CBN: The Task Before Yemi Cardoso’s Team

Behold, there is a new Sheriff in the Nigerian banking and financial sector, Dr Olayemi Cardoso, who takes over as the new Governor of the Central Bank of Nigeria (CBN). Along with his Deputies, Dr Cardoso successfully passed through  screening by the Senate last week. Being a CBN Governor at  a time when the nation’s economy seems to be in disarray, is not a tea-party. With spiralling inflation, a high rate of unemployment, rising prices (Stagflation), the Naira at it lowest ebb, foreign investors fleeing from Nigeria, what magic can the Cardoso-led CBN do, to stabilise Nigeria’s economy and infuse cutting-edge monetary policy at this time, to turn things around? Adetilewa Adebajo and Dr Sam Amadi examine and analyse the challenges ahead of CBN’s new team, and proffer possible ways to surmount them

The Change of Guard at the Central Bank of Nigeria

Adetilewa Adebajo

The new Central Bank of Nigeria (CBN) Governor, Dr Olayemi Cardoso, in responding to the questions from the Senators during his confirmation hearing, pledged to commit himself to governance and compliance at the highest global standards. This, he stated, has been the hallmark throughout his brilliant career. The Senators, to their credit, did their bit by asking all the pertinent questions given the antecedents of the former CBN Governor, Godwin Emefiele. Senator Orji Kalu, in particular, asked point blank; if the President makes a request that is not in line with CBN statutes, would the new Governor have the spine to say no?

Great Expectations 

The great expectation now, is for a reformed and Independent CBN which will return to its core functions of monetary policy, price stability and reserve management.

The challenges ahead for the Apex Bank Governor, are significant. The first task is to restore confidence, reputation and integrity to an institution, that has over the last eight years, overreached itself and violated its own statutes. The next task after this, is to review the current situation with the Nigerian Economy in stagflation, and come up with effective monetary policies that will address the problems, especially of runaway inflation, unemployment, and poverty. The Nigerian economy requires economic growth of 8-10% on a sustainable basis, to get us out of this state. This must be the target. While we have lost about US$250-300 billion of our GDP in the last eight years, the new Governor is projecting US$1trillion GDP economy in the next eight years.

There is no doubt that the challenges are significant. It is therefore, imperative, that the new Governor builds a strong experienced team around himself, with capacity in the area of economic policy formulation, monetary policy and price stability. At all levels, they must build and test solid economic models with relevant data, to play out scenarios that will guide policy decisions. The competence and integrity of new appointments into the Governing Board of the CBN, will be a litmus test and clear signal of intent. More important, the additional appointments into a newly constituted Monetary Policy Committee (MPC), aside the Governo r and his Deputies who all have limited monetary and price stability experience, is of significant importance and a critical success factor.

Foreign Exchange 

The interaction with the fiscal authorities will be critical, because the mismanagement and lack fiscal discipline is what has led to an unsustainable debt burden that is now affecting the supply of foreign exchange (FX) in the economy. 95% of revenues are going towards debt servicing, and future oil revenues have been committed through various opaque forward contracts and oil swaps. A fundamental task is to work with the Government to unravel these forward contracts and swaps, in a bid to reconcile and determine the real position of our revenues. This also has to be complimented with the savings from the subsidy removal, because as oil prices go up the subsidy savings erode.

Clearing the FX backlog has to happen over time in a structured manner, to restore confidence and stability to the market. There are no quick fixes, as reform of the FX markets are long overdue. Retaining the US$20-25Billion of yearly diaspora remittances in the banking system, and the development of an interbank FX market is also a priority. There is also need to restore confidence in the domiciliary accounts, and return to a position where 25-30% of money supply was in FX held in domiciliary accounts.

Ways and Means

Real yields and real returns as are currently negative as a result of cost push inflation, driving up the demand for FX. Therefore, moving the economy out of stagflation and taming runaway inflation is paramount. An immediate end to the inflationary and illegal 30 trillion Naira ways and means financing, is another priority. The legal limit of the ways and means according to parameters stated in Section 38 of the CBN Act 2007  currently, should not exceed 1 trillion Naira. 

