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Price stability, domestic content czar reigns

By Chijioke Nelson, Asst, Editor, Finance/Economy
20 May 2019   |   3:11 am
Alban William Housego Phillips, a New Zealand born economist, whose name was attached to post-war economics, was popularised by the term, “Phillips Curve”. The curve was all about establishing a relationship between inflation and unemployment rates. In other words, how much of inflation is needed to spur growth. His work really showed that there was…

The Governor of the Bank of England, Mark Carney attends a press conference at the Bank of England in London on February 25, 2019. – Britain and the United agreed Monday to maintain how multi-trillion dollar financial transactions are carried out between the two countries after Brexit, aiming to avoid market uncertainty when the UK leaves the EU. The UK and US carry out trades of derivatives — securities whose value is based on an asset such as currencies, stocks and commodities — worth a combined $2.4 trillion daily, Bank of England governor Mark Carney told a press conference in London. (Photo by Kirsty O’Connor / POOL / AFP)

Alban William Housego Phillips, a New Zealand born economist, whose name was attached to post-war economics, was popularised by the term, “Phillips Curve”. The curve was all about establishing a relationship between inflation and unemployment rates.

In other words, how much of inflation is needed to spur growth. His work really showed that there was a trade-off between a strong economy and low inflation and that caught the fancy of several academics and policymakers. He also favoured stabilisation policy strategy.

Nigeria, among other economies, has benefitted from the adoption of the popular ideas extolled by Philips’ audacity.

Indeed, consistency, doggedness, professionalism, and focus, the likes of Philips, amid avalanche of ensuing criticisms, are required to arrive at a stable system that keeps going, against all odds.

Of course, the country’s many cycles in its quest for economic development have revolved around commodity uncertainty (our sole offerings) to global market; poor resource utilisation; entrenched trend of growth retarding behaviour; and lack of political will to take on challenges.

The last five years presented great headwinds that called for inquest- a review of trends in resource management, capacity, potentials for increased productivity and leadership’s self assessment. Shortly before the 2016 recession, a rare three-fold phenomenon confounded the economy – high inflation, unemployment, and non-growth.


These were the real challenges, which solutions called for practical analysis of macroeconomic developments and backed by sheer-will, be it personal or political.

For Ucha Nwagbo, an economist, “something must give for a change to occur, and it’s either the process or the will or both. The ‘potential’ mantra is rhetorical, it’s the realisation of potential that makes an economy and it takes deliberate effort. The resource curse narrative must give way for inclusive development gains.”

In a system where inflation and unemployment appear entrenched, due to collective negligence of the causative factors, though obvious, like Philips, it would be audacious to embark on findings that would raise objections and perhaps, alter the status quo, with short-term discomforts for all.

The sudden pursuit of import substitution strategy, with its stabilisation mechanisms, though long coming, was a typical show of conviction, especially when some “variables” like local capacity, resource availability, and a well-analysed opportunity costs point positive. It was to establish a fact and pursue the end to an unending cycle of development challenges. Coincidentally, such was the emergence of Godwin Ifeanyi Emefiele, as the Governor of the Central Bank of Nigeria (CBN).

Following the controversial exit of his predecessor, now Emir of Kano, Muhammadu Sanusi II, his emergence defied all speculations, and so did his policies that are now popular, whether for good or bad, depending on individual perspective. Is the end actually justifying the means?

Perhaps the longest cycle in crude oil price volatility to disfavour Nigeria, which in the last five years, has not allowed a “windfall”, but the apex bank has heavily reaped “windstorm”, carrying the burden of monetary policy wholly, and partly those of the fiscal side.

Nwagbo added: “If there is another Emefiele among the leaders, with his genuineness and firm belief, to complement him in the last five years, it would have been better. You will see his concerns in his words and actions. You will see Nigeria as a business by his concepts, not politics and empty promises.”

For The Economist, a British magazine, the inquest and audacious move to either rein in a self-inflicted economic doldrums or revive redundant resources, was generally tagged, “Toothpick Alert”. At some other times, along with other merchants of “foreign economic theories”, it was “capital control” and re-emphasised with all sense of sarcasm. The policy was seen as bereft of hopes and not even a chance, irrespective of the peculiarity of the economy and its people.

