Nigeria’s new Central Bank Governor
Godwin Emefiele the new head of the Central Bank Nigeria (CBN) who will resume on June 4, is described as steady and deliberate; “a stabilizing and positive force”. The former chief executive of Zenith Bank, Nigeria’s second-largest bank by assets, sat on the Zenith Bank’s credit committee and watched risks with the eyes of a hawk.
The mandate of Emefiele will be to keep the inflation rate, which reached 7.9 percent in April, inside the 6 percent to 9 percent target band. He will, together with other members of the Monetary Policy Committee (MPC), decide whether or not to keep the naira at the midpoint currency peg of N155 to a dollar.
Emefiele’s measured decision-making approach should be complemented by other MPC members. Though there are suggestions that the naira should be allowed to depreciate a little bit to hasten the accretion of foreign exchange reserves, the inflow of portfolio investment, “hot money”, has may incentivise the CBN to keep the currency steady; the 2015 elections are another incentive to keep things the way they are.
In addition, the planned rebasing of the Consumer Price Index (CPI) may make current inflation forecasts redundant. If a greater weight is assigned to non-food items, there would be limited pass-through to inflation from exchange rate movements.
At his Senate confirmation hearing Emefiele said that devaluation of the naira would be “devastating” for the economy; although the level of Nigerian dollar reserves down 16.6 percent year to date (May 22) to $37.3 billion may provide a better indication of the CBN’s ability to defend the currency.
Emefiele’s cautious and calculated attitude will be necessary amid the surge in terrorist attacks, upcoming elections and expected increase in government spending, and uncertainty about the petroleum industry bill. It is reasonable to expect he won’t be too hard on banks.
The new CBN governor will be taking the helms at a period when Nigerian lenders while having relatively stronger balance sheets after the 2009 banking crises, are contending with reduced profitability on the back of higher reserve requirements, lower fees and increased competition.
Nigerian stocks have dropped 4.3 percent year to date (May 23), as the heavyweight banking sector sold off on concerns over the impact of increased regulations on profitability.
Banks are also increasingly getting exposed to dollar liabilities (Eurobonds) to match expected dollar denominated loans to the power and oil and gas sectors, leaving them exposed to currency risk in event of a naira devaluation scenario.
Though the new CBN governor will be a positive factor for Nigerian banks we wonder if he’ll push lenders, based on his experience at Zenith Bank, to rein in spiralling costs and increase lending to the private sector and catalysing a retail banking revolution.
The size of Nigeria’s retail banking market has the potential to grow to about 10 million people in five years, rivalling South Africa. This growth would be influenced by new initiatives of biometrics, credit bureaus, a more efficient housing collateral mechanism and technology.
As Emefiele steps into this new role, he’ll be faced with uncertainties and risks that affect the entire economy not just one more bank. The tools with which to fight them won’t be the same as those from his days as bank CEO.
Nonetheless, his priorities would be no different from the previous governor. It remains price stability. The unknown issue is whether he’ll go all the way like Sanusi Lamido who, for instance, was willing to raise the cash reserve ratio on public sector funds to 100 percent to ensure all government money is in one account and to achieve price stability.