The Central Bank Governor’s Failing Score Card, By Femi Akinfolarin
…the CBN governor’s score card is one of failed monetary policy, racing inflation, massive fall in the value of the naira (which could have been staunched by now), collapse of the manufacturing sector and weakening of banks. His principal needs to understand and appreciate that this legacy is shared by both of them, and he either acts swiftly to change this or lose resoundigly in 2019.
All over the world, central banks are responsible for two primary activities. The first is the management of the monetary system of a nation, with all it entails, while the second is the supervision and management of the banking systems within the country. As part of a Central Bank’s focus on monetary policy, it monitors, targets and manages inflation. whilst ensuring price stability. As part of its management of the banking sector, the Bank acts as the lender of last resort to the banks within that sector. Fiscal policy development and implementation is left to the government of the day. So basically, a central banks score card is really how well it manages price stability, inflation and the strength of the banking system.
On the fiscal policy side, the government of the day determines its priorities and implements strategies to drive the achievement of those goals, for example the decision of the Buhari government to run an expansionary budget with strong infrastructural spending is designed to ensure that the economy is reflated and our GDP starts to grow once again. In a perfect situation, the two sides, monetary and fiscal policies, should work together to ensure low inflation, full employment and GDP growth.
The Central Bank of Nigeria has continued to perform well below expectation in all the above indices, with the attendant impact on the Nigerian populace. Inflation is the highest it has ever been at over 18 percent, official unemployment is now about 13 percent, while youth unemployment is through the roof at 24 percent. The GDP has shrunk with the economy officially in recession, whilst the value of the Nigerian currency, the single item by which most Nigerians can judge the performance of the CBN, has completely collapsed.
Of all the above, it’s with regards to the ham-fisted handing of the naira that we should judge the CBN governor the most. Mainly because that is what has had the most impact on the ordinary man on the street. A currency’s value against other currencies is a measure of a number of things. Things like the rate of inflation; current account deficits; terms of trade; public debt and political stability. There are also some intangibles to be considered, majorly the perception of a central bank governor’s words. Do institutional investors believe that the governor will do what he says? An example was the way the international markets believed the current Emir of Kano when he was CBN governor, and proclaimed that he would defend the naira to the best of his abilities and never devalue the currency. This current governor enjoys no such credibility and the abysmal way he has handled the currency liberalisation regime has contributed strongly to the devastating destruction of its value.
There are many examples of this trend; for example, the Central Bank governor, last year, announced a new currency policy where the naira would be allowed to float and find its level, as well as the introduction of a platform where sellers and buyers of the currency could meet and trade the currency without any interference from any quarter. He then promptly forced banks to keep within a narrow band of N305 – N315 to a dollar, when selling the naira. Similarly, he forced oil and gas companies to sell within a similar band, therefore creating a floor below the naira that kept all institutional funds out of the country, creating a shortage of foreign currency that then led to a further depreciation in the value of the naira. Only yesterday, the naira was trading at N500/$1 at the black market. Nigeria currently has at least 6 different price regimes for forex. One for banks; one for oil and gas companies; another for pilgrims; one for black market operators; one for importers on the approved importation list; and one for traders who are desperate, which usually has about a N10 mark up on the black market.
One of the things that institutional investors wanted to know from the federal government team that just raised the $1billion Eurobond was when our currency regime would be truly liberalised. They were worried about bringing in their funds when there was a possibility that they might not be able to repatriate these funds at proper value later.
Another example is the fact that the Monetary Policy Committee has raised the monetary policy rate to 14 percent and kept it there in a vain attempt to target inflation for two consecutive quarters. However during this same period, narrow money (naira notes and coins) in circulation has increased to over N10 trillion, implying that either the CBN is printing money or money is flooding into the country from some subterranean vault.
With regards to its banking sector supervisory role, under the current administration, the Central bank allowed Heritage Bank to acquire Enterprise Bank, while Skye Bank was permitted to acquire Mainstreet Bank. But guess what? Both acquiring banks are currently experiencing what can only be defined as ‘assisted living’, as the acquisitions have stretched them substantially beyond their capabilities.
One of the things that institutional investors wanted to know from the federal government team that just raised the $1billion Eurobond was when our currency regime would be truly liberalised. They were worried about bringing in their funds when there was a possibility that they might not be able to repatriate these funds at proper value later. In fact, the Eurobond issue mainly succeeded because it was such a small amount and there was significant pent up demand for higher yield asset amongst European institutional investors.
Add on top of all these, the allegations coming out of the National Assembly last week that certain oil and gas majors have had to sell foreign exchange to certain principals of the current regime, and it’s time to be truly alarmed. It’s also pertinent to note that this is the same Central Bank governor who allowed the erstwhile National Security Aadviser in the last administration to use vans to move monies out of the central bank vault, Idi Amin style.
In conclusion, the CBN governor’s score card is one of failed monetary policy, racing inflation, massive fall in the value of the naira (which could have been staunched by now), collapse of the manufacturing sector and weakening of banks. His principal needs to understand and appreciate that this legacy is shared by both of them, and he either acts swiftly to change this or lose resoundigly in 2019.
Femi Akinfolarin, a lawyer, writes from Lagos.