectiveness and Staff Motivation).

24. The Bank embarked on other reforms in currency and payment systems, money market, foreign exchange market; micro enterprises financing; and bank supervision. • Reforms were also carried out on the monetary policy framework, external reserve management, issue of legal tender currency and the payment system. • In the banking sector, the key elements of the reforms included: • Adoption of the universal banking system in February 2001. • Re-capitalization for banks to a minimum of N25.0 billion through mergers and acquisition or initial public offerings (IPOs), which was completed in December 2005. • Enhancing the intermediation function of banks

25. Issuance of a new code of corporate governance for the financial sector in March 2006 and effective April 1 2006, to ensure transparency and accountability in the sector. • Some reforms also took place in the other sub-sectors of the financial sector: insurance, capital market and mortgage sub-sectors.

26. CBN MANDATE, MOMETARY AND ECONOMIC DEVELOPMENT • The CBN amended Act 2007, mandated the Bank to: • Ensure monetary and price stability • Issue legal tender currency in Nigeria • Maintain external reserve to safeguard the international value of the legal tender currency • Promote a sound financial system in Nigeria • Act as banker and provide economic and financial advise to the Federal Government

27. The first and perhaps the most important mandate of the CBN is to ensure monetary and price stability which is done through the formulation and implementation of Monetary Policy. • The central objective of monetary policy is to keep prices stable, that is to achieve low inflation rate. • In implementing this policy the CBN makes use of some instruments which include: • Open market operations (OMO) • Discount window lending • Reserve requirement

28. Element of Monetary Policy Management • Generally, monetary policy influences the level of money stock and/or interest rate. • Macroeconomic aggregates such as output, employment and prices are in turn, affected by it (interest rate or money; credit; wealth or portfolio; expectations channel; and exchange rate channels). • It involves setting objectives and targets for the major economic indicators; choosing a nominal anchor, policy instruments and the framework for monetary policy implementation; programming; Liquidity management; and Communications and evaluation of outcomes.

29. CBN monetary policy targets include the operational target, the intermediate target and the ultimate targets. • In designing monetary policy, the CBN reviews developments in the economy over a period of time currently two years • Articulates the major pressure points and risk to price stability; and formulates a framework which guides its monetary policy implementation. • This framework is captured in a monetary programme. • At present the CBN uses the IMF financial programming framework which analyses and traces the linkages between the four sectors of the economy.

30. The stance of monetary policy is dictated by the prevailing economic situation and the period’s objectives. • The conduct of monetary policy by the CBN relies on a theoretical framework as well as an institutional framework. • Presently, the Bank manipulates the operating target (reserve money) over which it has substantial direct control. • This in turn influences the intermediate target (broad money supply, M2) which impacts on the ultimate or final objective of monetary policy, i.e., inflation and output.

31. A nominal anchor for monetary policy is a single variable or device which the central bank uses to pin down expectations. • Generally, there are two kinds of nominal anchor: quantity-based nominal anchor; and price-based nominal anchor. • The quantity based nominal anchor targets money while the price-based nominal anchor targets exchange rate or interest rate. • Currently, the CBN uses broad money supply (M2) as the nominal anchor for monetary policy. • Then what role does monetary policy plays in ensuring economic growth and development.

32. The major role of monetary policy is to maintain price stability, in addition it also address exchange rate stability. • By maintaining both internal and external balances, monetary policy ensures economic growth through increase in output and thereby generating employment.

33. MONETARY POLICY AND THE ACHIEVEMENT OF VISION 2020 • Contemporary macroeconomics agrees that economic reforms stimulate economic transformation. • Economic reforms are deliberate policy actions instituted by the government of a nation to redirect the operations and processes in the economy. • Several studies have shown the importance of economic reforms to promote economic growth and developments. • The studies, there support the philosophy underlying the National Economic Empowerment and Development Strategy (NEEDS) and the Vision 2020.

