CBN should focus on its primary mandate

Make transparent data-dependent decisions, let the naira be

I do not suppose the Central Bank of Nigeria (CBN) faces a dilemma in the real sense at its monetary policy committee (MPC) meeting this week (25-26 July). True, the economy would probably contract this year – by 2.7 percent is my reckoning – and annual inflation may be as high as 18 percent by year-end. But in the recent past when the CBN tried to spur growth by easing monetary policy, it failed. It was not because it was not diligent enough. Not at all. There were just bigger factors at play, most of which were (and are still) not within its control. There was uncertainty on the fiscal front. This has not abated. Now, officials say revenue targets could be missed by as much as half, albeit better non-oil receipts in recently shared federal revenue suggest things could improve. Revenue would probably be volatile. Pipeline vandalization (by resource control agitators in the Niger Delta region) disrupting crude oil production compound woes from continued low prices. And then foreign portfolio and capital flows that were much looked forward to, after the supposedly free floating of the naira, have not been quick to materialize.

There may actually come a time when the CBN is able to implement measures that succeed in motivating the type of bank lending that boosts the real economy. Not yet: that would only come after pertinent structural reforms. The cost of running a business remains high in Nigeria. Banks have to factor in the ideally unnecessary cost of generating their own electricity, almost permanently via supposedly standby generators. Inflation at above 16 percent also means they cannot lend below that price risk threshold. It matters little how much incentives they are proffered. What policy tightening does, which one advocates (my expectation for this meeting is a 1 percent rate hike to 13 percent), is signal the CBN’s commitment to its primary mandate: price stability; which despite the many inefficiencies in the Nigerian economic system, it has a bizarrely consistent success record in ensuring, when it wants to. So, it is not entirely correct that a balanced tightening stance would not be helpful – some economists have been suggesting the CBN needs to support growth by keeping rates unchanged at this meeting and in the foreseeable future. One is not being dismissive. Banks, not necessarily unhealthy ones, do rely a great deal on borrowings from the central bank. And when the monetary policy rate (MPR) is relatively accommodative, they get some relief. Unfortunately, the hope that such accommodation would incentivize increased lending to the real economy is often – if not always – dashed. Add to that: about 15 percent of total loans outstanding are either currently bad or non-performing. And these are loans given to supposedly good borrowers hitherto. Naturally, banks are now very cautious. Still, at current inflation levels, the CBN has to act.

What market participants want is for the naira to trade freely and for policy to be data-dependent and fundamentals-driven. It is not so much the choices that a central bank makes that matter but the rationale and transparency with which they are made. That is where the CBN has faltered hitherto. There is a lot now known about how the CBN operates, especially the almost overbearing influence of the country’s president on policy-making. It is probably now fruitless for the CBN to make pretensions to independence. But with the CBN finally allowing the naira to trade more freely in the week preceding this month’s meeting, committee members may at least get the opportunity to simply focus on discussing a balanced tightening move that signals they are concerned about inflation, but at just the pace that won’t hurt growth materially. Even so, it would help if deliberations result in a formal declaration that it is best if the CBN intervenes less in the foreign exchange market. It simply does not make sense to have a supposedly flexible FX regime and then continue to haemorrhage scarce hard currency, aiding speculators. Best to simply let the naira be. If the exchange rate is determined by market forces, demand would slow. But when the CBN interferes intermittently, the policy becomes even more wasteful than the previous one.

Be decisive with the banks

It is very unhelpful if the CBN has to continually make statements that banks are healthy. It says so and then the deposit insurer, a typically conservative and taciturn institution, comes out to warn about non-performing insider loans. It is well known that problematic loans in Nigeria tend to be insider-related. And such is the influence of these insiders that they rarely get hounded by bankers. When not insiders, bad borrowers tend to be politically connected or active politicians themselves: you only hear about the errant ones in the news when they are either unrepentant critics of the government of the day or have run out of favour with the powers that be. The CBN needs to talk less and act more. Identify the toxic assets on banks’ books, sterilize and park them with the government’s bad bank, sanction and fire irresponsible management teams, and provide liquidity and capital where necessary. But when the problem is not tackled head on and rumours abound, it persists. And by the way, these rumours are not entirely just gossip. Bank treasurers know which banks are in trouble. Because banks lend to (and borrow from) each other on a daily basis, it is easy for treasurers to know which banks are having sustained liquidity issues: they tend to be net borrowers and never have money to lend to other banks. So it is an open secret which banks are having liquidity problems. The CBN should be decisive.

Rafiq Raji