For Emefiele, it is home-grown philosophy for localised challenge. It is a struggle to rein in lingering depressed local capacity caused by negligence and over-dependence on foreign/luxury products, fuelling not only inflation and unemployment, but stoking exchange rate crisis and pressuring the national reserves, as well as fiscal balance.

It was time for the real fight to enthrone a regime of price stability for inclusive growth and build domestic capacity, using endowed resources. It was time for exercise of sheer-will and the essence of the Philips Curve, using tradeoffs and stabilisation mechanisms.

In his first World Press Conference on assumption of office, Emefiele, said: “We must, by now, have been tired of hearing people talk about the ‘potentials’ of Nigeria. Now is the time to live that dream. I truly believe that working together, we can achieve our goals and give Nigerians the chance to live longer, better and more fulfilled lives,” he said.

The 41 items was this policy necessary? The answer, expectedly, varies by perceptions. But given the exigency, no reaction would typically be the same.

“It’s like trying to avoid hitting a passer-by, who carelessly crossed the road, while the car is on high speed. Would you steer away the car before applying the brake or would you apply the brake before steering away the car?” an economist, Tony Adi, asks.

From the outset of the foreign exchange challenge to its peak in 2017, devaluation was the “quick fix” for the majority, especially the investors, but it was only an option. It meant more Naira for the government to battle its fiscal crisis, according to their arguments. Of course, that was a part of the truth, but what about inflation and the possible erosion of purchasing power?

At this point, the demand for dollar was estimated to have reached $5.5 billion monthly, with foreign inflows at a record low of less than or equal to $1billion.

Adi added: “We can now speak on hindsight. Egypt was together with Nigeria on the same crisis, but with their capacity, higher than Nigeria, opted for devaluation. Till now, they are still battling with inflation and currency crisis. It is now obvious that CBN’s decision at that time may not have been the best, but the most sought-after devaluation, was still not the alternative.”

Perhaps, the most controversial of the monetary policy and the turning point for the first five-year reign of Emefile at the apex bank, due next month, in just less than one year in office, was the listing of 41 items that can be produced either in whole or part in-country, as ineligible to access foreign exchange at the official window.

This was a precursor to series of policy changes. It was possibly the worst of his “misdeeds” by critics of his policies, and maybe, a reason to foreclose anything good from his leadership.

In hindsight, the move was a foresight to imminent foreign exchange crisis occasioned by oil price volatility that would soon crystalise, but mostly, a test of what the citizens and Nigeria are capable of doing.

At that point, the reserves were fast depleting, reaching a low of $23 billion by October 2016. It was indeed, a time to tinker import substitution strategy.

Today, all the items on the prohibition list, now increased to 43, are being produced wholly or in part in the country or undergoing capacity enhancement. Employment has increased, foreign exchange saved, domestic capacity raised, thereby supporting inflation and exchange rate management.

Uyi Egene said: “The successes of Emefiele’s monetary policy and interventions are not really much as we would be made to believe. To my understanding, he has only succeeded in reminding Nigerians of their agrarian nature.
“There is much remaining the same in industrialisation. The value chains are still poor. But there are employments already created by a mix of the policies, coupled with sliding inflation rate. While they are not sufficient enough, the truth is that they have become necessarily evident in the returning stability,” he said.

Forex policy
The exchange rate managed float policy, introduced to lessen pressure on the foreign exchange (forex) market, has remained in the fault line by opponents, many of whom, still insist on devaluation of the currency. 

The policy was introduced in 2016, alongside the Naira Settlement Foreign Exchange Market. The foreign exchange policies came on the belief that the nation has attained the position where market participants can settle foreign exchange futures transactions in local currency.
While Emefiele had severally reiterated that the management of the foreign exchange market had produced the “most optimal results when compared with other emerging markets in recent times,” at the BusinessDay Economic Summit in Lagos, in March, he said that no nation has freely floated their currency.

In April 2017, the Investors and Exporters Window, where transactions are fully market determined, was introduced. But the platform took the world by surprise, when it turned in $10billion foreign inflows in barely six months after takeoff. Today, the platform turns over a weekly transaction averaging about $700 million to $900 million.

It was therefore not a surprise when Standard Chartered’s London-based chief economist for Africa, Razia Khan, in a report by Bloomberg, said: “We do not think the Nigerian naira is substantially overvalued at current levels. The closing of the spread between the rates in the parallel and investor markets suggests that it is close to fair value.”

