The traditional core mandate of a central bank, often referred to as “inflation targeting” by modern economists, is to maintain price stability. Advanced economies like the US, UK, EU, and Japan have established explicit inflation targets around 2%. However, for developing economies like Nigeria, adopting a rigid target may not be the most effective approach.
Beyond price stability, central banks also have responsibilities for financial stability and macroeconomic stability. The former involves ensuring the soundness of the financial system through regulatory oversight, while the latter involves influencing key macroeconomic indicators to achieve desired outcomes.
While some economists advocate for central banks to adhere to their orthodox role of inflation targeting, others argue for a more proactive role in promoting economic growth and development. This debate is particularly relevant in Nigeria, where the current CBN Governor, Mr. Olayemi Cardoso, has signalled a shift from the interventionist approach of his predecessor, Mr. Godwin Emefiele.
Emefiele’s CBN directly intervened in sectors like agriculture, aviation, mining, and power, injecting billions of Naira. Proponents of this approach highlight the potential for these sectors to diversify Nigeria’s economy beyond oil dependence, create employment, and enhance food security. They point to successes like increased rice production, which reduced reliance on imports. They argue that the CBN had to intervene in the absence of effective policies from other actors.
However, critics argue that these interventions have been riddled with problems like loan repayment issues (e.g., Anchor Borrowers’ Programme), blurring of the CBN’s role as lender of last resort, and exaggerated or unfulfilled gains. They point to sectors like power and aviation where interventions haven’t yielded significant results.
The current state of the Nigerian economy paints a grim picture: high inflation (28.2%), high unemployment (35-40%), low GDP (2.54%), and foreign exchange scarcity. This situation, coupled with rising energy costs and unreliable electricity, has led to multinational exits and widespread business struggles.
As a crucial institution, the CBN should not be confined by rigid orthodoxy. Recognizing that every economy has unique circumstances, the CBN needs a flexible approach. It should critically evaluate the past interventions, identify successes and failures, and learn from them. Interventions should be targeted and strategic, focusing on sectors with potential and partnering with competent banks. Additionally, greater synergy with fiscal authorities is crucial to avoid past pitfalls.
In conclusion, while maintaining price stability is essential, central banks in developing economies like Nigeria should not be limited to this role alone. They must find a balance between inflation targeting and proactive interventions that support economic growth and development, taking into account the unique context and challenges of their respective economies.
Dr. Okolo is a chartered stockbroker and management consultant based in Lagos.
