Daunting expectations from Shonubi as CBN ‘housecleaning’ begins
• Races against time to articulate exchange rate harmonisation roadmap
• Faces herculean task of resolving naira redesign dilemma
• Teriba: Acting governor needs clear understanding of fiscal policy direction
Folashodun Shonubi, a deputy governor (Operation Directorate) of the Central Bank of Nigeria (CBN) until Friday, will assume his new responsibility as the Acting Governor with oddly divergent goals as the monetary authority faces the most daunting period of its history.
The Monetary Policy Committee (MPC), which he now chairs as chief executive officer of the bank, has raised the interest rate to 18.5 per cent, the highest in decades to rein in inflation.
But with inflation now at over 22 per cent, the highest in 17 years, many thought monetary tightening was far from over, until the President, Bola Ahmed Tinubu, during his inauguration hinted at a low-interest rate regime to boost the private sector and purchasing power.
The cash reserve ratio (CRR), a prudential cum monetary tool, is also sitting at 32.5 per cent, which Dr. Muda Yusuf, an economist and director-general of the Centre for the Promotion of Private Enterprise (CPPE), described as among the highest in the world.
It is bad enough that the official CRR, which has restricted the proportion of deposits available for lending significantly, is high. But it is worse than the effective CRR is as high as 50 per cent, according to top bankers with knowledge about its operation.
Over the years, there has been a demand for a more dynamic CRR such that balances frozen by the Central Bank are adjusted on a real-time basis to ensure that the amount reduces in response to falling deposits of each lender and vice-versa.
The acting governor, perhaps, has a responsibility to reduce the CRR as well as recalibrate the system to end what bankers have described as arbitrary deduction and freezing of mobilized deposits on which they pay interest and insurance premiums as part of his effort in supporting the fiscal authority to unlock credit culture.
Unlocking credit could have consequences for the money stock and, in turn, further increase inflationary pressure. But Yusuf said Tinubu’s disclosure has shown “clearly that economic growth is the priority for now”.
The President has reiterated his commitment to a six per cent yearly output growth. He also pledged to create one million jobs by unlocking the potential of the digital economy, tall dreams experts said would only happen with affordable and accessible credit.
“Whatever decision you take, in economics, there is a price to pay. The priority is how to grow the economy; how to create jobs and how to make credit more affordable.
“Also, the key drivers of inflation are not necessarily money supply. How many people have access to credit, anyway? Credit is not a big driver of inflation. How much impact has the tightening had on inflation? I think we should be looking at other drivers of inflation, which are supply-side issues and the ways and means (W&M) financing. On the monetary side, the only thing I have seen is the huge W&M financing,” Yusuf argued.
CBN’s overdraft, which totaled N23.72 trillion as of when the former administration secured parliamentary approval for its securitisation, has been a sticking point. The International Monetary Fund (IMF) and other development institutions faulted the growth and called on the suspended CBN governor, Godwin Emefiele, to comply with the enabling Act, which restricts access to five per cent of the previous year’s revenue and speedy repayment not exceeding the financial cycle.
With the hasty amendment of the statutory provision extending the borrowing limit to 15 per cent of the previous year’s revenue of the Federal Government, the CBN is now more burdened.
And with the debt allowance of the government restrained by frightening debt service-to-revenue ratio that surpassed 80 per cent last year, the prohibitive international debt market and the extremely high cost of local borrowing, the newly-inaugurated government could be tempted to return to the W & M window for funding. Already, there are questions on how the government would fund the 2023 budget deficit totaling N12.1 trillion. How Shonubi would respond to a possible request is a major acid test of his determination to chart a new course.
Collaborating with Yusuf’s argument, Dr. Chiwuike Uba, a development economist, argued that W&M was a major contributor to the impact of the money supply on inflation. With the overdraft currently at N23.72 trillion, the windfall contributes about 44 per cent of the country’s money supply.
Shonubi assumes the office with an academic background in engineering, where he earned his first and second degrees before he studied for MBA, with interest in finance. But with a CBN that boasts of hundreds of Ph.D. holders in diverse specialties of economics and departments and directorates headed by professionals, experts said all he needs is the ability to envision the big picture and apportion the painting appropriately.
Yet, there are many hard choices to make that border more on courage than professionalism. For instance, the naira redesign that placed Emefiele on a collision course with the campaign team of the President in the run-up to the election is in limbo. The Supreme Court put the validity of the old notes on December 31, 2023, and the President said his administration would “recognise” the two versions of the legal tenders.
About six months to the end of the validity of the new banknotes, the currencies are technically out of circulation. Dr. Ayo Teriba, an economist, said the acting governor would need to speedily decide what to do with the controversial policy, which many Nigerians have tagged ‘naira confiscation’.
On his core mandate, Teriba said until the current administration fashions out its economic direction, “there is no basis for debating what the acting governor would do”. He argued that money demand, the basis of the existence of central banking, is derived from the economy and is never an isolated subject.
“You have to resolve the W&M. You have to decide whether to continue with 32.5 per cent CRR. You have to decide whether to continue with 18.5 per cent MPR. But you cannot debate any of this until there is clarity on the economic direction of the government. You need fiscal guidance before articulating the direction of monetary policy,” he said.
Teriba is not also carried away with the appointment, saying the appointee was a “co-traveler with Emefiele” who is part of everything the embattled governor did in office. According to him, the Central Bank is an institution and until it is cleaned, nobody can tell who has a future in the bank or not.
About three years ago, the Central Bank announced its commitment to rate convergence. Along the way, the CBN official rate was discarded for the Investors’ and Exporters’ (I &E) window. But different rates continue, causing rigidity issues in the market and triggering all manners of malpractices, according to analysts.
In his inauguration, the President said it was time the monetary authority began to work towards achieving the long-awaited harmonisation, a big task now thrust upon the new handler. To achieve exchange rate convergence, analysts have suggested, there are trade-offs some of which could hurt the economy and economic agents.
For instance, devaluation, which some economists said could close the market arbitrage, eliminate speculators and incentivise the inflow of foreign capital, could worsen inflation through the FX pass-through effect and ultimately increase the price of the just-deregulated premium motor spirit.
The general inflation adjustment could be huge considering Uba’s argument that currency depreciation/devaluation is responsible for 90 per cent of Nigeria’s elevated inflation. The CBN, whose mandate it is to strike rate harmonization deals, takes responsibility for inflation.
To achieve a single exchange rate, Prof. Ken Ife, an economist, said: “The acting governor could start focusing on gradual convergence policies. They should double the forex supply by getting more from NNPC, which controls 90 per cent of forex supply from crude (89 per cent) and gas (11 per cent) and redouble efforts on the CBN RT200 FX Programme and 100for100 public-private partnership programme to increase the quantum of value addition for export.
“CBN also needs to see how they could help Dangote Refinery to rapidly start producing to bring competition and more forex as well as set up intervention funds for modular refineries/gas assets.”
Despite pressure from the international community to remove trade restrictions, Ife charged CBN to continue forex demand management and ease it out while normalising as the country grows in supply to avoid shock.
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