Nigeria’s regulatory environment is often complex and tough to navigate both for domestic investors with local experience and foreign investors who are just starting out. This situation is not attractive to investors because they want regulators to create and enforce clear and predictable policies. However, policies are often inconsistent, unpredictable and stringent in Nigeria, thus making regulatory risk a big consideration for investors.
Recently, the Central Bank of Nigeria (CBN) implemented a host of measures that make the regulatory environment more challenging. One can argue that some of these measures are instances of regulatory overreach, especially when the Bank takes decisions with obvious political motivations and impose sanctions that are not commensurate with the offence committed. And unlike other institutions with limited impact, the CBN can be considered a super regulator because its decisions are often far reaching and they serve as a signal to investors and economic agents doing business in Nigeria.
The most absurd measure of the Bank was the instruction to commercial banks to freeze accounts of protesters and institutions related to the #EndSARS protests, a campaign against police brutality in Nigeria between September and October 2020. The Bank was dishonest in its court application by mentioning that the accounts were related to terrorism financing when it was clear that all the people and institutions affected were playing a pivotal role in the #EndSARS protests.
Rather than implement appropriate policies that would incentivise the behaviour it wants, the CBN would rather wield the big stick through sanctions that could destroy businesses and investor confidence
Even more, the decision to freeze the accounts was made prior to a court order while the Bank refused orders to unfreeze accounts after it was later instructed by the court. Till today, the alleged link between #EndSARS protests and terrorism financing remains unproven while the Bank issued no communication on the outcome of its investigations into the matter. These actions make it hard to overlook the missing sense of irony that a protest against state sanctioned brutality against Nigerian citizens would lead to more oppression by Nigerian institutions, especially the CBN. For a Bank that should be independent, it is also hard to ignore the seeming political influence in such an action, much less during an economic crisis.
Beyond the CBN’s misadventures into the political, the Bank has also used unreasonable measures to enforce compliance with its outrageous rules. In January 2021, the CBN instructed that all exporters with unrepatriated export proceeds would be banned from accessing all banking services. This would affect the operations of these companies, including hiring, payroll management, meeting obligations to suppliers, among many other implications. This is despite the fact that the CBN incentivised this behaviour of non-repatriation of FX proceeds by refusing to correct the misalignment in exchange rates between the parallel market and the Investors and Exporters’ (I&E) FX Window.
Obviously, exporters would be reluctant to bring in export proceeds at a lower exchange rate compared to the parallel market, especially when it is certain that they would still have to source FX at parallel market rates for certain transactions like paying for financing costs.
The above examples are instances of the CBN’s regulatory overreach in recent times. It is clear that rather than implement appropriate policies that would incentivise the behaviour it wants, the CBN would rather wield the big stick through sanctions that could destroy businesses and investor confidence. Yet the country is better served by a CBN that implements consistent policies, communicates properly to guide economic agents and sticks to its core objectives. A focus on everything else weakens trust in the CBN, confidence in the economy and economic outcomes. This is partly why foreign investors have been reluctant to bring in capital to purchase securities and also to start and/or invest in businesses in Nigeria. Domestic investors are also not encouraged to sustain their investments. No category of investors would certainly want to do business in a country where institutions are above the law.
The obvious challenge the Bank faced during the past year was dealing with the devastating impact of COVID-19. The ensuing health and economic crises dealt a devastating blow to the economy. While the Bank responded with intervention loans and mobilised resources from the private sector to support recovery, the hardship brought by COVID-19 is far from over. Therefore, it is a surprise that the CBN has been distracted by adventures outside its scope. In areas where the CBN’s leadership is truly required, the Bank has not lived up to its promises.
For instance, although Nigeria exited recession in Q4 2020, real GDP was still 2 percent lower than 2019 levels. 2020 marked the fifth consecutive year of negative per capita income growth. The Inflation rate has risen from 12.2% in February to 18.2% in March 2021, significantly worse than in other African countries. This has been devastating to consumers in an economy with limited employment and wage growth prospects.
The unemployment rate has also risen from 10.4% in 2015 to 33.3% in 2020 while the total number of unemployed has increased from 8 million in 2015 to 23.2 million in 2020. Labour market conditions are even worse when you consider that there has been a sharp drop off in the labour force population to 69.7 million in Q4 2020 from 80.3 million in Q2 2020 and 90.5 million as at Q3 2018. That means there are at least 20.8 million people who are able to work but stopped searching for jobs. Similarly, full-time employment has fallen to 30.6 million as at Q4 2020 from 51.3 million in Q3 2018. Little wonder poverty and insecurity are on the increase.
Without confidence in policymakers and the economy, achieving the priorities of high growth, increased employment and reduced poverty – which are all crucial to Nigeria’s long-term prosperity – would be impossible. Even CBN’s narrow objectives of low and stable inflation and financial system stability would be affected. The optics and implications of CBN’s regulatory overreach matters and the Bank should aim to improve public trust in its business. Otherwise, the institution would struggle to influence behaviour – its most powerful tool – to meet its policy objectives.
Adekoya is a Lagos-based financial analyst.