1 April 2013

Nigeria: Sanusi's Monetary Policy Scorecard in 5 Years


Nothing lasts forever. The regime of one of the most controversial Central Bank of Nigeria (CBN) governors will come to an end this year.

Sanusi Lamido Sanusi, CBN governor in a rare move that contradicts the 'Nigerian character,' opted out of a second term arrangement and thus, may not vie for the position in 2014.

Sanusi, the bold and courageous CBN governor, announced his intention not to seek reappointment in 2014. This only formalises speculations that he is not interested in a second term.

His decision came a day after the Monetary Policy Committee (MPC) held its 2nd meeting in 2013, where it retained its tightening stance, leaving interest rates unchanged.

Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company Limited said the combination of his imminent exit from the Nigerian policy making scene and the MPC's decision has only served to increase the interest and jitters about the implication of these events on the markets, monetary policy and Nigeria's sovereign credit rating.

Sanusi was sworn-in as the CBN governor on June 3, 2009, in the midst of a banking crisis of confidence, solvency and liquidity. He came at a time of global financial turmoil and domestic uncertainty. His job was cut out for him. The scorecard below shows a "then and now" comparison.

Monetary policy as defined by Augus Swanenberg in the book, Macroeconomics Demystified "is a Central Bank's policy directed or causing changes in the availability of money in the economy in order to achieve price stability." If that definition is anything to go by, then the primary goal of monetary policy therefore, is the stability of price level.

The monetary policy stance during this period was accommodating. The monetary policy regime adopted was that of targeting the intermediate monetary aggregates and by implication, managing inflation. It was in other words, a move towards implied inflation targeting.

The results of the monetary policy strategy are self-evident. Growth rates were elevated within an environment of financial stability. Most of the parameters for evaluating monetary policy performance including exchange rate stability, moderating inflation, capital and trade flows were generally positive.

Rewane argues that the central bank, whilst not adopting the explicit inflation targeting framework, has implemented policy using the discretionary rule.

"No matter what rule, or whether it is anticipatory or reactive, the goals of monetary policy remain the same. In other words, because the economy works best with predictable prices, the stability of the price level is the primary goal of monetary policy. A low single digit price level growth is considered the practical equivalent of price level stability", he said.

Nigeria's inflation rate currently at 9.5 percent (February 2013), is below the Federal Government's target of 12.9 percent. Short and long term interest rates have been approximately 100-200 basis points (bps) above rate of inflation, thus real interest rates have been positive.

Capital formation has grown from a negative of -6.8 percent of Gross Domestic Product (GDP) in 2008 to six percent in 2012. The exchange rate volatility of the naira has been maintained at a +/- 3 percent and there has been greater convergence of rates in the forex market.

The central bank, during this period, moved in an unpredictable manner to protect the value of the naira. It reduced the net open positions of banks and introduced limited exchange controls.

There has been an increase in the inflow of portfolio funds also known as hot money to approximately $12 billion, due to the attractive interest rates and stable currency.

John Okolo, an analyst in Lagos, said foreign investors who brought in these monies will not hesitate to withdraw them the moment they think new policies will not be friendly.

Rewane said, in all, it can be said that the period has been one of revolutionary reforms like the cashless policy and bringing Nigerian monetary policy in line with global best practices.

However, despite the increase in the velocity of circulation of money, growth in intermediate aggregates of money supply has been muted, while inflation has been kept relatively under control.

The CBN Governor's intention to leave office upon completion of his tenure creates a void that will be difficult to fill. Finding a candidate with the appropriate qualities of courage, forthrightness and candor will be a tall order.

Rewane agrees with analysts who are afraid of what will happen to monetary policies between now and when he leaves.

Like foreign portfolio investors who are on the edge, Rewane asked, "Will he be a lame duck, dead duck or keep on with the aggressive autonomy of instruments and policy as of today."

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