Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), was nominated by President Muhammadu Buhari for a second five-year term in office Thursday, making him the first CBN governor to keep his job for a second term since the end of military rule two decades ago.
Although the appointment remains subject to the Senate’s approval, there are four key implications of a second term for Emefiele.
It’s hard to argue it won’t be more of the same, in terms of policies, when Emefiele has a second go at the helm of the CBN.
There are wide expectations for sustained exchange rate stability, which Emefiele so vigorously pursued during his first tenure, even if it comes at the cost of burning through the external reserves.
The market rate for the naira has hovered tightly around N360-N363 per US dollar for almost two years now while the defacto CBN rate holds steady at N306 per dollar.
The naira barely bulged last year when fears of interest rate hikes in the US led to fund reversals from emerging markets and sent their currencies plummeting.
It was Emefiele’s resolve to keep the naira steady, by increasing the CBN’s dollar interventions and mopping excess naira liquidity, that shielded it from the emerging market currency rout.
If global oil prices and local production stay healthy, you wouldn’t bet against a stable exchange rate. With the right firepower, Emefiele has demonstrated with his first term that the CBN will defend the naira.
Meanwhile, there’s a good chance Emefiele retains his signature multiple FX rates practice.
Interest rates and bank lending
Interest rates are unlikely to let up in the short term.
Emefiele’s commitment to exchange rate stability and his target of single-digit inflation rate means continued monetary tightening through OMO auctions and other strategies like keeping effective Cash Reserve Requirement (CRR) for the banks closer to 40 percent than the benchmark 22.5 percent.
A tight monetary environment would restrain banks from lending, which has pretty much been the case for more than three years now.
Rather than lend to the real sector in an economy fraught with risks from inadequate infrastructure to weak consumer demand, banks- especially the big lenders- have opted to park cash in high yielding government securities.
The big lenders from GTB to Zenith saw their loan books shrink in 2018 for the third year running, even when the initial guidance was for a 10 percent expansion in loans.
Some have again guided towards growing their loan books this year as they rediscover appetite for retail lending but admit that a tight monetary environment is the biggest threat to their plans.
Focus on agriculture and manufacturing
With Emefiele bent on getting the banks to lend to the real sector at affordable rates, his reappointment almost guarantees a continuation in CBN interventions for the agriculture and manufacturing sectors.
As an incentive for banks to lend to the agriculture and manufacturing sectors, Emefiele told the banks last year that any of them that lent money to either of those sectors at single digit rate interest rates could apply to get the funds from the cash reserve they have stashed with the CBN.
There’s isn’t enough data to suggest the banks are falling over one another to lend to those sectors as a result of the CBN incentive.
Boon for local producers
Perhaps the biggest implication of Emefiele’s reappointment is that the Central Bank will continue supporting local producers at the expense of importers.
There’s a chance more items make it to a list of 42 items whose importers are banned from buying FX from official channels.
Emefiele remains desperate to send a signal that the CBN is willing to support local production and promote non-oil exports as a means of diversifying the country’s dollar revenue stream.
It will be more of the same in the next five years whether it be by introducing additional intervention schemes for local manufacturers or letting the hammer loose on importers of items that can be sourced domestically.
