The central bank must see the light itself

Now that Nigeria has a new president-designate, albeit subject likely to challenge in the courts, it seems timely to look at the sensitive matter of central bank autonomy. The role and performance of the Central Bank of Nigeria (CBN) and its governor, Godwin Emefiele, did feature in the election campaigning. The mutterings were mostly negative. This trend is fraught with risk because of conventions and legislation that sets out the independence of the CBN and the monetary policy committee. (We are avoiding the debate about the governor’s own political manoeuvring ahead of the elections.)

If policymakers have a model of what we can broadly term a market economy, then they must accept that institutional investors and other participants attach great importance to central bank autonomy. Brazil’s President Lula has been making some high-profile criticisms of monetary policy. In mid-February he argued that the policy (Selic) rate of 13.75 per cent was too high and the bank’s inflation target of 3.25 per cent was too low.

The exchange-rate regime has many critics but the CBN should be allowed to make policy changes itself. Discreet prodding from politicians is legitimate (and universal) but the central bank must be seen to set the agenda

The target, he said, should be raised to reflect “Brazilian standards” and then the policy rate could be lowered. Lula was elected to the presidency last year on a platform of poverty reduction and more rapid growth. The market response to his interventions has been pressure on the exchange rate as well as a rise in inflation expectations and domestic bond yields. They have also contributed to selling pressure on the stock market.

Read also: Managing nigeria’s debt portfolio

The South African Reserve Bank (SARB) has come under periodic pressure over its orthodox monetary policy. At the height of the Covid-19 pandemic, which hit South Africa more than any other country on the continent, some trades union leaders and elements in the ruling African National Congress (ANC) demanded direct intervention in the economy by the bank and closer alignment of monetary with fiscal policy. We would argue that the SARB’s stance is required to compensate for fiscal profligacy.

As we approach the most closely contested legislative elections under majority rule, due in 2024, we can anticipate fresh attacks on the SARB from the more radical wing of the ANC and market turbulence in response. Although it had to go to court in 2017 in the face of an attempt to amend its constitutional mandate, it has held the line.

The same cannot be said of Turkey, where the view of the president, Recep Tayyip Erdoğan, is that higher interest rates lead to higher prices. In January inflation slowed to 57.7 per cent year-on-year and in February the monetary policy committee trimmed the policy rate by 50bps to 8.5 per cent, which brought the easing since September to 10.5 percentage points. We can give the committee the benefit of the doubt because it met after the earthquake. That said, the president has placed family and close allies in the finance ministry and central bank to impose his thinking. Foreign portfolio investors (FPIs) have mostly given up on Turkey, and in three years the lira exchange rate has crashed from USDTRY6.5 to USDTRY18.9. The lessons would appear to be: don’t undermine the autonomy of the central bank and don’t install your cronies in the top posts.

Returning to Nigeria, the election manifesto of the victorious APC pledges to “preserve the independence of the central bank”. We trust that it will honour the pledge because to do otherwise would damage investor sentiment. The nihilists may say that the administration can do as it pleases because foreign investors have exited local markets (other than those unable to remit because of the administrative fx allocations of the CBN). They may point out that Argentina, which has had more IMF programmes than any other country, has transited several times from zero to hero standing.

This thinking consigns Nigeria to further decline in our view. The parallel with Argentina may look convincing, However, it ignores the reality that, unlike Nigeria, it is on the radar of foreign portfolio investors (FPIs) in the US, the largest source of capital for the emerging market universe.

The exchange-rate regime has many critics but the CBN should be allowed to make policy changes itself. Discreet prodding from politicians is legitimate (and universal) but the central bank must be seen to set the agenda. The extreme step of dismissing the messenger carries many risks. A previous CBN governor was suspended in February 2014. The FPI community was not happy because they liked the direction favoured by the incumbent and had some valid questions about the legal grounds for the suspension.

The market impact was contained because we were still in the Africa rising mindset at the time and investors still gave the federal government (FGN) the benefit of the doubt to the direction of its economic policy. The age of Africa rising now seems a distant memory and there has been steady deterioration on the current account. We may hope and some may pray for “market-determined” exchange rates and indeed other changes at the CBN but these must come from within and not be externally imposed.