Many of you would have heard the rumour: Nigeria’s central bank governor, Godwin Emefiele (aka Meffy), is considering the 2023 presidential ticket. At first, the news shocked me, and then after a moment of processing, I realised that I shouldn’t be surprised.
After all, Stears Business has been referring to Emefiele as Nigeria’s “de facto President” or “Nigeria’s most powerful governor” for years now.
From renovating the national theatre to launching the 100 for 100 policy to help Buhari’s plan to create millions of jobs, Emefiele has managed to stretch the limit of a traditional central banker and has gained some popularity along the way. In one of my more recent pieces, I contrasted Emefiele’s economic might with our more tepid finance minister.
Some takeaways:
· In its bid to help finance different sectors of the economy, Nigeria’s central bank has become susceptible to political influence.
· A lack of central bank independence has forced Nigeria into long periods of attempting to sustain a “strong” naira.
· An overvalued currency makes it difficult to sustain our peg to the dollar, creating multiple exchange rates and dollar shortages—further worsening macroeconomic conditions.
Think about it, Meffy has even launched the world’s largest rice pyramid. While this rice wasn’t free, the connotations of rice sharing and election season in Nigeria is too tempting for this writer to ignore.
If you still think that Emefiele’s right to the presidential bid is a joke, remember that the Anchor Borrowers’ programme, one of many loan-related schemes under Emefiele, has supported around 5 million farmers. That’s a third of Buhari’s total votes in 2019.
How many people have that amount of reach?
Interestingly, the political clout of being the Central Bank of Nigeria’s (CBN) governor is not specific to Emefiele. Afterall, Charles Soludo, one of Meffy’s predecessors, recently became the governor-elect of Anambra state. Similarly, Lamido Sanusi, another past governor, has faced intense calls to target the presidential seat.
However, my point is not to analyse Emefiele’s theoretical presidential campaign. Instead, I intend to highlight something potentially wrong with the structure of the CBN—it’s too political. The difference between the CBN and the federal government is blurred, given that Buhari has too much influence over the CBN’s affairs. And all we ever hear Emefiele do is support Buhari. In fact, his response to the rumour of him running for president was that his “major commitment at the moment is to assist President Muhammadu Buhari to stabilise the economy and place the country on the path of growth”.
This might not sound like a bad thing. But the central bank’s core mandate is to focus on price stability, not help Buhari create millions of jobs. And a central bank that the president can easily influence is bad news for everyone.
The lack of independence in the CBN has arguably exacerbated many of Nigeria’s economic problems. These problems are many, including our 16% inflation rate and our messy exchange rate system, which continues to deter investment and international trade—building blocks for a thriving economy.
It calls for a radical restructuring of the CBN.
Farming for monetary policy = Quantitative Easing.
In what might seem contradictory, let me start this line of argument by commending a lot of what the CBN has done over recent years.
In one of my first articles for Stears Business, I made parallels between the Anchor Borrowers’ programme and Quantitative Easing (QE), a popular feature of the largest central banks across the world.
The idea behind QE is that when the main monetary policy tool—interest rates—has reached its limit in stimulating the economy (i.e. monetary policy interest rates already at 0), QE allows central banks to lower other types of interest rates. They do this by purchasing a large number of bonds (e.g corporate bonds).
As a result, corporations get access to lower credit, stimulating the economy.
CBN schemes like the Anchor Borrowers’ programme try to achieve a similar goal. Its objective is to reduce the interest rates that farmers face to single-digit loans—a rarity in Nigeria. If you look at many of the CBN’s policies, they have almost the same structure. From film financing to helping the Distribution Companies (Discos) buy meters, all the CBN is trying to do is extend credit in a country where the financial market is not deep or willing enough to support the economy.
According to one report, only 4% of the 90 million micro, small and medium-sized enterprises (MSMEs) have access to credit in Nigeria. MSMEs account for 50% of industrial jobs and 84% of total employment in Nigeria, and about 49% of GDP.
An economy without credit is like a car with deflated tyres—it won’t move at its optimum speed. And so whenever Stears Business alludes to the CBN being Superman or Batman, there’s a good reason for it.
So why am I suggesting that we change the CBN’s structures?
Well, while other advanced economies can execute QE under the umbrella of independent monetary policy, the CBN’s frequent activity of “disbursing” loans has not. More than anything else, the CBN has worked as a development bank or financier for the federal government. Whichever sector the federal government wants funding to go, the CBN does the needful.
If Buhari wants the country to focus more on domestic agriculture, he works with the CBN to ban food imports and supports the sector with hefty loans.
You’re more likely to see Emefiele on a farm wearing a helmet than providing forward guidance on monetary policy. In fact, I recently saw a video of the CBN governor announcing some funds that would be donated if the Super Eagles reach certain stages of the Africa Cup of Nations. Evidence of an obsession with disbursing money.
The truth is that Emefiele is a trained banker, not an economist. And so, unsurprisingly, he does what any CEO of a development bank would do. The punishment for this is a lack of commitment to fighting inflation and collusion with the federal government on industrial and exchange rate policy. If Buhari wants ₦1=$1 because it is politically preferred, the CBN toes the same line.
And this brings me back to the point of the blurred lines between the CBN and the federal government.