The aggressive foreign exchange reforms policy and its impact received international recognition from the revered Forbes Magazine, as Emefiele bagged, “Best of Africa Achievement,” in an awards ceremony attended by United States dignitaries, global investors, international bankers, as well as Nigerian banks’ executives, for steering the forex market to stability against all odds.

“The only thing that has been recurring in the foreign exchange argument is devaluation. It is disheartening to see that the world is going protectionism, but people are busy pressuring you to open your doors. It is not necessary if there is alternative. At least, we can explore our ideas to the full first,” Nwagbo added.

Bureaux de Change (BDCs) were included in the foreign exchange reforms, aimed at checking rent-seeking, depletion of the nation’s foreign reserves, unauthorised financial transactions, “dollarising” of the economy, and the unenviable position of Nigeria as the largest importer of dollars in the world.

On his assumption of office, out of 130 BDCs sampled based on volume of purchase from banks, 121, representing 93%, were in breach of the objectives and provisions of their operations.

Today, the operators, under the aegis of the Association of Bureaux De Change Operators of Nigeria (ABCON), launched its live run automation portal, a process that started since 2016.

The portal’s operations are expected to automate all BDCs, with those of Nigeria Inter-bank Settlement System (NIBSS), Nigeria Financial Intelligence Unit (NFIU), and CBN, to improve the level of compliance with set regulations.

And to demonstrate how serious forex policies are globally, European Union regulators, Thursday, fined five banks, including Barclays, Royal Bank of Scotland, Citigroup, JPMorgan, and Japan’s MUFG a total of more than €1 billion ($1.1 billion) for colluding in the trade of large sums of foreign currency.

Development interventions/financing
The development financing initiatives of the apex bank is another aspect that received attention for good and bad in the last four years.

One of the high points of the controversies elicited by CBN’s interventions was a call seeking the reduction of the powers accorded the institution, assessed to be extensive and alleged to be a disconnect between monetary and fiscal policies.

The call was directed to the National Assembly that conferred the powers on the CBN through a legal instrument, to slash and pave the way for checks and balances. It was a call for intervention.

Such powers were especially in deciding and acting on financial matters without recourse to the Ministry of Finance that is constitutionally required to supervise financial policies, programmes and activities of the Federal Government.

Erstwhile banker and financial expert, Fola Adeola, while reacting on the development then, said CBN’s autonomy is a global practice and should be so, but noted that “if the matters in question are anything other than monetary policy issues,” there may be a case to make.

Of course, at the peak of the ongoing economic challenges, the apex bank increased its use of conventional and unconventional policies to stabilise the economy. While stepping up monetary policy to stem rising distortions to price stability (inflation), it also assumed roles in fiscal management at various times, using development interventions to stimulate the real sector to take up production of the imported items.

The establishment of Secured Transaction and National Collateral Registry, and the National Credit Scoring System were aimed at improving access to the information on borrowers and assist lenders to make good credit decision.

Now the registry has generated over N1.5 trillion loans to MSMEs and individuals in the nation’s economy within two years, its Registrar, Mohammed Mainasara, said.

To complement existing interventions, CBN unveiled a N300 billion Real Sector Support Fund (RSSF), in efforts to unlock the potential of the productive sector to engender output growth, value-added productivity, and job creation. So far, N152 billion has been approved.

Also, it scripted about N213 billion for Nigerian Electricity Market Stabilisation Facility (NEMSF), to settle outstanding debts in the Nigerian Electricity Supply Industry (NESI), which has recorded N56.68 billion disbursements to five generating companies and five distribution companies.

The CBN collaborated with the Federal Government and development partners to establish the Development Bank of Nigeria, envisaged to address the problems of low interest and long-term funding for MSMEs in Nigeria.

The latest of the bank’s intervention to ease access to finance in the midst of economic challenges and assessed high risk environment, is the emergence of N5billion-capitalised NIRSAL Microfinance Bank.

The microfinance bank, as the brainchild of the Bankers’ Committee, which Emefiele is sitting atop its leadership, was set up in collaboration with the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL), and the Nigerian Postal Service (NIPOST). The bank will give out loans at a five per cent interest rate and customers will have a two-year moratorium and five years for repayment.

The Lead Director of CSJ, Eze Onyekpere, said: “The fact that SMEs will access credit without necessarily providing a collateral as the business itself can act as collateral and will be registered in the National Collateral Registry as security for the loan, is a wonderful innovation.
“The recognition of securities, which the conventional money deposit banks have rejected as collateral, is a welcome development, a step in the right direction. This should be deepened to support entrepreneurship and the blossoming of creative ideas.

