Policy continuity, minus spotlight on corruption, expected at CBN

The independence of central bank policymaking is unlikely to be compromised under new governor Godwin Emefiele, despite misgivings around his predecessor Lamido Sanusi’s ouster.

Maintaining the naira’s currency band (N150-160/$ +/-3 percent) will continue to be the bank’s central priority as long as foreign exchange reserves remain above the $30-32 billion range (current reserves stand just over $37 billion).

Finance Minister Ngozi Okonjo-Iweala will be the predominant voice in economic policymaking in the early months of Emefiele’s tenure, which should reinforce policy continuity from the Sanusi era.

The politicization of Sanusi’s ouster in February raises legitimate concerns about central bank independence as Godwin Emefiele assumes his post on 3 June. A combination of factors suggests, however, that the new governor will not face similar pressure from the Jonathan administration. Unlike Sanusi, he is unlikely to veer outside of the traditional remit of monetary policymaking. He will not shed a public spotlight on the administration or national oil company NNPC over billions of dollars in missing oil revenues, for example. The Sanusi dismissal had little to do with monetary policy, but rather stemmed from his outspoken criticism of government corruption and waste. Emefiele will keep a low public profile on these issues, but will retain his predecessor’s core policy leanings. Over a long career at Zenith bank, his leadership style (and temperament) is said to have been reserved, cautious, and methodical — traits that will likely keep him out of political crosshairs, as seen in his rapid Senate confirmation in April.

Sources who have known Emefiele for a long time do not think this means he will be subservient or self-censoring, but simply focused on the core policymaking duties at the bank and private in his deliberations. The Jonathan administration is not likely to meddle directly in the central bank under Emefiele, having gotten a clear negative signal from markets after the Sanusi ouster. Potential amendments to the Central Bank Act, which would arguably erode the bank’s independence by making its board chairman another presidential appointee, are unlikely to be passed this year. The bank’s independence is in fact increasingly institutionalized from within, including in the monetary policy committee (MPC), the deputy governor positions and the professional ranks below. Emefiele will not be inheriting a cowed institution but one that sustained Sanusi’s policy priorities in the interim period since February and has momentum to continue in that direction. These positive developments in the central bank transition do not change our short term political risk trajectory from negative to neutral but we will move towards such a shift if President Jonathan continues to consolidate his control over the ruling People’s Democratic Party (PDP) ahead of his upcoming re-election announcement.

The composition of the MPC remains mostly intact from the Sanusi era and its members are likely to maintain naira stability as the overriding priority ahead of February 2015 elections. Emefiele’s forceful support for that policy during his Senate confirmation hearing suggests there will be broad policy alignment on this front, though the consensus will be strained should reserves fall to the $30-32 billion range (the last naira peg move happened in November 2011 when reserves hovered around $32 billion.) Should reserves fall another $5 billion there will certainly be voices in the MPC (including interim governor Sarah Alade) calling for a shift in the currency band, possibly to N155-165/$ or N160-170/$. The first MPC meeting with Emefiele as governor on 21-22 July will provide an early indication of his policy orientation, especially if reserves fall further in the interim. There is little political pressure on the central bank to stop defending the naira band of N150-160/$+/-3 percent at the moment. The Jonathan administration knows that a devaluation in the import-dependent economy would hit pocketbooks hard and potentially spur inflation. If anything, economic advisors in the presidency may be more comfortable with a deeper foreign exchange drawdown to defend the naira than the technocrats at the bank.

On the benchmark lending rate, on the other hand, unions, local business associations, and politicians in both the ruling PDP and the opposition All Progressives Congress (APC) are clamoring for lower interest rates to bolster lending in the real economy in light of relatively low inflation at about 8 percent. The benchmark rate, which has remained at 12 percent for about two years, has become more politicized than the defense of the naira in recent months. The bank is not likely, though, to lower the rate now as it remains concerned about election-year profligacy and any upward creep of inflation (or growing divergence between headline and core inflation). Bank officials appear committed to a ‘stay the course’ policy direction absent a major shock, which would only support more tightening. Emefiele does not seem ideologically opposed to eventual easing, however, and has highlighted job creation and credit availability as priorities that cannot be ignored by the bank. Another two-year spell without any benchmark rate easing is improbable, particularly once elections are done.

Emefiele’s real test in safeguarding the central bank’s independence may come less from politicians than from bankers. The banking sector is lobbying against recent hikes in the cash reserve ratio (CRR) on public funds, which now stand at 75 percent (and at 15 percent on private funds). Most analysts think these measures have helped mop up excess liquidity while pushing banks to lend more to the real sector. Should Emefiele wind this policy back and cut CRR on public and private funds early in his tenure, this could raise questions about ‘industry capture’ (or at least the perception thereof) coming on the heels of the governor’s long career in the Lagos banking sector. On balance we think Emefiele will resist potential pressure from his former banking sector associates, including his longtime mentor (and well-known PDP fundraiser) Jim Ovia, but his policy leanings on CRR may be an early signpost of his willingness to counter the interests of the commercial banking sector.

Emefiele’s learning curve, reserved leadership style and the likely narrowing of the central bank’s policy agenda will probably shift (even) more weight to Minister Okonjo-Iweala in macroeconomic policy debates. Policy-wise she is likely to be in alignment with Emefiele on the core issues, including maintaining the current naira band and benchmark lending rate absent a major shock to the economy. This reinforces the likelihood of monetary policy continuity under Emefiele, at least at the outset of his tenure. While Minister Okonjo-Iweala may overshadow the new governor, she is unlikely to encroach upon traditional central bank territory, with her hands full on pre-election fiscal management.

Philippe de Pontet