The tale is told of how past Nigerian military rulers often turned the central bank into their personal printing presses. The outcome of this uncontrolled money printing was disastrous.
In 1995 Nigeria’s inflation rate was a vertigo inducing 75 percent, while the naira which was at virtual parity with the dollar in the early eighties had tumbled to N21/ $1 by 1999, a more than 400 percent devaluation according to a Business day analysis of available CBN data.
This was of course in the official market, which met less than a tenth of dollar demand; in the parallel markets where the naira exchanged for N88/$1(in 1999) the rate of naira devaluation was much higher at over 640 percent between
1980 and 1999.Meanwhile the average GDP growth rate was 1 percent per annum, between 1980 and 1999.
Thankfully those days are long gone but it serves to highlight the importance of the CBN to a country’s economy and how its enormous powers may be used or misused. Even so, the Central Bank of Nigeria (CBN) has been survived turbulent and torrid times in the past 15 years.
Specifically, June 2009 was a terrible year to be appointed governor of the CBN. In a recent interview, Sanusi Lamido Sanusi, the outgoing governor, says “a lot had gone wrong.”
Nigeria, in addition to scorching effects of the global financial crisis in developed markets, was facing an economic cardiac arrest: the financial sector was in turmoil; oil prices had crashed; inflation remained high; the value of the naira, against the dollar, was declining rapidly.
Investors’ confidence was receding and their demand for dollars was increasing that Chukwuma Soludo, the then CBN governor, effectively shut down the foreign exchange market to prevent a “repeat of the Russian experience”.
The Expanded Discount Window (EDW), a CBN initiative prior to the appointment of Sanusi, gave banks N941 billion in exchange for financial instruments as collateral did not
avert a banking crisis. Credibility, the currency of effective central banks and based on their independence, was in great demand.
To restore confidence in Nigeria’s economy the independence of the central bank was crucial in fighting these four fires: systemic risk in the banking system, exchange rate devaluation, rising inflation, and distrust of the banking system.
It is independence that allowed the removal of five bank CEOs alongside the injection of N400 billion into the banking system to protect depositors and prevent the banking system from breaking down.
The CBN built its blueprint for reforming Nigeria’s financial system on four pillars: to enhance quality of banks; establish financial stability; enable healthy financial sector evolution and ensure the sector contributes to the real economy.
Maintaining credibility i.e. a stable banking system, a resilient naira, a predictable exchange rate, declining inflation, down from 13 percent in 2009, has remained at a single digit (something that has not happened in a decade) are some of the high points of the present CBN.
A compliant CBN governor could help the president wage a ‘political war’ by reducing the Monetary Policy Rate (MPR), in the erroneous belief that it will help boost lending, growth and exports. If it happens, will it be disastrous for the
economy – a return to antiquated times when government dictated to the CBN.
Central banks all over the world are assuming new roles with higher expectations from their citizens. Analysts believe that the outcome of the forthcoming elections in Nigeria will to a large extent be determined by the economic well-being of its citizens.
The central bank in developing countries often takes on the role of development institutions.
In Nigeria the CBN has intervened in the Power, Aviation, and Agriculture sectors of the economy by setting up intervention funds with the aim of extending loans at low interest rates. Businesses in Nigeria are often starved for credit.
Thus the pattern of voting will be influenced by how the economy has been able to attract foreign direct investments, banks’ lending to the real sector and individuals. The monetary policy rate, the anchor rate at which CBN borrows
banks, ultimately determines the direction of banks’ lending for businesses. In essence, CBN’s monetary policy stance matters.
The central bank is important in a develop ing country like Nigeria because of its huge balance sheet (in 2012 for example the CBN generated gross income of N629.8 billion and made a surplus of N100.3 billion), and the many policy options available to it to maintain macroeconomic stability and boosting growth.
According to the CBN Act 2007, the central bank governor’s principal remit is to provide economic advice to the federal government, while acting as the official banker to the government of the federation. Apart from signing every currency denomination, the governor among other duties, oversees the country’s banking sector. Alongside the Monetary Policy Committee (MPC) of the CBN, the governor also determines the monetary policies of the country, which have an impact on the financial system and the macro-economy.
Which is why the appointment of the next CBN governor is been eagerly expected, by Nigerians and international investors, as he or she will play a major role in the MPC the body that sets MPR.
Analysts at FBN Capital, an investment bank, reckon “the new CBN governor will have to “contend with the same issues that his predecessor has had to grapple with in the last few years – Nigeria’s import dependency, inadequate revenue diversification and fiscal slippage. Electioneering in 2014/15 will add to these challenges in the new governor’s first year in office.”