“The initiative will therefore, increase value addition, create new jobs as the SMEs will have access to credit to expand and deepen production.”

Emefiele, now granted a second chance to consolidate his reforms, following legislative approval, has hinted that there would be no magic wand in the process, as it would be rough and tough.

But he equally reassured the lawmakers that with his renewed mandate, there would be no more business-as-usual, as “CBN will push very hard to ensure that those who seek to undermine the policies of Nigeria without respecting the laws of this country will be brought to book under any circumstances.” And so help us God!

Ben Shalom Bernanke, an American economist at the Brookings Institution, served two terms as Chair of the Federal Reserve, the central bank of the United States, from 2006 to 2014. During his tenure as chair, he oversaw the Federal Reserve’s response to the late-2000s financial crisis.

Bernanke served as chairman of President George W. Bush’s Council of Economic Advisers before President Bush nominated him to succeed Alan Greenspan as chairman of the United States Federal Reserve.

Bernanke was confirmed for a second term as chairman on January 28, 2010, after being re-nominated by President Barack Obama, who later referred to him as “the epitome of calm.”

Bernanke asserts that it was only the novel efforts of the Fed (cooperating with other agencies and agencies of foreign governments) that prevented an economic catastrophe greater than the Great Depression.

In a short statement on Martha’s Vineyard, with Bernanke standing at his side, Obama said Bernanke’s background, temperament, courage and creativity helped to prevent another Great Depression in 2008. He was confirmed for a second term by a 70–30 vote of the full Senate, the narrowest margin, at the time, for any occupant of the position.

Bernanke has been subjected to criticism concerning the late-2000s financial crisis, even after leaving office. According to The New York Times, Bernanke “has been attacked for failing to foresee the financial crisis, for bailing out Wall Street, and, most recently, for injecting an additional $600 billion into the banking system to give the slow recovery a boost.”

Bernanke was said to have overruled recommendations from his staff in bailing out AIG, worlds biggest insurer, raising questions as to whether or not the bail out decisions were necessary. But Senators from both parties said his actions averted worse problems and outweigh whatever responsibility he may have for the financial crisis.

Mervyn Allister King, also known as Baron King of Lothbury, is a British Professor of Economics at the London School of Economics, who served as the Governor of the Bank of England from 2003 to 2013.

Most notably, King oversaw the bank during the financial crisis of 2007–2008 and the Great Recession in his two-term appointment.
King argued that when the financial crisis and bank meltdown hit in autumn 2008, he and other Western central bankers “prevented a Great Depression”, in part by cutting interest rates to virtually zero. The Economist agreed, saying that he “has a point”.

The bank, under him, faced criticism, however, for the pace of the rate cuts, which took five months from the beginning of October 2008 to get down from five per cent to 0.5 per cent, where they remained for several years.

King abandoned his institution’s remit on keeping inflation around two per cent. After becoming only the second Bank of England governor to speak to the TUC in its 142-year history, King conceded that people were “entitled to be angry” about unemployment and the bank bailout.

King has been scathing about the banking sector since it crashed, especially its “breathtaking” £1 trillion bailout and its continuation of bonus awards in 2009, calling for a serious review of banking’s structure and regulation.

With King’s term as governor ending in 2013, top UK banks have warned that unless a less “hostile” figure is found as a successor, they may feel it necessary to move abroad.

King had faced accusations of refusing funding to the Northern Rock Bank, precipitating a run on that bank, a situation not seen in the UK since 1914.

Mark Joseph Carney is an economist, with Canadian, British and Irish citizenship and current Governor of the Bank of England since 2013, due to expire in January 2020.

His actions as Governor of the Bank of Canada between 2008 until 2013, are said to have played a major role in helping Canada avoid the worst impacts of the financial crisis.

During his reigns at the Bank of Canada, he applies a non-standard monetary tool (conditional commitment) at some point, a situation likened to CBN’s unconventional policies today, in the bid to boost domestic credit conditions and market confidence.

The bank’s decision to provide substantial additional liquidity to the Canadian financial system, and its unusual step of announcing a commitment to keep interest rates at their lowest possible level for one year, appear to have been significant contributors to Canada’s weathering of the crisis.