Restructuring CBN’s Balance Sheet

The CBN balance sheet is 30 times over the ways and means limit, and in dire need of restructuring. This illicit financing is also a significant revenue line for the CBN, as it is charging Government interest at 20%. The ways and means are being financed with N10 trillion from Government deposits, N10.3 trillion from open market operations (OMO) and N11.5 trillion cash reserve requirements (CRR) debits from the banks. These are funds that should otherwise be available for the private sector, to stimulate economic growth.

In the process of restructuring the CBN balance sheet, all the intervention loans and related institutions such as NISRAL, need to be reconciled and transferred to the relevant development banks namely Bank of Industry, Bank of Agriculture and Development Bank of Nigeria. These institutions have the expertise to properly evaluate, disburse and manage loans. Once the central Bank has restructured and cleaned up its balance sheet, restoring ways and means to statutory limits, it can then concentrate on reconciliation and rebuilding its external reserves. This, in a manner that will support the economy, and in line with CBN statutes. With yet another US$100 oil price on the horizon, presents an opportunity to shore up our reserves.

Conclusion 

Turning the Nigerian Economy around is not as difficult as it seems, it’s about positioning, focus, instilling confidence and doing the right things. It’s a marathon, not a sprint. To deliver desirable results, CBN needs to provide policy consistency over the next one year and restoring confidence backed by a solid budget and sustained structural reform on the fiscal side.

The Excess Crude account in 2008 was in excess of US$18Billion which saw us through the global financial crisis today, its near zero. Even the stabilisation fund domiciled with our Sovereign Wealth Fund, does not have the capacity to resolve the problem it was set up by law to address. The bane and Achilles heel of the Nigerian economy, which the new Governor must be mindful; The inability of Nigeria to build up buffers to enable it withstand the inevitable economic shocks and cyclical downturns, in a global financial economic system.

Adetilewa A. Adebajo

The Tasks Before the New CBN Board of Governors

Dr Sam Amadi

The new Central Bank of Nigeria (CBN) Governor and Deputy Governors, have come to office at a bad time. The bad time, is in two senses. First, they take over from a CBN Board whose exit is to the credibility of the Central Bank. The Governor and his Board members have guaranteed tenure, as part of policy framework to secure their independence. They are appointed by the President, and approved by the Senate. To remove them before end of tenure, requires that the President addresses the Senate and secures two-third majority approval of Senators. In the present circumstances, there was no such address and Senatorial approval. The current Board had been appointed to replace them, before the rumour of the old Board’s resignation became public. Whatever actually happened, it is clear that the old Board did not voluntarily resign, and the President may not have followed due process as provided in the CBN Act, before appointing the new Board.

The second inauspicious moment, is the financial state of the Nigerian economy. The new Board of the CBN takes over at a time the Naira is at its all-time weakest position. Today, $1 exchanges for about N1000. Credibility of the monetary policy is in tatters, as a result of the malfeasance of the previous Board. The President has appointed a sole investigator to look into the affairs of the Bank, and revelations so far, point to large-scale corruption and misdirection of monetary policy by the old Board. This situation points to urgent need for a reset. What should the new Governor and his team do, to reset and reestablish confidence in Nigeria’s financial market?

Rebuild Confidence

The heart of banking is confidence, confidence of the people in the safe custody of their money. In today’s world of complex financial engineering that results in multiple forms of Collateralised Debt Obligations (CDO) and other Assets Based Securities (ABSs), we often forget that the essence of banking is confidence. I like the story rehashed by Cambridge University Economist, Professor Ha-joon Chang, from the Disney movie, Mary Poppins. It goes like this:

“Michael does not understand. Even though he has given back to his father the very thing that has caused all the trouble, it has not made things right again. Why are grown-ups so strange? Michael wanted to use his tuppence coin to buy bird feed from that old lady sitting on the steps of St. Paul’s Cathedral, but his father tricked him out of it. His father said he would show what more interesting things could be done with Michael’s money, when he and the children (Michael was with his sister, Jane) get this work.

When Michael and Jane got there, this very old man called Mr Dawes, the ‘directors’ (as he called them), and even their father started singing about depositing his tuppence in Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank (what me). They said that this money would make him part of all these Things he had never heard of in strange places – ‘railways through Africa; dams across the Nile; fleets of ocean greyhounds; Majestic, self-amortising canals; and plantations of ripening e. Mesmerised by the song, Michael momentarily lost concentration and opened his eyes first, at which point Mr Dawes, surprisingly for such an old man, snatched the coin. He somehow made all the bank’s customers rush to withdraw Naturally, Michael shouted ‘Give me back my money!”, but their money, the bank refused to pay them, and chaos ensued. He and Jane in the end, managed to grab the coin back from the old man and ran away, but upon returning home they found that his father had been fired from work for what had happened given to his father, but father has not got his job back. Why did what he said cause such a problem? Why did all these people want their money back too? More confusingly, how could the bank refuse to pay the customers their own money?”

