The 294th meeting of the policy committee of the Central Bank of Nigeria (CBN), scheduled for Monday, 20 November, did not hold. Neither did the 293rd edition of the meeting. In September, when the latter edition was due, the CBN was going through an unprecedented change in its leadership. Until the CBN governor’s address to the Chartered Institute of Bankers of Nigeria’s (CIBN) 58th Annual Bankers’ Dinner and Grand Finale of the Institute’s 60th Anniversary last Friday, the apex bank did not, as far as we know, offer any reason for its failure to hold the meeting of its Monetary Policy Committee (MPC) this month. Understandably, the resulting information vacuum has been filled up with speculation. The word out through alternative channels claim that the delay in constituting the CBN’s governing board is the main cause of the MPC not meeting yet. Whatever the cause, the two months between the failed September meeting and last week’s aborted one was time enough to fix it. Especially given the immensity of the monetary policy problem the country faces.
The CBN governor’s address to the CIBN duly acknowledged the enormity of the difficulties before the bank. But even when he acknowledged his institution’s need to communicate more with the markets and be more transparent about this, he failed to see how the failure to hold the MPC meeting on schedule complicates the CBN’s work. In part, this is because the markets parse meetings of the Central Bank’s policy committee for signals of policy direction, which, in turn, drive both the direction and tempo of domestic economic activity. On the other hand, central banks have come to appreciate the importance of these meetings as part of the communication channels for their policy of forward guidance – letting the markets in on the banks’ thinking on policy direction. Significantly, under Mr Godwin Emefiele, the Central Bank of Nigeria preferred to take the markets by surprise. Indeed, he is alleged to have taken perverse delight in the thought that the markets could suffer heart attacks on account of his policies. The markets took the nation for a ride instead.
Within this context, hope was that under Mr Yemi Cardoso, the apex bank would communicate differently. It has been anything but that. Up until Friday last week, under Cardoso the CBN’s communication pendulum has swung between surreal silence, and dissembling. That this will complicate the CBN’s work just as much as, if not more than, the preference under his immediate predecessor, is illustrated by the apex bank’s recent decision to repay the forwards owed to domestic banks. In spite of clear evidence that the net external reserves were all but depleted by Mr Emefiele’s market of many windows, the CBN advertised this as a solution to the naira’s loss of value, since prices were freed in the foreign exchange markets.
In the event, the CBN met between 70 per cent to 100 per cent of its repayment obligations to the cohort of foreign banks operating in the country, and about 10 per cent of its obligations to local banks. The infusion of foreign currency liquidity into the markets saw the naira appreciate. But given how inadequate the sums were, as the local banks account for more than 80 per cent of the outstanding forward obligations, the naira’s appreciation may have been simply a case of the infamous dead cat bounce. The naira’s relentless return to the exchange rate levels before the forward repayment brouhaha underline how steep the uphill climb before the Cardoso-led CBN will be.
As indicated by Mr Cardoso in his speech to the CIBN, the Central Bank will have to address the institutional failures that were underlined by its excesses under Mr Emefiele, especially, how, despite structures designed to check and balance the governor, Mr Emefiele’s canon broke loose from all its moorings. The temptation to address the Bank’s statutes in this process would be as wrong as it would be unproductive. Whether it is the Central Bank’s governance, its extension of credit to the Federal Government, or its foray into development finance, the institution’s multiple failures under Mr Emefiele were about the moral fibre of those he worked with, rather than inadequacies in the enabling laws.
At some point in the implementation of the reforms that CBN will need to modernise itself, it will have to consider its relationship with the Bankers’ Committee. There is absolutely no justification for a regulator chairing the trade body for the industry that it has oversight of. Yet, this committee, under Mr Emefiele, illustrated the dearth of character that was so key to the many errors that the CBN made and which the economy is paying for so dearly today. Or how else to explain how bank managing directors/chief executive officers were willing to endanger their staffs’ lives during the currency swap exercise, rather than point out that the apex bank was being economical with the truth each time it claimed to have kept the banks well supplied with the new currency notes? With this genre of leadership, it is scant surprise that the banking industry’s resilience is good only “under mild-to-moderate scenarios of sustained economic and financial stress.”
The economy faces harder times ahead. This makes a root-and-branch reform of the banking sector that more urgent. Of course, in reforming the industry, its people risk will matter, if the health of the financial system matters. And it does, because recessions that include bank failures hurt economies more, and the negative effects last longer. Far more than this, however, banks are a key component of the country’s monetary transmission mechanism. In spite of rising yields on money market instruments in the open market, the monetary transmission mechanism remains out of whack. The CBN’s policy rate is an orphan. The debit to banks for cash reserves with the CBN would confuse a sorcerer’s apprentice.
PREMIUM TIMES is persuaded that the cost of money still has some way to go up. Partly because we are not likely to see the naira return to its function as a store of value for so long as the real yield on naira-denominated assets remains negative. But no less important, too, because despite the wishes of our policymakers, Nigeria is not a low-cost jurisdiction. Domestic infrastructure, both physical and social, is too decrepit for this to be the case. On the upside, we have seen the month-on-month inflation rate trend down in the two months to October. Is this because we are seeing the base year effects from rising food prices finally work its way through? Or have the Federal Government’s tentative policies begun to bear fruit?
The jury won’t be in on this until early next year. The economy, meanwhile, looks likely to run out of room to manoeuvre long before then. The foreign exchange problem, which lies at the heart of its current travail, cannot be solved without restoring the naira’s ability to function as a store of value. And this will not happen so long as real interest rates (that is after providing for inflation) remains negative. There are many reasons why the CBN may loathe increasing its policy rate, including the additional debt service burden that the Federal Government then incurs on its domestic debt, but rising domestic prices do far more damage to the economy.
PREMIUM TIMES
