Calls for apex bank reform: A hasty alert?

Godwin Emefiele, CBN Governor

Godwin Emefiele, CBN Governor

The call for the current administration to reform the management of the Central Bank of Nigeria (CBN), has been described as hasty and smacks of “an over-boiling steam for patriotism and consummate desire to ensure that the management of the Nigerian economy delivers growth and generate employment.

Besides, the calls were also adjudged extremely fascinated with efficiency and growth of the Chinese economy, which was cited as an example of sustainable Gross Domestic Product’s growth (7.5 per cent yearly) and job creation.

But a Cross River-based financial analyst, Dickson Enobong, said the call premised on money supply challenges, does not hold water as it does not take the manipulation of only one variable (money supply) to achieving macroeconomic objectives of full-employment growth.

There is currently no literature in economics that suggests achievement of macroeconomic objective of full-employment growth by just manipulating a single variable (money supply). The usual practice all over the world has shown some sort of symbiotic and supportive relationship with the fiscal authorities in order to ensure economic growth and employment.

It is all the more disturbing, the way and manner the call banded and elevated Quantitative Easing (QE) used by the industrialized economies to a magic wand. Simply put, QE is expansionary monetary policy, which connotes increased money supply or cheaper cost of fund.
“In the delicate art of economic management, policy prescriptions, whether tight or expansionary, are hardly deployed without necessary recourse to the structure of the economy in question. That country A applied QE in peculiar circumstance, does not necessarily suggest that Country B must also do same without taking into consideration the inherent structure of its economy,” he said.

Enobong said the huge infrastructure gap that doted the country over the years, obviously explains the apparent rigidities that characterise the Nigerian economy, thus, placing some limitations on the relative efficacy of monetary transmission mechanism to actualise full employment and economic growth.

In other words, the analyst meant that even if the apex bank were to subscribe to the prescription of massive dosage of QE, it would have resulted to a sub-optimal outcome, with minimal impact on the Nigerian economy.

One key challenge in the conduct of monetary policy operations in Nigeria is the fact that, the Nigerian economy has a long history of fiscal dominance, with the CBN being constantly confronted with excess liquidity problem. Given this situation, any attempt at expansionary monetary policy has often frittered away in terms of the high inflationary rates.

Also, in line with the key mandate of the apex bank, “to maintain price and monetary stability”, the CBN in keeping with the tradition of most central banks have always preferred to rein in inflation within single digit level, since QE would not register any appreciable growth.

Like the saying goes, if you cannot improve on the condition of the poor, it is better to leave him where he was. It is only stable inflation rate that can ensure that. Most advanced industrialized economies, the United States, inclusive, have been experiencing low, if not, negative inflation and low GDP growth. This readily explains why these advanced economies adopted QE geared towards boosting growth. On the other hand, the Nigerian economy has been battling with perennial liquidity surfeit and recently, followed by declining GDP growth, hence the action of the CBN in deploying tight monetary policy measures to rein-in inflationary pressure,” he said.

It is equally important to point to the need to properly situate the context within which comparative policy analyses are made if the essence is aimed at making positive contribution to the society. In other words, we compare like with like.
In the middle of the argument for the reform of CBN, the analyst noted, is an article written by Odilim Enwegbara titled: “Why Buhari Must Reform CBN.”

For China’s GDP to be growing more than 7.5 per cent annually with 12.5 million jobs created annually too during the past three and half decades, the People’s Bank of China has always pursued a pro-investment, pro-growth and pro-jobs monetary policy.
“But in the endless pursuit of this overall national prosperity and job growth, China’s socialist market economy as an organic communitarian system is driven by Chinese monetary policymaker always working hand-in-hand with China’s fiscal policymakers.

Therefore, while fiscal policymakers constantly stimulate economic growth by massively investing in infrastructure expansion and upgrade in ways that lower the cost of doing business in China, maximizing this pursuit of rapid economic growth, the People’s Bank of China, on its part floods the system with cheap liquidity, which the banks in turn make cheaply available to the country’s real sector economy — manufacturers and other goods and service providers,” Enwegbara said.

But according to Enobong, a closer look at his thesis reveals a deceptive ploy to blackmail the apex bank by comparing Nigeria with the economies of United States and China, with well-developed infrastructure that ensure efficient and effective monetary transmission mechanism, making their economies very elastic.

He said that it is simply foolhardy to assume that by manipulating a single variable (money supply) in an economy with humongous infrastructure gap, it is possible to achieve macroeconomic objective of growth, and employment generation.

Monetary policy has its limitations, which explains the reason for collaborative efforts of fiscal authorities in the drive to achieve sustainable economic development. Nigeria is not an exception. The CBN has always applied quantitative easing in some deserving circumstances that yielded desired result. For example, at the onset of global financial crisis, the CBN deployed a unique quantitative easing through the bailout granted to eight distressed commercial banks.

In realisation of the increasing need to provide funding for real sector activities that translates to economic growth and job creation, the current management, under the leadership of Mr. Godwin Emefiele, embarked on various types of real sector development initiatives aimed at inducing employment generating growth. That is quantitative easing in all sense of it. Above all, the uniqueness of the approach remains the fact that it recognizes the interest elastic nature of the Nigerian economy, and therefore designed the development financing model in a way that shields these real sector entities from market determined interest rates.

This explains why the interest rates for all of the real sector development initiatives of the CBN were pegged at single digit (nine per cent). If indeed, the intention of CBN is to feather the interest of commercial banks, the financing structure would have been made to be governed by market determined interest rates,” he said.

Enobong alleged that the intention of the agitators in the call for reform was to incite the Presidency to dismantle the present leadership of the CBN and dilute the independency of the bank.

From every ramification, the present leadership of the CBN has gone beyond mere verbal pronouncements to demonstrate, in real terms, concrete efforts in enunciating policy prescriptions aimed at real sector development and employment generation. Nothing can be farther from the truth, especially the CBN policy that barred importers of 41 classified goods access to foreign exchange demonstrates in strongest term, a bold initiative ever taken by any government agency to encourage domestic production and employment,” he added.

1 Comment
  • Obiwon

    Why is the governor of CBN hiring people to defend his lopsided monetary policy? Mr Odilim Enwegbara has stated the fact along with what needs to be done. So, why hiring some prepaid armchair economic analysts to distort what was said by Odilim in his call for the reform of CBN? Why is Emefiele so apprehensive to the extent of arguing that Odilim is out to blackmail him? Is this the first time Odilim has opposite Emefiele’s monetary policy, after all, he has been opposing Emefiele the same way for years he alerted Nigerians about damaging Okonjo-Iweala’s continued mismanagement of the economy? Emefiele is never conducting monetary policy with patriotism but with his Zenith Bank’s interests. If not the reason what else would have been Jim Ovia’s reason for putting him there?