Peace
Many will regard the best days of the last Central Bank of Nigeria (CBN) governor, Chukwuma Soludo as the days after consolidation until 2008. During this period, consolidation helped transform the financial landscape of the country. All the parameters of banking industry changed in those years. Nonetheless, I disagree that those were Soludo’s best days. His best days were the days he had to respond to the global financial crisis.
Soludo’s response to the global economic crisis was the classic central bank response to crisis. Indeed, he demonstrated the beauty of monetary economics, anchored on the Bagehot principle. Two responses are worth mentioning. The depreciation of the naira was spot on and adequate to prevent a run on the naira and preserve the foreign exchange. Second, the CBN started monetary easing as soon as it suspected credit crunch. In doing this, Soludo exhibited all the powers of monetary policy in preventing a banking crisis. Especially, Soludo demonstrated brilliant understanding of the separation and the coordination required between individual bank risks and systemic risks. So, Soludo’s economics was spot on.
However, his politics was absolutely wrong and that was the genesis of all his problems.
Now enter the ninth Nigerian governor of the CBN, Sanusi Lamido Sanusi (hereafter SLS). Intelligent, brilliant, thoughtful, good debater, and above all, has a stable temperament. The president made a fantastic choice to lead the next transformation of the CBN. For the next five year, SLS will be saddled with the goals of monetary policy. The broad aspects of these goals remain the same, and they are the following: maintain or improve (at least in our case) price stability or stability in the value of money, provide a monetary policy platform for sustained economic growth, and maintain financial stability. However, there are some serious and immediate challenges.
The second and third round implications of the global economic crisis remain a challenge. SLS will be expected to provide a continued monetary policy response to the crisis. The monetary ease of the past year has prevented banking crisis and failures. The CBN, under Soludo had used all the tools of monetary policy, including open market operations, discount window lending or the extended version, changes in reserve requirements to achieve the important aim of preventing a bank failure and the systemic risk that would have followed. Thus, one of the challenges confronting SLS is determine when to strengthen monetary policy, as we all know that a continuation of this pronounced monetary ease for any length of time, almost inevitably, leads to inflation and speculation (or another round, some will say).
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Another immediate challenge is to attend to the perceived risk in the banking industry. There is an apparent low confidence in the industry. The confidence of the Nigerian public had become shaky at the back of the role of the banking industry in the capital market, very limited accounting information disclosures, illegal share buy-back, diminished profits in the industry, weak balance sheets following margin loans issues and losses suffered when oil price declined last year. All these have combined to give an impression of a banking crisis. SLS will be required to put in place concrete measures to separate the myth from reality.
Indeed, with the banking consolidation, the way the economic crisis of the last year has impacted on the industry, and the way the banks respond to the risks they face have become very significant. How important is this appointment that the embodiment of risk in the banking industry is now going to carry the entire risk of the industry?
SLS will also be very aware of the continuous threat of inflation in the Nigerian economy. More importantly, he will be aware that, despite the progress we have made on inflation in the last few years, inflation is such that it can creep back as one of our nightmares. Since late last year, at the back of naira’s depreciation, fuel crisis, and general uncertainty macroeconomic outlook, the rate of inflation has been on the rise, albeit steadily. However, the greatest problem with our inflation figure is data. Helping with improvement in data will be critical in the next five years.
The expansion that the economy craves will depend critically on how much support it can get from infrastructure. This is not only the physical infrastructure that the government is working to provide. The expansion of economic activity also depends on infrastructure on monetary transaction. Despite progress, our monetary transaction process is still slow, cumbersome, random, and fairly untraceable. This is an impediment for a modern economy or one seeking to be one. The central bank that SLS will lead will be expected to lead in this direction!
Further down, SLS will be expected to work towards monetary union in the region. Ours is the largest economy in the West African sub-region and our leadership has been critical in this respect. Except we continue to lead, monetary union will remain a myth. So, with all these challenges and risks, it is welcome to a risk man.
