Nigeria: CBN and the Urgency of Reform

Towards the latter part of the Buhari government, PREMIUM TIMES had reason to demand severally for the resignation, sack and prosecution of Mr Godwin Ifeanyichukwu Emefiele as Governor of the Central Bank of Nigeria (CBN). The furore over the Central Bank’s ways and means advances to the Buhari government unquestionably establish his credentials as a scofflaw.

On the other hand, the recent release by the National Bureau of Statistics of domestic output numbers for the first quarter of this year confirm our fear that his cack-handed implementation of the banknotes swap policy early this year was nothing short of economic sabotage.

That Mr Emefiele remains head of the Central Bank simply underscores the difficulty that we have had as a country with holding public officers accountable for their work, and the general moral lassitude that would rather have incompetent functionaries hold on to their offices, rather than resign honourably.

Unfortunately, the reforms that the economy will need to aggressively drive growth and development over the current electoral cycle, require immediate repair of the breakdown of trust that Mr Emefiele has so effectively engineered in the domestic monetary policy space. We imagine that a new administration could find ways of expediting Mr Emefiele’s exit that were not familiar nor available to the Buhari government.

This is why it is even sadder that the Buhari administration’s attempt to clean up some of Mr Emefiele’s mess, including the decision to increase to 15 per cent the portion of last year’s actual public revenue that the Central Bank may advance the Federal Government to help manage the latter’s deficit, was not done more transparently.

Doubtless, the dire state of the federal purse, and clear limits to how much the Federal Government may raise from the markets, might mean that recourse to the Central Bank’s ways and means advances remains the economy’s most effective temporary expedient. The cost which this expedient continues to impose on the economy, especially through the upward adjustments to the cost of living index, meant this option would have benefited from keener conversations.

PREMIUM TIMES’ preferred option, for instance, would have been a prorogation of Section 38 of the CBN Act 2007 for the period it is estimated that it will take the government to clean up its books. The borrowing ceiling may then be set as part of the process of enacting annual appropriations, including a quarterly report to the finance ministry on both the uses of the funds thus borrowed, and progress made on the regularisation of the public finances. By the end of the prorogation period, with or without an act of the National Assembly, a sunset clause reverts Section 38 to its pre-emergency provisions.

Following the transition at the helm, almost without question, the new leadership of the CBN will have to conduct a review of its policy and operational framework over the last eight years. PREMIUM TIMES expects that understanding how the CBN easily and continuously monetised the Federal Government’s deficit for eight years, even when it was not unaware of the inflationary repercussions of these, would be on top of the reform agenda. Along with dimensioning the Central Bank’s urgent need to retrench its encroachment into the retail loan market, and the need to float the naira’s exchange rate, this newspaper expects that this review will see the apex bank resume its narrow statutory and historical focus on price stability, and the mechanisms for bringing this about.

If the contortions towards the end of the administration’s tenure, by which the Buhari government tried to manage the huge ways and means advances lent it by the Emefiele-led Central Bank, still leave an unpleasant taste in the mouth, we worry that managed the way the CBN has gone about its work of late, unwinding the large cash reserve requirement balances held by commercial banks at the CBN – conservatively put at circa N14 trillion – could be just as disruptive of the financial services space. Yet, unwinding this position will matter a lot for restoring the proper functioning of the domestic money transmission mechanism.

All of this will be helped by administrative reforms including, especially, the process for appointing the governor of the CBN. Much of the current clamour to succeed Mr Emefiele is from people persuaded that the work of the Central Bank governor is to glad-hand loans to the Federal Government and businesses at below market rates; and to arbitrate demand and supply impulses at the many windows in the official foreign exchange markets.

The reforms PREMIUM TIMES envisages will not only make these functions redundant, but will require in the office of the Central Bank governor, a Nigerian who understands how the non-accelerating inflation rate of unemployment (NAIRU) and the real neutral rate of interest that balances the economy in the long-term (R*) matter to the task of maintaining stable prices locally.

That this person must be an expert of sorts (in both his or her understanding of economics and monetary policy) is a given. That it would be a distraction to the successful candidate’s discharge of this assignment were he or she to remain chair of the Bankers’ Committee, we hold to be a self-evident truth. We have long wondered at PREMIUM TIMES why a regulator should chair an industry trade body.If it is incongruous that the Minister for Trade and Industry sits on the board (not to talk of chairing) the Manufacturers’ Association of Nigeria, Mr Emefiele’s larger-than-life presence as chair of the Bankers’ Committee was one of many such perversions that the economy has had to endure in the last eight years. Obviously, Mr Emefiele underlined and then exploded the myth that commercial bankers necessarily make decent central bank governors.

The commercial banking space is but one of several growing channels through which central banks implement monetary policy. If it is important, it is on account of the volume of financial resources that pass through it, and not because of a qualitative role that its personnel play in that space.

The ease with which Mr Emefiele trampled over safeguards put in place to prevent the very excesses that marked his tenure, have invited reflections on the possibility of strengthening the CBN’s enabling statute to prevent a governor from involvement in partisan politics. But to the extent that the current act expressly forbids much of what Mr Emefiele did while in office, PREMIUM TIMES believes that the failures in the management of monetary conditions over the past eight years were not the result of inadequacies in the apex bank’s operating environment. They were the result of the cessation of the normal functioning associated with good character.

Still, there is room for re-interrogating the functions and process of appointment of the Central Bank’s deputy governors. The presence of Central Bank offices in the 36 states of the federation is more functionally apparent than real. Six central bank deputy governors in the six geopolitical zones would be a far more effect and efficient arrangement. So long as each understands that his or her central function is to “own” economic activities in those places. Thus equipped, deputy governors will contribute more usefully at meetings of the Central Bank’s policy committee.

Should trade bodies be allowed to nominate members to the policy committee? This will undoubtedly strengthen the independence of members of the committee. PREMIUM TIMES continues to mull, however, the most effective mechanism for realising this goal.

That said, the saw that argues that a family functions properly until its black sheep comes of age is why PREMIUM TIMES insists, again, on Mr Emefiele’s defenestration, and trial. And his replacement forthwith with an evidently more qualified person.