26 May 2014

Nigeria: Experts Advise Emefiele On Monetary Policy

As the governor-designate of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, comes to office in a few days, some analysts in the country have said his greatest challenge would be to bring a balance between the monetary policy and the real economy.

Financial analysts and economists in the academia who spoke variously with LEADERSHIP stated that the CBN needs to ensure that its monetary policy is in tandem with the real sector to promote employment and growth in the Nigerian economy.

Emefiele, who was nominated by the president on February 20 this year following the suspension of the erstwhile governor, Mallam Sanusi Lamido Sanusi, was confirmed on March 26, 2014, by the National Assembly.

His tenure is commencing in an era of single-digit inflation, high lending rates, increasing fiscal spending ahead of the 2015 elections and a pressured foreign exchange market.

According to Professor Akpan Ekpo, the director-general of the West African Institute for Financial and Economic Management, the incoming CBN governor needs to focus on relaxing monetary policies to bring down lending rates.

He noted that the current interest rate in the country does not support the development of the real sector. With average lending rates in the country standing around 26 per cent, the cost of credit is expensive, particularly for operators in the manufacturing sector.

The Monetary Policy Committee of the CBN has consistently held benchmark interest rate at a record high of 12 per cent for over two years and further tightened monetary policy with the gradual increase of the Cash Reserve Requirement (CRR) on public sector deposit. At the last MPC meeting chaired by the acting CBN governor, Dr Sarah Alade, the committee had maintained the status quo.

Similar to the view of Prof. Akpan, economist and financial analyst Ayo Teriba advised that the incoming CBN governor should be more considerate of the real economy in monetary policy decisions. According to him, Sanusi had, in his determination to bring down inflation rate in the country, denied the real sector access to affordable credit.

Noting that inflation had dropped to single digit, Teriba said there is need to relax monetary policy to increase lending to the real economy.

"Monetary policy became active in September 2010; before then inflation was around 15 per cent and unemployment was also around 15 per cent. Following the tightening of the monetary policy under the Sanusi era, inflation has dropped to single digit but unemployment has doubled. Who wants increased unemployment?" he queried.

Teriba stressed that the MPC has to be objective and its choices have to be informed by economic conditions, adding that the MPC during the tenure of the erstwhile CBN governor, Sanusi, just continued to tighten monetary policy without matching monetary policies with conditions in the real sector or considering the effects the policies would have on the real sector.

On the declining external reserves of the country, Prof Akpan noted that the incoming CBN governor would also have the challenge of managing the declining reserves with the pressure at the forex market. Stressing the need to shore up the reserves, Akpan said the CBN needs to find other means of managing the value of the naira without depreciating the level of the reserves. Teriba on his own part noted that as long as the country still has the means in terms of the reserves, it should continue to defend the value of the naira.

He stated that as an import dependent nation, devaluing the value of the naira or leaving it to market forces would send the prices of goods and services in the country to the sky, causing a sharp rise in inflation.

Optimistic that the pressure on the naira at the forex market would soon subside, Teriba said the pressure which is being triggered by the tapering of the United States Federal Reserves is expected to wane before the end of the year.

The head of Economics department at the Obafemi Awolowo University, Ile-Ife, Professor Abayomi Adebayo, holds a contrary view: he advises the incoming governor to allow market forces to determine the value of the naira. To him, the current situation where the CBN dips into the external reserves to defend the value of the naira is mainly to the benefit of operators in the market.

Prof Adebayo also advised that the new governor should restore the integrity of the CBN as the apex bank, noting that the CBN had dipped its hands into issues that it ought not to as a central bank, making it lose its integrity even in-house.

He advised that Emefiele should leave politics to the politicians and focus on monetary issues, adding that the position of a central bank governor is meant for a conservative person who will focus on his core objective of managing the monetary policy of the country.

Also, an operator in the banking system maintained that, having gone through a lot of policy somersaults in the last five years, the banking sector needs some stability. The banker stressed that Emefiele should give some sense of stability to the system as "we have seen a lot of policy somersault from the former governor; so maybe he should let things stabilize a bit before he starts introducing a lot of changes".

The banker who commended Sanusi for instilling discipline in the banking system urged the incoming CBN governor to continue on the trail of corporate governance and responsible banking. "Sanusi introduced sound risk management balance into the system. He brought some sense of discipline into the system, unlike before his time when we used to have a lot of cowboy banking practices. My advice to him (Emefiele) is that he should reinforce that. We have seen what happened between 2007 and 2008 because of the lax risk management that we had then, but he has come in to instill some discipline in that aspect. My advice to the governor is that he should stick to that.

Towards the end of his tenure, former CBN governor Sanusi had tackled the government over issues pertaining to corruption.ades

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