The government needs an industrial policy and needs to fund specific sectors with cheap funding. That is agreed. But it should not come at the cost of central bank independence, which worsens macroeconomic conditions.
Hence, I’ll be thrilled to see Emefiele carve out a part of the CBN to run a Development Bank while a trained economist (of which there are many in the CBN) becomes the governor of a new and more independent central bank.
The danger of no independence
I can choose many ways the CBN’s lack of independence harms our economy, but the main culprits are inflation and exchange rates.
Let’s start with inflation. Traditionally, central banks were created as separate entities from the government to avoid political influence in setting interest rates. Because politicians prefer to have higher growth at the expense of inflation, they would always choose to have lower interest rates to stimulate the economy—leaving inflation to rise (remember, lower interest rates often mean higher growth but higher inflation as well).
But having an independent central bank that focuses on maintaining inflation removes political influence. The government focuses on higher growth with fiscal policies, while the central bank tames inflation with monetary policy.
These policies can contradict each other, but it’s often necessary when you have high inflation and low growth—like Nigeria does today.
Turkey is a prime example of how not to conduct monetary policy. The Turkish president has his hands all over its central bank and has consistently persuaded it to keep interest rates low despite inflation rates at nearly 50%.
Late last year, the bank shocked markets by reducing interest rates further (the opposite of what an independent central bank would do). It was clear to many that the Turkish president had orchestrated the cut. In fact, the one member of the bank’s monetary policy committee that voted against the interest rate reduction got sacked.
Markets reacted to the dismissal by selling the Turkish currency, the lira, to a record low.
In Nigeria’s case, we hardly care about the monetary policy interest rate and its impact on the economy pales in comparison to other more advanced economies. A more critical policy tool here is the exchange rate.
That’s where we need a lot more independence.
Nigeria’s love affair with a strong naira.
Nonso Obikili, an economist at the United Nations and popular commentator on Nigeria’s economy, wrote a paper on exchange rate policy independence in West Africa.
In the piece, he explains how exchange rate policy independence has been overlooked in Africa. Like I alluded to earlier, Nigeria doesn’t need independence in interest rate policy like Turkey or other advanced countries. Exchange rate policy is more critical to our macroeconomic conditions, yet it doesn’t enjoy the same level of independence.
A natural starting argument of Nonso’s paper is the preference of the political elite and middle class towards a “stronger” exchange rate. Because Nigeria barely exports anything apart from oil, we don’t experience the benefits of a weaker naira (more non-oil export sales). To us, it just makes imports, including travel, more expensive. Hence, the stronger, the better.
The government has the same agenda. Apart from keeping its middle and richer class happy, a stronger currency also gives the political elite cheaper imports and keeps debt servicing costs from increasing.
But just because politicians prefer something doesn’t mean it’s better for the economy (remember the interest rate inflation problem explained earlier). That was why independent central banks were created, to begin with.
In my first article to ever “blow”, I explained why the logic of preferring a strong currency is flawed. Nonso’s paper brings the evidence to light as his estimation results conclude that African countries with overvalued currencies were associated with slower economic growth.
Those of you who remember the exchange rate decisions made since 2014 till today would be inclined to agree.
Oil prices started to tumble when Buhari came into power in 2015. Unfortunately, that meant lower dollar supply, making our exchange rate peg to the dollar unsustainable. However, with campaign promises to maintain a strong naira, the CBN (influenced by Buhari) was reluctant to devalue the currency.
In the end, the CBN had no choice but to implement foreign exchange capital controls and create multiple exchange rate channels. This chased investors and companies away, pushing us further into a crisis. Nigeria still hasn’t recovered from the subsequent recession.
Our exchange rate problems still remain. The apex bank recently announced a move to stop supplying dollars to banks—a move that will help the CBN save its dwindling foreign reserves but could create a larger wedge between the official and parallel market.
New rules
As I have argued before, the secret to making Nigeria rich lies outside our borders. Trade and foreign investment provide us with the market and required investment to build the nation and increase income levels. But that is currently being hampered by poor exchange rate management.
Why would an outsider bring in foreign investment into Nigeria for domestic or trade reasons if they don’t know which of the different exchange rate markets they will have access to?
Worse, they might not even get access to dollars when they need it—many companies are still waiting outside the CBN’s doors for foreign exchange. At one point in 2020, a World Bank-backed power plant that provides a 10th of Nigeria’s electricity was at risk of default because it couldn’t get dollars to pay its loans.
That doesn’t sound like a country to invest in.
Fundamentally, laws have to change at the CBN so that the exchange rate policy is completely independent of political influence. Both Nigerians and politicians don’t know what’s best for the currency, and so it should be left to the economists to decide. Increasing the benefits from a weaker currency by boosting non-oil exports will help balance the argument, but changing the CBN laws and mindset of the institution will complete the package.
The current CBN act sets the authority for formulating and defining exchange rate policy to the board of the central bank, which is appointed by the government. That should shift to an independent monetary policy committee alone with no political influence. It should also be made clear in the act that exchange rate management to enable better macroeconomic conditions should be prioritised—weak or strong policy. The current wording of an objective “to maintain external reserves to safeguard the international value of the legal tender currency” is biased towards a stronger currency.
The 2023 presidential elections are coming up so let me help you pick a candidate. Don’t vote for someone who says they will make the naira stronger, vote for someone who says they can’t control it.
