The CBN and development banking
In his inaugural speech Godwin Emefiele, the Governor of the Central Bank of Nigeria (CBN), said that he wants the central bank’s mission to include “development banking,” aimed at cutting unemployment and raising Nigerians out of poverty. Limits to that goal include the weak transmission mechanism of monetary policy, low financial inclusion, and Nigeria’s still huge informal sector.
Setting out his first vision of maintaining stability in the Nigerian currency last week, Emefiele, signaled that the CBN may gradually begin cutting interest rates.
In response investors fretted that falling interest rates could lead to a panic selloff. By the end of the week the naira had eased to a two month low of N164.4 against the dollar at the interbank market. The sell-off in the naira highlights the limited policy options available to the CBN in achieving its set objectives.
The naira has been an attractive currency for investors who exploit the difference between interest rates on two currencies. Carry trade, as it is known, involves borrowing in a low-interest-rate currency, say dollars, and buying assets in a currency offering a high interest rate. A strategy of carry trade is to invest in commodity-related currencies. Low–volatility: stable growth and inflation are favourable for returns.
Foreign portfolio investors doubt the CBN’s ability to simultaneously lower rates while keeping the naira firm. Income from oil is weak, the current account surplus, as a percentage of rebased GDP, is smaller. All amid a worrying security challenge.
The CBN cannot ignore the growing influence of external factors such as foreign investors in determining naira stability. Analysts estimate that foreign holdings of Nigerian equities and local-currency bonds and Treasury bills fell this year by 25 percent to $17 billion.
Investors have recently been concerned by the suspension earlier this year of the country’s respected former central bank governor, Lamido Sanusi and by growing security challenges.
Official dollar reserves declined by $1.2 billion in May to $37 billion, the lowest level recorded since the bullish announcement by JP Morgan in August 2012 that it would include three FGN bonds in its emerging market indices.
Analysts note that the reserves as mid-May could cover nine months of import but Nigeria’s “hearty import appetite and limited productive base” are additional pressures.
These challenges are not new. Fixing them will require combing the strengths of the past governor and overcoming its weaknesses. In depth deliberations on supply-side issues of employment, unemployment rate, wages and incomes, or the practical implications of labour market conditions must complement monetary policy decisions.
The unemployment rate reached 27.4 percent in 2012 from 12.7 percent in 2007, the government said in its mid-term report released last year.
Nigeria which leapfrogged South Africa this year to become the largest economy in Africa with a GDP of $489 billion, expects its economy to expand by 6.75 percent this year, according to Finance Minister Ngozi Okonjo-Iweala.
The figure while impressive is still below the potential double digit growth rate that could be achieved, by fixing power supply issues, accelerating reforms and improving the ease of doing business in the country analysts say.
Moving the needle on these reforms to boost growth fall beyond the remit of the CBN, once again, exposing the limits of translating Emefiele’s wish list into reality.