Emefiele’s rhetoric tests reality as CBN’s policy limits exposed

On his first day on the job last week, Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), set out his vision of maintaining stability in the Nigerian currency, while signalling that policymakers might gradually start cutting interest rates.

By the end of the week, however, the naira had eased to a two-month low of N164.4 against the dollar at the interbank market as investors fretted that falling interest rates could lead to a panic sell-off in the currency.

The sell-off in the naira highlights the limited policy options available to the CBN in achieving its set objectives as global carry-traders doubt Emefiele’s ability to simultaneously lower rates while keeping the naira firm.  

“The bar, in terms of assessing the credibility of policy (for Emefiele), is likely to be higher, given the challenges the Nigerian economy currently faces,” said Razia Khan, regional head of research, Africa, at Standard Chartered Bank, in a response to questions. 

“In an environment where fundamentals (weaker oil receipts, a smaller current account surplus as a percentage of rebased GDP, a worrying security backdrop) may not necessarily support FX stability, addressing the limitations on FX stability in as non-disruptive a manner as possible will be key,” Khan said.

Investors have recently been concerned by the suspension, earlier this year, of the country’s respected former central bank governor, Lamido Sanusi, and by growing security challenges.

Adding to the challenges for the new CBN governor is the growing influence of external factors, such as foreign investors, in determining naira stability. Analysts estimate that foreign holdings of Nigerian equities and local-currency bonds and treasury bills fell this year by 25 percent to $17 billion.

Official dollar reserves declined by $1.2 billion in May to $37.0 billion, the lowest level recorded since the bullish announcement by JP Morgan in August 2012 that it would include three FGN bonds in its emerging market indices.

“Reserves as at mid-May provided nine months’ import cover…which would be a sufficient cushion, were it not for Nigeria’s hearty import appetite and limited productive base,” said Gregory Kronsten, FBN Capital analyst, in a June 5 note.

Ayo Teriba, chief executive officer, Economic Associates Ltd, reckons that the biggest challenge for Emefiele will be keeping the good components of Sanusi’s approach to monetary policy, while overcoming weaknesses that became glaring in the last three years.

“The problem with the Lamido era was that beyond the transparency, the striking features of monetary policy deliberations were their lack of depth, breadth, or intellectual rigour. Real activity crept out of the MPC deliberations, which became two narrowly focused on money flows between the CBN, banks and government,” said Teriba.

“For so many years, monetary policy deliberations have had nothing to say about supply-side issues of employment, unemployment rate, wages and incomes, or the practical implications of labour market conditions for monetary policy decisions,” he said.

The unemployment rate reached 27.4 percent in 2012 from 12.7 percent in 2007, the government said in its mid-term report released last year.

Emefiele said in his speech last week that he wanted the central bank’s mission to include “development banking”, aimed at cutting unemployment and raising Nigerians out of poverty.

Limits to that goal include the weak transmission mechanism of monetary policy, low financial inclusion, and Nigeria’s still huge informal sector.

Nigeria, which leapfrogged South Africa this year to become the largest economy in Africa with a GDP of $489 billion, expects its economy to expand by 6.75 percent this year, according to Ngozi Okonjo-Iweala, finance minister.

The figure, while impressive, is still below the potential double-digit growth rate that could be achieved by fixing power supply issues, accelerating reforms and improving the ease of doing business in the country, analysts say.

Moving the needle on these reforms to boost growth mostly falls beyond the remit of the central bank, once again exposing the limits of translating Emefiele’s wish list into reality.

PATRICK ATUANYA