34. The Vision 2020 agenda is building on the gains from NEEDS to promote a stronger economy. • The key features of Vision 2020 are: • Polity – By 2020 the country will be peaceful, harmonious and a stable economy. • Macro-Economy – A sound, stable and global competitive economy with a GDP of not less than US$900 billion and a per capita income of not less than $4000 per annum. • Infrastructure – Adequate infrastructure services that support the full mobilization of all economic sectors. • Education – Modern and vibrant education which provides for every Nigerian the opportunity and facility to achieve his maximum potentials and provides the economy with adequate and competent manpower.

35. Health – A health sector that supports and sustains a life expectancy of not less than 70 years and reduces to the barest minimum the burden of infectious diseases such as malaria, HIV/AIDS and other debilitating diseases. • Agriculture – A modern technologically agricultural sector that fully exploits the vast resources of the country, ensure national food security and contribute ssignificantly to foreign exchange earnings. • Manufacturing – A vibrant and globally competitive manufacturing sector that contributes significantly to GDP with a manufacturing added value of not less than 40%.

36. The Vision aims at restructuring the economy in favour of industry, increasing national and per capital incomes, improving the living standards of the people and ultimately reducing poverty in the country. The target of raising the level of the GDP form the current level of US$191.4 billion to US$900 billion in 2020, almost a five-fold increase, requires that all the sectors be made to work efficiently and effectively. 36

37. MONETARY POLICY AND VISION 2020 • Monetary policy has a lot contribute in the achievement of Vision 2020. • Its most important objective is to achieve and maintain price stability – stable prices or low inflation. • It is in the course of achieving price stability that it helps in the realization of other economic objectives such as growth in output and reduction in unemployment. • Central banks devote significant resources at their disposal to fight inflation because it is detrimental to economic growth.

38. An environment with relatively stable prices promotes macroeconomic stability, aids planning, encourages savings, investment and promotes higher standards of living, thus reducing poverty. • Indeed both theory and empirical evidence are in agreement that sustainable long-term growth is only possible in a regime of predictable low inflation. • It is only this type of macroeconomic environment that the Vision 2020 can be achieved. • In the last nine years, the CBN has seriously committed itself to fighting inflation under the framework of NEEDS. • The result has been salutary as shown in the table below.

39. Selected Macroeconomic Indicators

40. CBN had laid down a policy strategy not only to attain Vision 2020, but also to make Nigeria the Financial Hub of Africa. • The CBN had launched the Financial System Strategy 2020 (FSS 2020) to complement the Vision 2020. • The strategy is to make Nigeria Africa’s financial centre by year 2020. •  The FSS 2020 envisions to make Nigeria the safest and fastest growing financial system amongst the emerging markets and the mission is to drive rapid and sustainable economic growth primarily in Nigeria and Africa.

41. The FSS 2020 has been configured to develop and transform Nigeria’s financial sector into a growth catalyst so as to engineer Nigeria’s evolution into an international financial centre. • The strategies to be adopted include: • Strengthening the Domestic Financial Market • Enhance Integration with External Market • Build an International Financial Centre

42. OTHER CONDITIONS NECESSARY FOR THE ATTAINMENT OF VISION 2020 • Apart from monetary and financial stability, other necessary conditions for the attainment of Vision 2020 include: • Harmonious and consistent policy formulation and implementation • Political will that can see the initiative through and ensure continuity through the setting up bodies backed up by laws • The role of the judiciary is critical not only to stable polity but also contribute to economic development

43. There is need for massive prudent investment in enegy sector, particularly electricity generation and distribution as well as in petroleum refinery include: • Extensive road rehabilitation and construction of new ones • Develop the rail system, expand and modernise the airports and the seaports, • Improve the quality of education and health in order to ensure the provision of healthy manpower.

44. CONCLUSION • The paper discussed the role monetary policy could play in the attainment of Vision 2020. • A lot of work has to be done in both the financial and other sectors. The FSS 2020 was reviewed and seen to be in the right direction – towards achieving 2020. • Other necessary conditions for realizing the dream include effectiveness of government and its institutions; rebuilding infrastructure, especially energy, transportation and social services.

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