In the last of six series we conclude that, in line with Nigeria’s global economic aspiration, The Road to CBN Governorship must be built on independence
On July 1 2014 the Central Bank of Nigeria (CBN) will be 56 years old. If all goes as planned, it would be a month to the date after the successor of Sanusi Lamido Sanusi, the incumbent governor, would have been announced and confirmed.
For the incoming governor celebrating the 56th anniversary of the CBN will be the least of priorities. Rather, he or she will be preoccupied weightier matters such as getting to grips with the mandate of CBN.
The CBN’s mandate, established by an Act of Parliament in 1958 (and amended six times), is to ensure monetary and price stability; issue legal tender currency; maintain external reserves to safeguard the international value of the naira; promote a sound financial system and act as the Federal Government’s banker and economic and financial adviser.
An appointment during a pre-election year, at a time the global economy is recovering from the Great Recession and as the banker of a large and growing economy will put the next CBN governor under the spotlight.
What is more, the CBN governor is an unelected technocrat wields powerful tools and key economic decisions are in his or her.
Banking on development
Attention, too, will focus on how the CBN has aided economic development. Of late, the CBN has added developmental functions to its core objectives. The CBN in Nigeria has intervened in the Power, Aviation, and Agriculture sectors of the economy by setting up intervention funds with the aim of extending loans at low interest rates.
The creation of employment and provision of infrastructure are imperatives. The 2013 competitiveness ranking by the World Economic Forum shows Nigeria ranking lowest in terms of infrastructure and education.
A breakdown of the report identified weak institutions (ranked at 129th out of 148); ingrained corruption, undue influence, weakly protected property rights, insecurity (ranked at 142nd), poor infrastructure (ranked at 135th) and poor primary education (ranked at 146th) as the reasons for the country’s abysmal ratings.
An independent central bank is important in a resource-rich and developing country like Nigeria. The apex bank has a staff strength of 8,000 and a huge balance sheet (in 2012 for example the CBN generated gross income of N629.8 billion and made a surplus of N100.3 billion), and the many policy options available to it to maintain macro-economic stability and boosting growth (see article insert)
Independence, transparency and accountability
Does the size of its balance sheet coupled with its autonomy make the central bank a threat to democracy?
In an article, Africa: Geography and Growth, Paul Collier, economics professor at Oxford, credits former president Olusegun Obasanjo with making the CBN independent as a way of instituting a strong checks and balances and decentralizing public expenditure. Collier argues that such a system is best suited to a resource-rich and ethnically diverse country.
Collier contends that independent central banks are critical for checks and balances in a resource-rich country. Even more the role of central bank involves informing the society. “In the absence of a financial press central banks are the main independent institution of professional economic authority within the society able to command public attention. Central banks cannot afford to retreat into technocratic isolation. Electorates must be educated so that the mistakes of Africa’s past are not to be repeated during the present natural resource boom.”
To date, the CBN must be commended for fulfilling its role of managing the economy, intervening tin key sectors of the economy and educating the electorate.
The responsibility of an independent institution requires transparency and accountability. In other words, as Ben Bernanke, the outgoing chairman of the Federal Reserve (the central bank of the US) lately commented, “The Federal Reserve, like other central banks, wields powerful tools; democratic accountability requires that the public be able to see how and for what purposes those tools are being used.”
In July 2009 the CBN proposed to make monetary policy more open and transparent through “consultation procedures with bank executives prior to and after policy meetings”. Under, Sanusi Lamido, the monetary policies of the CBN has been conducted with transparency. This has boosted the credibility of the CBN and attracted investments to an economy that was scorched by the global financial crisis.
Nigerian banks and the financial system have bounced back from severe liquidity shortage, non-performing loans and loss of confidence.
The crisis next time
The CBN governor chairs the bi-monthly Monetary Policy Committee which sets the Monetary Policy Rate (MPR). During its 93rd MPC meeting on Jan 20 and 21, the first for the year, the MPC its commitment to a stable exchange rate regime”.
However, it listed four concerns: depletion of fiscal buffers following the continuing decline in oil revenue, rundown of reserves and depletion of excess crude oil savings; falling portfolio and FDI inflows; widening gap between the official and the BDC exchange rates; and creeping increase in core inflation.
The four concerns of the MPC are interrelated. Fiscal buffers are depleting, no thanks to oil theft, vandalism and leakages; capital inflows: Foreign Direct Investment (FDI) and Foreign Portfolio Investments (FPI) are falling. All these are likely to undermine ability to sustain foreign exchange stability – one of the core mandates of the CBN.
The exchange rate is the largest single input into inflation. Nigeria earns most of its foreign exchange from oil and the price of oil is volatile. And Nigeria’s import bill is humongous, spending as much as $11.5 billion on wheat, rice, fish, milk and sugar.
Price stability and a well-managed foreign exchange reserve are essential. But, as the MPC noted, “monetary policy is almost at its limits and needs support from the fiscal side in the form of excess crude savings if currency stability is to be maintained in the future.”
In its 2014 economic outlook FBN Capital noted that Nigeria’s economy was vulnerable to falling oil revenues because of “the predominance of oil in both budget revenue and foreign exchange inflows on the current account”. This is Nigeria’s Achilles heel.
It’ll be foolhardy to categorically say when the next economic crisis will happen. Invariably it will be a human phenomenon: financial panic. The CBN will use its toolkit of monetary policy to provide liquidity provision guarantee liability guarantees, restore confidence etc. But it will occur in a complex environment: Nigeria straddles the emerging and frontier markets Nigeria and will soon emerge as Africa’s largest economy, as the rebased GDP figures will show its GDP jumping by 60 per cent to $430 billion.
Sustaining success
The CBN’s single-digit inflation has been hailed as a rare success and its inflation target of 6-9 percent is considered attainable. A tight monetary policy and a stable exchange rate have, for the first time since 2007, resulted in single digit inflation. This feat is no mere feat.
Notably, also, yields on FGN bonds are largely higher other government bonds in the JP Morgan government indices. This is will be crucial going forward with dwindling revenues and falling oil production.
Going by the track record of the MPC meetings the CBN has the people and processes it’ll be a huge mistake to if parochial, petty and pernicious politicking gets in the way of appointing a credible and competent CBN governor. Even she or he is a dark horse.
By: TAYO FAGBULE
