Monetary Policy Reforms as Drivers of Growth

In this piece, James Emejo writes on the recent cocktail of policy interventions by the Central Bank of Nigeria and their impact on the economy.

Monetary policy is the strategies and actions taken by a country’s central bank to control the supply of money and manage interest rates in the economy.

Central banks use monetary policy to influence economic performance and achieve macroeconomic objectives such as controlling inflation, managing unemployment, and promoting economic growth.

In Nigeria, the Central Bank of Nigeria (CBN) is the country’s monetary authority, with its key functions outlined in the 2007 CBN Act including monetary stability, currency issuance, foreign exchange management, financial system stability, lender of last resort, banker and financial adviser to the government as well as regulator and supervisor of the financial system among other developmental finance roles.

The CBN had demonstrated immense prowess in playing these roles in the recent past, being instrumental to the country’s economic prosperity as well as helping it to exit two consecutive economic recessions mostly through well-crafted policies – orthodox or otherwise.

Monetary policy effectiveness also relies on the complementary efforts by the fiscal authority to be efficacious – but even when the latter had failed to live up to expectations, the former had continued to implement policies that have ensured that the economy remained afloat in spite of domestic and global headwinds.

Analysts agree that the inflationary pressure wreaking havoc in the economy today is not a sign of weakness of the central bank’s policies but the inability of the fiscal side to do its job – the former, having deployed all instruments in its toolbox to curb rising prices. 

Inflation is mostly a result of structural challenges in the country including insecurity, absence of critical infrastructure, and low domestic output among others, and these are the responsibility of the fiscal side to address.

Even in the midst of current challenges facing the economy – especially in the absence of a cabinet to direct its affairs, following the emergence of President Bola Tinubu’s administration, the CBN has continued to evolve key reforms that have bolstered investors’ confidence in both the local and international space.

Essentially, effective monetary policies can play a crucial role in supporting economic growth by influencing various aspects of the economy.

The CBN has recently reeled out circulars and policies which analysts have attributed to the quiet return of investors in the economy.

·      Bunch of reforms

Since the appointment of the acting CBN Governor, Mr. Folashodun Shonubi by President Bola Tinubu on June 9, 2023, the former has continued to introduce key reforms that have renewed the trust in the economy.

Analysts believed these reforms are capable of improving the resilience of the economy as well as ensuring the growth of the economy in the medium to long term.

Shonubi, on assuming his new position immediately abolished the segmentation in the foreign exchange (FX) market and collapsed all rates into the Investors and Exporters (I&E) window – to the excitement of investors and analysts.

Among other immediate reforms, he further announced the cessation of the RT200 Rebate and Naira4Dollar Remittance Schemes, with effect from June 30.

Both initiatives, introduced by the suspended CBN Governor, Mr. Godwin Emefiele, were launched to boost non-oil exports and diaspora remittances to encourage foreign exchange inflows into the economy.

The central bank in a circular on the Operational Changes to the Foreign Exchange Market, signed by CBN Director, Financial Markets Department, Angela Sere-Ejembi, also alerted all authorized dealers and the public of immediate changes to operations in the Nigerian Foreign Exchange (FX) Market, of the re-introduction of the order-based two-way quotes, with bid-ask spread of N1, adding that all transactions shall be cleared by a Central Counter Party (CCP) among other alterations to the operations in the Fx market.

Following the reforms, investors’ appetite in the bonds market surged while market capitalization showed unprecedented performance.  

Only recently, the CBN under Shonubi also announced the resumption of enforcement of the Loan-to-Deposit Ratio (LDR) policy effective July 31, 2023, in line with the bank’s objective of the policy and the need to moderate industry excess liquidity.

The policy seeks to encourage banks to increase consumer, mortgage, and corporate credits thereby stimulating aggregate demand, output growth, and employment, and to promote a sound financial system in the country – without compromising the health of domestic banks.

Among several other reforms introduced by Shonubi, the apex bank also announced the introduction of its digital currency known as the eNaira as a payment option to recipients of diaspora remittance.

The bank explained that the move was in furtherance of efforts to liberalise the payout of diaspora remittance.

The new policy was contained in the bank’s circular titled, “Operational Framework for eNaira Payment Option to Recipients of Diaspora Remittances”, dated June 15, which was addressed to International Money Transfer Operators (IMTOs) and the public and signed by the CBN Director, Trade and Exchange Department, Dr. Ozoemena Nnaji.

The apex bank stated that the guidelines in the framework would facilitate payment of proceeds of diaspora remittances to recipients who choose eNaira as a payment alternative.

Under the guidelines, the IMTOs are required to apply for a one-time “No-Objection” to pay out in eNaira from the central bank.

In yet another major policy initiative, the CBN under Shonubi also approved a reduction in the Cash Reserve Requirement (CRR) of merchant banks to 10 per cent from the current 32.5 per cent. The change takes effect from August 1, 2023.

The central bank announced this in a circular dated July 14, 2023 and signed by CBN Director, Banking Supervision Department, Mr. Haruna Mustafa, which was directed to all merchant banks, pointing out that the move was expected to boost the banks’ ability to avail increased infrastructure, real estate, and other long-term financing needed to support the development of the Nigerian economy.