For most of his five-year term, the policy thrust of Lamido Sanusi has been toward a tightening of monetary policy. This, to a large extent, has brought about stable foreign exchange and price stability.
For instance, monetary policy rates remained low in most advanced economies in the major part of last year. The Federal Reserve Bank (the Fed), the Bank of England (BoE), the Bank of Canada and the Bank of Japan (BoJ) retained their policy rates between 0.25 and 1.00 per cent. The European Central Bank (ECB) reduced its rate to 0.50 per cent from 0.75 per cent. In June 2013, the Reserve Bank of Australia and the Bank of Korea respectively reduced their policy rates to 2.75 and 2.50 per cent from 3.00 and 2.75 per cent in January 2013.
Among the BRICS countries, monetary policy remained accommodating except for Brazil, which reviewed its policy rate upwards to 7.50 per cent in April from 7.25 per cent in March and to 8.00 per cent in May 2013. India maintained an accommodative monetary policy stance by reviewing its rate downwards to 7.25 per cent in March 2013, from 7.75 per cent in January, while China, South Africa and
Russia left their rates unchanged at 0.50, 5.00 and 8.25 per cent, respectively, at the middle of last year.
Razia Khan, head of Africa research at Standard Chartered Bank, London notes that through focused and professional approaches to policy issues the CBN has had positive impact on Nigerians, local and foreign businesses.
“Sanusi is seen as the architect of reforms that stabilised Nigeria’s banking sector, the removal of the minimum one-year holding period for offshore investors in FGN bonds, and a more credible anti-inflation policy with a commitment to FX stability. Given Sanusi’s close identification with factors that contributed to Nigeria’s 2012 GBI-EM index inclusion, developinvestors will closely watch CBN succession plans. Foreign investment in FGN bonds and bills totalled an estimated USD 11.6bn as of September 2013,” says Khan.
The successful reform of the banking sector with the accompanying positive economic indicators like single inflation digit rate, rising foreign reserves, growing GDP rate, among others has continued to engendered confidence in the economy by both the local and international investors.
For instance, as part of the ongoing effort to improve savings culture, the CBN last April revised the Guide to Bank Charges, requiring banks to pay a minimum of 30 percent of MPR on savings accounts in realization of the negative real rate of return on deposits, a major disincentive to savings.
Samir Gadio, emerging markets strategist with Standard Bank, London considers a resilient naira to dollar exchange rate as the major achievement of CBN policies. “USD/NGN stability represents CBN Governor Lamido Sanusi’s greatest macroeconomic legacy, and we suspect the central bank will ensure that the exchange rate continues to hover around current levels in coming months. A smooth and orderly succession at the CBN will reduce the possibility of a pre-emptive build-up of long USD positions in Q2:14.”
Underscoring the need for a conducive political environment for thriving of CBN policies, Gadio observed that “Further gains in duration look unlikely in the medium term despite a persistent single-digit inflation path and elevated real interest rates. The uncertain political outlook, investor concerns about the transition at the CBN and a likely leg of pre-electoral fiscal expansion, as well as higher bond issuance volumes from next year, will not be conducive for further yield compression at the long end.”
Analysts at Afrinvest, a Lagos-based investments bank, reckon the CBN policies have become more relevant to the economy despite the low correlation between high interest rates and Nigeria’s economic performance. Evidence that Nigerian banks lend more if rates are cut is very weak because financial intermediation is low.
As for growth, improved government spend on infrastructure will have a much greater impact than loosening.”
For Afrinvest analysts, the new governor “should have an impeccable character, with [an] impressive track record and sound leadership skills”. Nigerians are accustomed to a focused and resolute CBN with an understanding of the uniqueness of the economy.
Despite calls for a lower interest Lamido Sanusi and the 11 other members of the MPC has avoided falling for the mistaken conventional wisdom that lower interest rates will spur loans to the real sector. Banks, no doubt, will be pleased but they are unlikely to give loans to businesses.
The World Bank in a 2011 report estimated that formal businesses in Nigeria receive only 1 percent of the funds they need for expansion from bank loans, the rest is obtained from retained earnings, suppliers credit or borrowing from family and friends.
According to research firm Roland Berger, Nigerian banks face daily logistical problems of large distances, poor infrastructure and high operating costs in reaching new customers and turning a profit.
The average branch of major Nigerian banks costs about $1 million per annum, one of the highest in Africa, leading to banks charging high interest rates (24 percent and above) in a bid to break even.
High interest rates are not the major binding constraints to doing business in Nigeria. Burdensome overhead costs and other bottlenecks, e.g., abysmal legal and regulatory institutions, erratic electricity supply, remains the major roadblock to a competitive and conducive business climate.
By: TAYO FAGBULE, JOHN OMACHONU & PATRICK ATUANYA