This story illustrates the real backbone of banking. It is about generating and sustaining confidence. We are fortunate that, we have not suffered any significant bank run. The state of the banks is stronger today, this is in part due largely to the consolidation policy which has resulted in banks having a stronger asset base. But, with the tales of corruption coming out of the Apex Bank, it might be that things have fallen apart. The new Board, should take a look at the quality of banking supervision. There may be need to strengthen Financial Regulation through reviewing prudential guidelines, to ensure that banks stay within comfort zones to continue to serve customers’ needs and avoid both Liquidity and Solvency Crisis.

The responsibility of prudential regulations falls directly on Mr Philip Ikeazor, as the Deputy Governor in charge of Financial Systems Stability (FSS). He comes with great experience, as a seasoned bank executive who understands the complexities and risks that mindless risk-taking by banks can cause the shareholders, as well as the financial system through systemic contagions.

Enable Credit

The second important role banks play in economic development, is to enable credit. Through the confidence people have in the stability of money deposited with them, banks create wealth through extension of credits to enterprises in the form of loans. This is one of the most important roles of banks, in modern economy. The origin of banking goes to efforts by people who have social trust in their small circles, to deposit values to persons they trust. They are given some notes, which indicate the nature of the custody. If the person or entity who holds custody is credible, the note can be used for commercial transactions, thereby creating wealth. Today, because banks are not required to have the money to back up all the deposits they have, and there is little risk of a run on them because of effective regulation and deposit insurance, the banks are at liberty to create credits beyond their cash holding. This is the heart of banks, as an instrument of wealth generation.

We need to be a credit country, where there is sufficient financial support for entrepreneurial engagements that can create wealth. Through its prudential regulations, the Governor and his team should incentivise increased credit creation for real sector investments, as part of its strategic direction of the economy towards full employment as much as possible and stable macroeconomic environment. The new Board should continue to insist on strong lending activities to medium and small enterprises as its priority focus, in order to energise production and create sustainable wealth.

Monetary Stability

The Central Bank’s main function is monetary policy, and this requires it to control inflation and the exchange rate to ensure a good environment for economic development. The traditional emphasis has always been to fight inflation, because of its destabilising effects on economic growth. At 25.80% inflation, Nigeria needs to bring down the inflation rate. How this is possible with two headwinds of rising energy costs and Naira devaluation, is a difficult proposition. The Ministry of Finance and Central Bank seem to have decided to defend the Naira, by seeking non-orthodox means of increasing dollar supply in the economy. The pitch for more diaspora remittance, has not worked. The Government is borrowing dollars from the African Development Bank (ADB), to pay with crude swap through the NNPCL.

What is clear is that, the new Board will need to restore institutional integrity in the management of monetary policy. The current inflation is also caused partly by the recklessness of the previous Board, in surrendering its independence to the President and his team. The revolution in central banking across the world has been to reinforce the independence of monetary authorities, and to separate management of fiscal and monetary policies to safeguard the economy. The last Board commingled the two, in an unwise manner. The challenge before Dr Yemi Cardoso, is whether, considering his relationship with President Tinubu, he can maintain the independence required of a modern central banker. He has to reject the politicisation of monetary policy, even as he lends monetary policy as an instrument of economic development policymaking.

Many economists opposed to neoliberalism, often quarrel with the idea of the independence of the Central Bank. In their view, the depoliticisation of the Bank may actually lead to an irresponsible and ineffective bank that does not support developmental priorities. But, we can engage in stimulating  economic activities through open market operations and prudential regulation, without committing monetary policy to short term political interests. In fact, the value of a central bank is that it acts as a counter majoritarian institution in monetary policymaking, to safeguard society from the dangerous urgency of political ideas and interests of the ruling clique.

Conclusion 

At this time in our history, and considering the terrible state of monetary policymaking, Yemi Cardoso should strengthen the independence and integrity of the Central Bank of Nigeria, if he wants to end successfully.

Dr Sam Amadi