Kingsley Moghalu served as Deputy Governor of the Central Bank of Nigeria, appointed by President Umaru Yar’Adua, from 2009-2014. As Deputy Governor in charge of Financial System Stability (FSS) and later Operations, he played a critical role in the execution of vast reforms in the banking sector and payments system initiated by the CBN Governor Sanusi Lamido Sanusi.
As a member of the CBN Monetary Policy Committee, Moghalu also contributed to the formulation of monetary policy that successfully reduced inflation in Nigeria from a double-digit 14 percent to a single-digit 8 percent by 2014.
After his five-year tenure at the apex bank, Moghalu was appointed a Professor of Practice in International Business and Economic Policy at Tufts University’s Fletcher School of Law and Diplomacy in Massachusetts, USA. He was named a member of the Editorial Board of Central Banking, the preeminent global journal of central banking policy, practice, and institutional framework.
He was also appointed Member of the Advisory Council of the Official Monetary and Financial Institutions Forum (OMFIF), an independent network of global asset management firms, sovereign wealth, and pension funds headquartered in London and with a combined $43 trillion in investable assets. He served as Special Envoy of the United Nations Development Programme (UNDP) on Post-Covid Development Finance for Africa in 2021 and as the Oxford Martin Visiting Fellow at the University of Oxford.
Before he returned to Nigeria in 2009 as a CBN Deputy Governor, Moghalu had worked in legal, political, and external affairs roles in the United Nations, and in risk management and development finance responsibilities in the $14 billion Global Fund in Geneva, Switzerland for 17 years.
He was educated at the London School of Economics, where he obtained his Ph.D. in International Relations, The Fletcher School at Tufts University (M.A.) , and University of Nigeria, Nsukka (LL.B. Honors) as well as certificates of risk management from the Institute of Risk Management in London, UK, macroeconomics and financial management, leading economic growth, and corporate governance from the International Monetary Fund (IMF) Institute, Columbia Business School, Harvard Business School and Harvard Kennedy School of Government.
Kingsley Moghalu is the CEO of Sogato Strategies LLC, a Washington DC-based macroeconomic and geopolitical risk advisory firm that advises global institutional investors with interests in sub-Saharan Africa including Nigeria, and the President of the Institute for Governance and Economic Transformation (IGET), a public policy think tank with headquarters in Abuja. He is the author of several books including Emerging Africa: How the Global Economy’s ‘Last Frontier’ Can Prosper and Matter.
Businessday interviewed Kingsley Moghalu on the triple crisis of Nigeria’s economy, forex instability, and the CBN as an institution.
Nigeria’s economy is in dire straits. What is the fundamental problem with our economy, and how can it be fixed?
We can begin at a level I call the level of the obvious. We depend on the export of crude oil and lack a truly diversified economy in terms of what we export and earn foreign exchange and overall revenues from. When a country relies on one commodity for 90 percent of its forex revenue and 70 percent of its revenue overall, that is a strategic risk. That country is in trouble. Then we have the problem of very low levels of electricity generation, distribution, and transmission. 4,000 megawatts or less.
This means that our economy simply cannot be a productive one. We also have serious problems of unemployment and structural inflation that arise from the absence of electric power. Industries are dying and productivity is low, jobs are not being created, and because generators are the default supplier of power, they form an additional 40-50 percent of the cost of production, which keeps price levels generally high. Then we have the fiscal problem of low levels of taxation revenue and the irresponsible borrowing that went on for many years. But we have even deeper issues!
Can you highlight what these “deeper” issues are?
They are four in my view: we don’t have a consistent philosophical foundation of economic policymaking, our constitution has fundamentally subverted real wealth creation, our political culture and political economy is one of corruption and weak institutions, and we lack real knowledge of economic policymaking. There is a lot I can say about all of this but let me keep it brief.
Every wealthy country has built its economy based on some economic philosophy or the other, mostly variations of capitalism. Capitalism is a philosophy. It has certain rules about what is needed to create wealth for citizens broadly, which is a different thing from the wealth of a few individuals.
To be successful, a capitalist economy must be anchored on property rights (especially the right to own land in freehold and the right to intellectual property). This means that the Land Use Act has passed its sell-by date. It must be abolished to release the wealth we have in land in Nigeria.