Specifically, the apex bank stated that the regulatory measure was in recognition of the nuanced business model of the merchant banks, particularly their wholesale funding structure, regulatory restrictions from the retail market, and permissible activities compared to conventional commercial banks.

In Another stretch, the central bank announced that domiciliary account holders are permitted to utilize cash deposits not exceeding $10,000 per day or its equivalent via telegraphic transfer.

CBN Director, Corporate Communications, Department, Dr. Isa Abdulmumin, stated this in a statement issued after an extraordinary Bankers’ Committee meeting adding that all visible and invisible transactions including medicals, school fees, BTA/PTA, airline and other remittances are now eligible for the Investors’ and Exporters’ (I & E) window.

As a result, he said Deposit Money Banks (DMBs) shall ensure expeditious processing of all eligible invisible transactions on behalf of their customers using the applicable rate at the I & E window.

The CBN director also said the apex bank will prioritize orderly settlement of any committed FX forward transactions as they fall due in order to boost market confidence further.

He added that the central bank will normalize its CRR maintenance processes and ensure equity in

its implementation across the banking industry.

He said, “The CBN will continue to engage stakeholders and issue further guidance as it implements the ongoing reforms.”

Among other cocktails of reforms, Shonubi further ordered banks to vacate a Post-No-Debit (PND) restriction earlier imposed on bank accounts of 440 individuals and companies. A PND refers to all debit transactions, including ATMs and cheques, on the accounts, that have been blocked but can receive inflows.

It is one instrument through which the CBN gives powers to stop customers from operating their bank accounts, with the permission of the courts.

The central bank conveyed the vacation of restriction in a circular, dated July 25, 2023, which was signed by A.M. Barau on behalf of the CBN Director, Banking Supervision Department, and addressed to all banks.

Although no reason was given for the lifting of the restriction, analysts said the move will further boost confidence in the financial sector and economy in general.

Also, in a major policy shift, the CBN under the acting governor, issued an updated corporate governance code for the banking and financial industry and increased the tenure of the Managing Director/Chief Executive of banks to a maximum of 12 years from 10 years.

This was disclosed in a circular on the new “Corporate Governance Guidelines for Commercial, Merchant, Non-interest and Payment Service Banks in Nigeria”.

The circular dated July 13, 2023, was signed by CBN Director, Financial Policy and Regulation Department, Chibuzo Efobi, and addressed to commercial, merchant, non-interest, Payment Service Banks and Financial Holding Companies (FHCs).

The central bank also increased the tenure of the Deputy Managing Director (DMD/Executive Director (ED) of a bank to a maximum period of 12 years. The objectives of the guidelines are to among other things promote high ethical standards amongst operators while enhancing public confidence.

·      Reforms to boost confidence, improve supply, discourage speculation

According to the CBN recent policy changes introduced in the country’s foreign exchange market were meant to promote transparency, liquidity and price discovery in the FX market in order to improve supply, discourage speculation, enhance customer confidence as well as ensure overall stability in the FX market.

·      Bold reforms enhancing resilience

 A study by the CAPE Economic Research and Consulting, which analysed the series of interventions undertaken by the CBN under Shonubi concluded among other things that, “In Nigeria, economic prospects for the second half of 2023 remains resilient, albeit at a moderated level, following bold policy reforms.”

·      Policy assessment

Only recently, the Monetary Policy Committee (MPC) of the apex bank evaluated the several measures put in place by the bank to boost foreign exchange liquidity.

At the just-concluded meeting last week, the committee particularly noted that the recent policy on foreign exchange market reform would increase market transparency and encourage more foreign capital inflows.

The MPC, therefore, urged the CBN to leverage effective policies to attract remittances from the diaspora to help moderate exchange rate pressures.

Specifically, the Committee commended the bank’s role in the effective oversight of the banking system, evidenced by the relative stability in key financial soundness indicators and resilience of the sector, despite tight global and domestic financial conditions.

Members, however, noted the potential impact of the recent policy reforms on financial system stability and called on the apex bank to act proactively to ringfence the banking system from any possible second-round effects.

·      Foreign investors show renewed interest in economy

Obviously attracted by the reforms introduced by the apex bank, especially the unification of foreign exchange, the Mayor of Houston, Texas, United States of America, Mr. Sylvester Turner, recently led a 30-man diverse business delegation on a courtesy visit to the Federal Ministry of Industry, Trade and Investment seeking more certainty of policies rather than a back-and-forth scenario – in a veiled reference to policy summersaults by the fiscal authority.

Turner emphasised that foreign investors would steer clear of Nigeria unless major regulatory constraints are resolved, adding that as much as the Houston delegation would like to facilitate increased investments in Nigeria, it was also critical that the environment of certainty was assured.

Interestingly, the CBN’s efforts so far are aimed at addressing these concerns but require a complementary gesture by the fiscal side to completely de-risk the system and make it further attractive to prospective investors.