What replaces Emefiele at the Central Bank?

In the coming weeks, President Muhammadu Buhari will announce to leave Godwin Emefiele in his position as the Central Bank of Nigeria (CBN) governor for another term of five years or appoint a successor. Since the CBN Act of 2007, no governor has been reappointed; so many analysts believe the President will announce a replacement for Emefiele. Indeed, while Chukwuma Soludo completed his term, President Goodluck Jonathan removed his successor Sanusi Lamido Sanusi before the end of his term.

Despite plenty rumours as to who occupies this seat in the coming five years, it is not the focus of this piece. The focus of this piece is “what”, and not who replaces Emefiele. Coincidentally, BusinessDay published the governor’s speech yesterday (see page 51), which helps in providing context to this piece. I will provide four further contexts, but bear in mind that this is not a comparison of the performance of CBN governors, which is difficult to do given that that performance relies on two variables outside their control – their bosses and oil price.

First, the management of the foreign exchange reserves and the value of the naira. In the BusinessDay’s article cited above, the governor said, “As the pressure increased in the foreign exchange markets, the CBN in April 2017, announced a strategy to further liberalise the market with the introduction of the investors and exporters window”. However, while this policy is a defining moment in his stewardship, it was because he was under pressure from the President that he maintained an unsustainable foreign exchange in 2016.

As Charles Robertson, Chief Economist at Rencap said in his piece published earlier this month “thoughts from a Renaissance man” and I quote “after two years of acute FX shortages, in Q2 2017, the CBN introduced a market friendly exchange rate for investors. Portfolio investors had greatly reduced their net inflows to just US$ 1.3 billion in 2016. The new FX rate led to a big jump back with a full year US$ 5.3 billion inflow in 2017”. The recession of 2016 cannot therefore be explained as an irretrievably outcome of the fall in oil prices, but an outcome of the disastrous policy at the time, especially given that the same governor wisely adjusted the FX rates twice in the preceding 6 months of President Buhari’s presidency – November 2014 and February 2015.

Second is the continuation of the special intervention funds started mostly by his predecessor Lamido Sanusi. As the governor argued in his piece “we increased our lending to the agricultural and manufacturing sectors through targeted intervention schemes such as micro, small, and median enterprise development fund (MSMEDF), Anchor Borrowers programme, commercial agricultural credit scheme and the real sector support facility”.

As a matter of principle, these are laudable initiatives. However, there is no doubt that these policies have become virtually permanent government subsidies outside of the government balance sheet, with semblance of unlimited scope, no plan towards an end, and most importantly, the public is at a loss if the programmes are achieving their set aims. This is important especially since it is common knowledge that the repayment ratio is abysmally low. So, what replaces Emefiele is important (and that could be him doing things differently), but these policies need review and more transparency.

Third is the handling of the banking institutions. While this is one aspect many will not remember, it is to his credit that there has been no major drama here. Nigerian banks suffer anytime following decline in oil prices. First, they suffer from exposures to the oil sector. Second, they suffer from devaluation of the Naira because of their exposures to foreign currency denominated loans. Third, they suffer as a result of increase in non-performing loans that arise following declining economic performance. In 2010, Lamido Sanusi treated it differently and sacked a number of CEOs. Undoubtedly, it was popular at the time, but it destroyed the value of the banks, and they were eventually sold or merged with stronger banks. But it was drama. Emefiele did the same with Diamond Bank and a stronger Access bank is acquiring the bank after the same kind of crisis. Good monetary policies are usually boring.
Fourth, there will also be the need to assess how the bank acts as the last lender of resort to the government. This has assumed a greater level of significance given the increasingly reliance of the federal government on the Central bank for funding, and the shrinking ability of the government to borrow if oil prices remain at the current trend. Godwin Emefiele, perhaps conscious of the economy has obliged the government considerably in the last four years, but it has severe implications for the economy. And in order to keep supporting the inflow of foreign exchange, stabilize reserves in the face of government’s excessive borrowing, and control inflation, the bank has kept the monetary policy rate high at 14%.

As I conclude, there is no doubt in my mind that successive Central bank governors have failed to convince their principals in government that there is what we can call the right economic policies. Some have also used this gap in fiscal policy to broaden their scope and powers. The broadening of the intervention funds are good examples of that. But most of them are motivated by the failing gaps in fiscal policies. And if those at the apex bank will be willing to admit the truth, the reason most of the intervention funds have achieved so little is because the fiscal dimensions of these problems cannot be solved by mere credit subsidization. So, as a country, and as the next CBN governor, their needs to be a sincere evaluation of the role of the bank in these measures.

In conclusion, it is therefore not about who replaces the governor or whether the governor remains, it is about what policies will replace those pursued in the last four years.
I thank you.

Ogho Okiti