Philosophically, we must also lay much more emphasis on combating poverty by emphasizing sustainable human development, instead of an extreme focus on GDP growth which is not always the same thing as development.
Second, such an economy must be anchored on innovation, that is, the invention of new products that improve the quality of life and production and therefore are in demand in the market. This is driven by technology.
The third requirement is capital. People must have access to sufficient funds at an affordable rate to be economically productive by starting new businesses and enterprises that create wealth. We rely too much on banks, which often do not lend long-term, and of course interest rates are high for monetary policy reasons as well as infrastructure problems that add to the cost of capital.
We also rely too much on credit, and we must shift more to equity financing. The government must provide cheaper finance but routed through microfinance banks and other MSME lending institutions.
To solve the political problem of our economy, which has created a rent-seeking culture, we must constitutionally restructure Nigeria, with “resource control”. This will bring responsibility and accountability down to the level of the states and regions, instead of everyone seeking access to the corridors of power in Abuja.
Oil theft in the Niger Delta and illegal gold mining in Zamfara State would probably meet a different response from the people who would now be the owners of these resources. Then we have the problem of lack of knowledge which we have seen a lot in recent years.
Here, what passes for “economic policy” is made by persons sitting in positions of political power or in certain institutions who have very little understanding of economic history, philosophy, macroeconomics, and political economy. This has led to policies that have severely injured Nigeria. The sustained petrol subsidy and fixed exchange rate, when Nigeria’s earnings from oil were on a downward slope, and borrowing to the extent that we are using 90 percent of our revenues to service debt, are all examples of economic illiteracy.
Economic management requires far more than transactional thinking. It requires intellectual depth and some degree of philosophical thinking and clarity. That, together with the political will of the President, is what will determine the trajectory of the economy.
That the CBN has been bastardized over the past nine years there is no doubt. I can’t recognize the institution today compared with the one I served in and left just in November 2014.
So, do you support President Tinubu’s removal of petrol subsidy and the unification of the exchange rate even though these reforms have brought a lot of suffering and instability?
The two subsidies were a huge drain on the economy and needed to go. No question. The question is how? I honestly think both subsidy removals should have been preceded by more rigorous preparation to manage the risks from their fallouts. The pain we are going through would not have been at this level if the political leaders in the past who should have dealt with these reforms had done so with courage.
The situation will eventually stabilize if the right policy options are pursued. Reforms are always painful. But they are a necessary sacrifice. Speaking of sacrifice, I don’t see the political class making any real sacrifices. It’s the masses that bear the brunt. It would have been better if the people also saw very concrete sacrifices from politicians. A significant cut in the pay of elected officeholders would have sent a strong message of solidarity with the people.
The revelations from the release of CBN’s audited accounts for the past seven years, and the report by JP Morgan have dealt further blows to the already troubled economy and the Naira specifically. As a former Deputy Governor of the CBN, what is your assessment of the situation?
The release of the Annual Reports of the CBN confirmed what many of us who are former economic policymakers have suspected. That is, that the Bank’s balance sheet was severely impaired. If it was not so, then why the secrecy and unwillingness to release the annual reports as required by law? But, while the release of the audited reports is a good thing, it would have been helpful, while releasing the report, to address the encumbrances on the reserves with some public commentary or explanations, and then also release a confidence-boosting measure to calm nerves.
Central banking is a confidence game, and so a central bank as an institution should be handled very carefully and delicately, even where decisive actions are necessary as in the present situation.
When I was a deputy to Lamido Sanusi as CBN Governor during the Nigerian banking crisis off the back of the global crisis in 2008, we as the Committee of Governors (the Governor and the 4 Deputy Governors) discussed internally what and how much to reveal about the state of one-third of Nigeria’s 24 commercial banks at the time that were in danger of collapse. We weighed the pros and cons.
We agreed to be fully transparent but to announce simultaneously that the CBN was guaranteeing all creditors and all depositors in the banking system, and that we would bail out the banks. However, in sending out this message, we also made clear that shareholders who had made a bad business decision in investing in banks that turned out to have been badly or even criminally run would have to take a haircut. This measure boosted confidence in our subsequent reforms because we signaled a forward direction, a steady path to a steady state of things.
