Download an overview of the nigerian economy

By
C. M. ANYANWU
DEPUTY DIRECTOR OF RESEARCH
CENTRAL BANK OF NIGERIA, ABUJA
OUTLINE
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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
2
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
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.
4
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.
5
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
6
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.
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
Structural Change in GDP
1960
1970
1981
1990 2000
2003 2004 2005 2006 2007
Agriculture
64.1
47.6
33.6
37.9
42.7
41.0
41.0
41.2
41.7
42.2
Manufacturing
4.8
8.2
5.6
4.5
3.4
3.6
3.7
3.8
3.9
4.0
Crude Oil
0.3
7.1
29.2
30.6
26.0
26.5
25.7
24.2
21.8
19.4
Building & Const.
NA
NA
4.1
1.6
2.0
1.4
1.4
1.5
1.6
1.7
Wholesale & retails
NA
NA
13.9
13.4
13.1
12.6
12.9
13.8
15.0
16.2
Services
NA
NA
9.8
8.2
11.2
12.3
14.7
15.2
15.7
16.2
NA = Not Available
9
Growth Rate of Selected Macroeconomic Indicators
Growth Rate of
Index of Agric Capacity
Prod.
Utilization
YEAR
Growth Rate of
Real GDP
Inflation
(Y-O-Y)
AVERAGE
(1980-1989)
2.2
24.8
7.2
45.0
AVERAGE
(1990-1999)
3.0
30.2
4.4
35.1
AVERAGE
(2000-2007)
6.2
13.0
4.9
46.4
Structure of GDP in 1981
Structure of GDP in 1960
Services, 9.8%
Crude Oil, 0.3%
Manufacturing,
4.8%
W & R, 13.9%
Agriculture,
33.6%
B & C, 4.1%
Crude Oil, 29.2%
Manufacturing,
5.6%
Agriculture,
64.1%
Structure of GDP in 2007
Services,
16.2%
W & R, 16.2%
B & C, 1.7%
Agriculture,
42.2%
Crude Oil,
19.4%
Manufacturing,
4%
11
 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.
12
 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.
13
 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.
14
 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
 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.
16
 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.
17
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
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
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
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
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
 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 reengineering 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).
23



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
24
 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.
25
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
26
 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
27
 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.
28
 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.
29
 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.
30
 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.
31
 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.
32
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.
33
 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.
34
 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%.
35
 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$900 billion in
2020, almost a five-fold increase, requires that all the
sectors be made to work efficiently and effectively.
36
MONETARY POLICY AND VISION 2020
 Monetary
policy has a lot contribute in the
achievement of Vision 2020.
 Its most important objective is to achieve and
maintain price stability – stable prices or low inflation.
 It is in the course of achieving price stability that it
helps in the realization of other economic objectives
such as growth in output and reduction in
unemployment.
 Central banks devote significant resources at their
disposal to fight inflation because it is detrimental to
economic growth.
37
 An environment with relatively stable prices promotes
macroeconomic stability, aids planning, encourages
savings, investment and promotes higher standards of
living, thus reducing poverty.
 Indeed both theory and empirical evidence are in
agreement that sustainable long-term growth is only
possible in a regime of predictable low inflation.
 It is only this type of macroeconomic environment
that the Vision 2020 can be achieved.
 In the last nine years, the CBN has seriously
committed itself to fighting inflation under the
framework of NEEDS.
 The result has been salutary as shown in the table
below.
38
Selected Macroeconomic Indicators
Average
1991-1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Average
1999-2007
24,113.9
42,938.0
59,451.3
59,388.0
65,208.6
80,320.1
89,866.1
111,569.3
130,159.6
161,336.0
89,121.7
Real GDP Growth Rate2.1
1.2
4.9
4.7
4.6
9.6
6.6
6.5
5.6
6.5
5.6
Inflation Rate (%)
Year-on-Year
37.2
0.2
14.5
16.5
12.2
23.8
10.0
11.6
8.6
6.6
11.5
Capacity
Utilization (%)
33.0
34.6
36.1
42.7
54.9
56.5
55.7
54.8
53.3
53.5
49.1
Average Exchange
Rate (N/$)
19.8
92.7
102.1
111.9
121.0
129.4
133.5
132.1
128.7
125.8
119.7
Interest Rate (%)
22.8
(Prime Lending Rate)
21.3
21.3
26.0
20.6
19.6
18.9
17.8
17.3
16.9
20.0
External Debt
Stock (% of GDP)
34.7
54.2
42.8
45.0
49.3
45.2
42.9
18.5
2.4
1.9
33.6
External Reserves
($ million)
3,548.5
5,450.0
9,910.4
10,415.6
7,681.1
7,467.8
16,955.0
28,279.1
42,298.0
51,333.2
19,976.7
Growth in M2
30.6
33.1
48.1
27.0
21.6
25.0
12.3
34.6
30.6
30.9
29.2
GDP Per Capita (N)
39
 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.
40
 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
41
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
42
 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.
43
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.
44
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