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Key points from Cardoso’s first speech as CBN governor

 Olayemi Cardoso, Nigeria’s latest Central Bank governor, made his first policy speech since becoming governor in September, at the Chartered Institute of Bankers of Nigeria’s annual dinner in Lagos on Friday.

Cardoso in his much-awaited speech signaled further interest normalisation, an increase in banks’ capital base and the adoption of an explicit inflation-targeting framework to enhance the effectiveness of monetary policy.

Here are 7 key points from his speech:

Bank Recapitalization

In light of Nigeria’s projected economic expansion, Cardoso underscored the need to assess the banking industry’s capacity to meet the demands of a larger economy. As an initial step, Cardoso announced that banks would be mandated to increase their capital base“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? I believe 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,” Cardoso said.

1 Trillion Economy in 7 years, not 2-3 Years

In line with the Policy Advisory Council report on the national economy released earlier this year, Cardoso noted that the administration’s ambitious goal of achieving a $1.0 trillion Gross Domestic Product (GDP) will be within the next seven years, not three years, which will be accompanied by a clear roadmap of priority areas and strategic initiatives“Attaining this substantial target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels,” Cardoso said.

He noted that the administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidies and the unification of the foreign exchange market rate.

“The removal of petrol subsidy and the adoption of a floating exchange rate, among other government policies, are anticipated to have positive effects on the economy in the medium-term. These measures are expected to enhance investor confidence, attract capital inflows, stimulate domestic investment, and ultimately improve the level of external reserves. Additionally, they are expected to contribute to the stabilization of the domestic currency.”

Banks Might not Pass a Proper Stress Test

Despite facing various challenges, Nigeria’s financial sector has shown resilience in 2023, with key indicators of financial stability generally meeting regulatory requirements.

However, stress tests conducted on the banking industry have revealed underlying vulnerabilities, suggesting that banks’ ability to withstand sustained economic and financial stress is limited to mild-to-moderate scenarios.

“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,” he said.

Authorised operator going beyond breech will be sanctioned

He noted the pivotal role of technology in providing financial services and boosting financial inclusion. Nevertheless, he cautioned that any licenses exceeding their prescribed boundaries would face sanctions.

“Technology will 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 non-compliance will be subject to sanctions, as operators have the responsibility to ensure that they are licensed for the activities they undertake,” Cardoso said. Cardoso noted that according to the Central Bank of Nigeria Act 2007, it requires that the meeting of the Monetary Policy Committee of the Bank be held at least four times a year, and the Bank has satisfied this requirement for 2023

“For the avoidance of doubt, the Central Bank of Nigeria Act 2007 requires that the meeting of the Monetary Policy Committee of the Bank be held 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 the CBN is confident that with continued tightening measures for the next two quarters, it will be able to effectively manage inflation.

“While absolute inflation is still rising, the declining rate of growth indicates progress. I am happy to report that our efforts over the past two months have begun to yield fruit,” he said.

“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,” Cardo said

 New FX system not ready so for now NFEM

Cardoso expressed apprehensions regarding the readiness of the new FX market to handle the Nigerian Foreign Exchange Market (NFEM).

He pointed out that the 43 items restricted under the previous administration have exacerbated the premium between the parallel and official markets, that such trade policy is primarily the purview of fiscal authorities and that the CBN’s involvement in such matters extended beyond its core responsibilities.

“Allow me to provide further clarification on the issue of the 43 items. Firstly, it is important to note that these items were never outrightly banned by the government. The CBN had imposed restrictions on their access to foreign exchange in the official market. “However, these restrictions resulted in increased demand for foreign exchange in the parallel market, leading to the depreciation of the exchange rate in that segment of the Nigerian Foreign Exchange Market (NFEM) and widening the premium between the parallel and official market.

Refocus on CBN core mandate and proper governance

CBN Governor Olayemi Cardoso acknowledged that the Central Bank of Nigeria (CBN) had deviated from its core mandates and engaged in quasi-fiscal activities that injected over 10 trillion naira into the economy through various initiatives across diverse sectors such as agriculture, aviation, power, and youth development.

According to Cardos, those activities had “clearly distracted the Bank from achieving its own objectives and taken it into areas where it clearly had limited expertise.”

“Ladies and gentlemen, 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,” Cardoso said. As an adviser to the government, Cardoso noted that the CBN will be repositioned as a catalyst for economic stability and growth.

“Instead of direct interventions, we will collaborate with stakeholders and formulate policies that create an enabling environment for sustained economic growth and development. Our catalytic role will support increased investment and private sector participation in the economy, improve access to finance for MSMEs, and enhance financial services for the underbanked. “Central banks are known as banks of last resort because they underpin the financial system. To do so effectively will require rebuilding and restoring trust in the Central Bank of Nigeria. Let me assure you that I am irrevocably committed to that calling,” he added

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