As it concerns the actual state of the reserves, yes, I like everyone else saw JP Morgan’s claim that the real reserves are at $3.7 billion. But I have also noted the CBN’s response to that calculation, especially the Bank’s point that you do not mark outstanding liabilities to the market on a particular day and say that this is your net balance.
In other words, fluctuations, liabilities, and other limitations on the reserves are not abnormal. The Bank also has a point there, although the extent of the encumbrances on the reserves is indeed quite significant.
The CBN has been in the eye of a storm in recent months. Going forward, what is needed to restore confidence in the institution?
We must be careful not to throw away the baby with the bathwater. We must separate the accountability of officials of the apex bank from the Bank itself as an institution. When we mix up all the drama of “revelations” without addressing the fundamentals that will restore confidence, we might end up hurting confidence in the apex bank and the economy more.
The immediate next thing President Bola Tinubu needs to do is end the previous leadership regime at the Bank in accordance with the law and appoint a substantive CBN Governor without further delay. This is what will give a guide to the future state and direction of the institution. If the appointment is the right one, it will hopefully begin the process of restoring confidence. That the CBN has been bastardized over the past nine years there is no doubt.
I can’t recognize the institution today compared with the one I served in and left just in November 2014. It used to be close to a model as an institution with serious corporate governance, professionalism, and so many high-powered capable staff and management who are still there. But we must be methodical more than we are dramatic, given that a very sensitive institution is the subject matter here, not just any parastatal or agency.
So, I think the President should make an appointment that opens a new page, sit down one-on-one with his appointee, and have a conversation. The new leadership of the Bank now takes it up from there, cleaning up the institution with political backing from the President.
This, in my view, is the professional way to handle this matter going forward. Let specific individuals face their wages of sin as a separate process. A prolonged Acting Governor regime is not appropriate at a time of crisis such as this, because it delays the restoration of full confidence in the system. Don’t forget that a central bank is not a local institution. Because the CBN deals with the rest of the world in terms of international trade, banking operations, foreign investment, and other economic relations, the whole world is watching and assessing this whole matter.
What sort of leadership does the CBN need?
I think the CBN today needs more than anything else, leadership that is professional, knowledgeable, with relevant experience, and respected internationally and nationally. In my own humble view, and with all due respect, our apex bank today should ideally not be headed by a banking sector professional who is a player in the financial markets. It also does not need a political associate of the ultimate political authority.
These profiles will not attract the confidence, both local and international, that is needed at this time given our national situation. The CBN needs someone who understands central banking, preferably understands institutions and understands macroeconomy and monetary policy. Central banking is mainly policy-focused as opposed to commercial banking which is transaction-oriented. Even at the best of times, it’s a difficult job and the consequence of error is high, not to speak of the situation today.
The ideal backgrounds from which central bank governors are selected are normally those of institutional central banking experience, academia (macroeconomy, monetary policy, development economics, political economy etc.), and relevant international financial and economic institutions. This promotes professionalism and independent decision-making and helps avoid conflicts of interest that often exist with market players.
It’s not like there is only one person in Nigeria who can or should be the CBN Governor. But I can also tell you for free that not too many people can do that job well. It is a very complex and unique role that calls for a certain combination of experience, qualifications, reputation, and temperament — assuming we want to be truly serious about it this time around.
Many analysts say the fundamental problem in the forex market is that of forex supply, which creates dollar scarcity. How can the CBN attract Foreign Portfolio Investment (FPI) and boost our foreign reserves?
Forex inflows again depend on that delicate matter called confidence. The subsidy removals have helped, but they are not enough. The level of confidence depends on how investors perceive the strength, stability, and performance of our economic institutions, most importantly the CBN. It depends on the actual policies and enabling business environment these institutions can create, and on the yield on the investments of foreign portfolio investors in terms of bonds and other securities.
For example, if in an atmosphere of high inflation, the CBN aggressively pursues lower interest rates (which we call accommodative monetary policy) prematurely, this will reduce the profits such investors will make. It will therefore be a dissuading factor because, first, they will see such a policy stance as one that contradicts standard macroeconomics. Second, they must weigh the political and other risks of investing in Nigeria against their profits, versus investing in other more stable economies even if yields there are slightly lower.
