Uneasy lies the head that wears the crown

In part three of our series, we take a look at the inbox of the in-coming CBN governor

Nigeria is shopping for a replacement for the incumbent governor of the Central Bank Nigeria (CBN) Sanusi Lamido Sanusi, whose tenure will come to an end in June 2014. The new CBN governor from the onset will have to establish his or her credibility and independence.

Why is there so much expectation from the person who will occupy the position of one the strongest central banks in Sub-Sahara Africa after Sanusi Lamido Sanusi’s resignation in June?

Firstly, the financial sector has continued to play crucial role in the development of the economy and ensured sustained foreign capital into the country.

Secondly, Nigeria, will soon emerge as the largest economy in Africa (in February), after the current GDP rebasing exercise, which will push the size of its economy to $430 billion, from about $283 billion, eclipsing South Africa ($393 billion), in the process.

Thirdly, the new Central Bank Governor must enhance the quality of banks, establish financial stability, enable healthy financial sector evolution and ensure the financial sector contributes to the real sector.

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Economists and analysts thus envisage enormous responsibilities lurking for the incoming CBN governor of Africa’s largest oil producer. He will have to put in place monetary policies that will control the inflation rate, without jeopardising employment and economic growth. One of the challenges facing the economy which he will have to address is the high interest rate to banks which have been curbing their growth.

On the 20th and 21st of January 2014, the CBN Monetary Policy Committee (MPC) met and still held on to the 12 percent benchmark Monetary Policy Rate (MPR) with an asymmetric corridor of +/- 200bps, 12 percent Cash Reserve Ratio (CRR) on private sector deposits, and increased CRR on public sector deposits to 75 percent from 50 percent; liquidity ratio remained at 30 percent of total assets, and Net Open Position stood at of 1 percent of shareholders’ funds.

Another responsibility of the CBN governor is the management of the country’s foreign reserves. This has been dipping as a result of dwindling oil revenues due to oil theft and pipeline vandalism in the Niger Delta. Hence the government borrows to fund budget deficits and delays in monthly allocations to states.

According a recent report released by the CBN, foreign reserves dropped to $43.6 billion on December 31, 2013, approximately $500 million below the $44.1 billion recorded on December 28, 2012.

The would be boss of the apex bank will have to collaborate with the Ministry of Finance in monitoring a declining Excess Crude Account (ECA) which holds the savings the nation makes when the crude price is above the benchmark price estimated in the budget

The Coordinating Minister for the Economy and Minister of Finance, Ngozi Okonjo-Iweala said lately in her reply to the 50 questions on the economy by the House of Representatives said the ECA had dropped to under $5 billion from $9 billion at the beginning of the year.

As reported by most Nigeria dailies, monthly revenue allocation by the Federal Government to the 36 states of the federation has affected the finances and smooth –running of various governments.

The federal government in 2013 fiscal year owed the three tiers of government N333.6 billion as arrears of revenue shortfall which is 6.7 percent of the 2013 budget of N4.99 trillion.

Anchor the naira

The new CBN governor will be saddled with ensuring the economy does not suffer a mishap due to falling oil revenues and production. Under his watch the naira will have to remain stable in relation to other international currencies.

Last year, the central bank defended the naira, through 94 foreign exchange Dutch Auctions between January and December 2013, with $26.6 billion (N42.6 billion) equivalent to 9.8 percent of the GDP.

Will the new CBN governor tenaciously pursue monetary policies that will increase the flow of foreign direct investment into the country?

Thus far, a stable naira against other international currencies has been helped by portfolio inflows into the foreign reserve and boosted by robust economic growth. The naira closed against the dollar between N155 and N159 for the most part of last year.

Aggregate foreign capital inflows stood at $7.79 billion at the end of second quarter of 2013 compared with $4.53 billion in second quarter of 2012. Of this, foreign direct investment inflow was $1.47 billion or 18.9 per cent while foreign portfolio investment accounted for $6.52 billion or 81.1 per cent.

Remittances flow from immigrants make up a large portion of income in some countries. This form of helps household remain above the poverty line; therefore, improving the standard of living of the people. According to a 2010 World Bank report, $21.6 billion was sent to Sub-Saharan countries, representing a 571% increase from $3.2 billion in 1995. In the case of Nigeria an estimated $9.9 billion was remitted in 2010.

In addition to defending the country’s currency, the new CBN governor will have to oversee continued downward trend in prices. Inflation rate rose slightly to 8 percent in December 2013 from 7.9 percent in November 2013 according to Nigeria Bureau of Statistics (NBS).

Apart from ensuring price stability, economic growth and the creation of employment, he will have to strategically oversee an institution whose man power over the last three years has surged by virtually 100 percent from 4,000 to nearly 8,000.

One of his fundamental responsibilities will be to ensure that the central bank is repositioned in such a way that will make it less susceptible to political directions or pressures which may encourage economic cycles (boom or bust), as politicians may be tempted to boost economic activities in advance of elections which could cause inflation.

Furthermore, he will complement government’s effort to institute a regime of fiscal consolidation that will ensure the reduction of government domestic borrowing. According to the Debt Management Office (DMO) the nation’s outstanding debt as at September 2013 is N8.32 trillion ($53.4 billion) which is 18.6 percent of the Nigeria GDP of N43.trillion ($270 billion).

Tackle economic go-slow

The creation of employment and provision of infrastructure are imperatives. The 2013 competitiveness ranking by the World Economic Forum shows Nigeria ranking lowest in terms of infrastructure and education.

A breakdown of the report identified weak institutions (ranked at 129th out of 148); ingrained corruption, undue influence, weakly protected property rights, insecurity (ranked at 142nd), poor infrastructure (ranked at 135th) and poor primary education (ranked at 146th) as the reasons for the country’s abysmal ratings.

According to the Nigeria Bureau of Statistics (NBS) third-quarter report for 2013, the manufacturing sector contributed 3.59 percent to the country’s Gross Domestic Products (GDP) which is very low compared with other developed countries where the real sector fuels economic growth.

Reforms that will push the country in the right economic trajectory of and culminate in international confidence not just for Nigeria alone but the entire West Africa region should be the focal point of Sanusi’s successor. One of the positive effect of the banking reforms by the outgoing CBN governor is the repositioning of the country’s financial institution on the right trajectory, as they provided the lion share in the financing of acquisition of the PHCN assets, which makes them major stakeholders and a long-terms players in the Nigeria power sector.

Will he/she be able to make banks stronger so as to provide mortgages to Nigerians and assist the just established Nigeria Mortgage Refinance Company (NMRC) finance the housing needs of the country considering the fact that Nigeria housing deficit has spiked as a result of rapid urbanisation?

The role of the NMRC is similar to that of the US mortgage giant Fannie Mae; a role that is pivotal to curbing Nigeria’s 17 million-unit housing deficit. The World Bank has granted a loan of $300 million for initial financing of the scheme.

The incoming Centre bank governor should be able to create a stable system that must be efficient and effective, robust financial institutions, strong prudential regulations and supervision, and efficient and reliable infrastructure.

In summary, the new CBN governor could either consolidate on the monetary policies of the outgoing CBN or generate uncertainty.

By: BALA AUGIE