This is especially when institutions such as the Federal Reserve Bank of the United States are still in monetary tightening mode by raising interest rates, and the US provides a safer anchor for investments from a risk perspective. So, we may have to prioritize price and forex stability so that we can achieve some macroeconomic stability which will also include fiscal measures such as increasing revenues and reducing debt repayments.
To increase our foreign reserves, we must attract more FPI and FDI, increase oil sales by stopping oil theft and increasing productivity and oil exports in the short term, do selected asset sales the revenues of which will go into the foreign reserves to support the value of the Naira, and re-channel diaspora remittances.
As a matter of urgency, we must pursue value-added export diversification over the next three to four years. Ultimately the value of a currency depends on the productivity and value-added export diversification levels of its economy. While we should fight speculative attacks on the Naira, we also should not be looking for artificial exchange rates that are not supported by market fundamentals when our economy is not productive, and we don’t have even a clean $50 billion in foreign reserves from oil sales.
The important thing is that, even with all the stress we have faced, Nigeria still has enough foreign reserves to cover 5 months’ worth of imports, down from 7 months, and the baseline rule is that three months of import cover is required as a measurement of reserve levels. 80 percent of crude oil sales go into the CBN-managed foreign reserves. The rest is shared between the Federal Government of Nigeria and the Federation account that is shared with the states.
So, a combination of increasing oil sales and asset sales that inject $20 billion into the foreign reserves, combined with a consistent upward trend in FPI/FDI, will stabilize the Naira exchange rate while we recalibrate the economy over the medium term. We also have the controversial option of officially pegging the Naira to the US Dollar and losing monetary policy independence, like the CFA currency zone in West and Central Africa that is pegged to the Euro. But their reserves are managed in good old France!
But there is also a problem of arbitrage going on in the banks and the Bureau de Change (BDC) forex marketers. What type of regulatory response is called for?
Yes, that is true. I think our banks need to be more strongly regulated, and sanctions for arbitrage need to be at such levels as to serve as a true deterrent. As for BDCs, I noticed that CBN has brought them back into their forex distribution system with stricter reporting requirements. That is sensible, I think, but the whole BDC sector needs a deeper review and approach to ensure they are a more responsible market player and that they are not used for illicit financial transactions.
What do you think about the concept of central bank autonomy? How necessary is it? Are there or should there be limits to CBN autonomy?
A lot of people misunderstand what central bank autonomy or independence means. They think it is something that is an affront to the ego or powers of elected political authorities. It isn’t. It is simply a good governance framework for making institutional and monetary policy or regulatory decisions that serve the best national economic interest over time. It does not mean that a central bank should not be accountable to the people or to political authorities such as the Parliament. This is a global best practice that has been developed since the 1970s. It is not unique to Nigeria. Empirical studies have shown that the performance of central banks that have an independent, professional (as opposed to political or politicized) decision-making frameworks such as independent Monetary Policy Committees and Boards of Directors have historically performed much better than those that do not.
The CBN used to be under the supervision of the Federal Minister of Finance but for very good reasons this ended in the early 1990s because it was not working. The Bank of England officially became independent of the Exchequer (Treasury) in 1997. The CBN Act provides several accountability provisions. But when politicians make the fundamental error of appointing the wrong person to head such an institution and such appointees connive with political leaders to subvert both the institution’s independence and its accountability, we should understand what has happened and fix it by putting the right people in place.
Misdiagnosing the situation and making the Bank’s legal framework a scapegoat is simply chasing shadows. It is an unwise central bank governor that disregards the political legitimacy of an elected President or the Parliament. It also is an unwise central banker that willfully becomes a jobber for partisan political authorities, a partisan political player himself or herself or becomes a vested market player instead of remaining neutral. Such an officer will surely fail at the job and the national economy will suffer. We have a very recent case study. Those who fail to learn from history are bound to repeat it. I remember that when Dr. Ngozi Okonjo-Iweala was the Minister of Finance and Coordinating Minister of the Economy, we at CBN, led by Sanusi, enjoyed a very cordial and professional relationship, and collaborated well with her because she overtly recognized and respected the independence of the central bank.