Emefiele’s CBN: One year after (1)

A YEAR ago on 5th June 2014, the new Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, outlined his agenda in “Entrenching Macroeconomic Stability and Engendering Economic Development,” focusing on monetary and price stability, financial stability and development finance.

The first set of monetary and price stability goals in his maiden speech is to pursue a gradual reduction in key interest rates, and include unemployment rate in monetary policy decisions; pursue lower inflation rates; maintain exchange rate stability and aggressively shore up foreign exchange reserves.

I had noted in a previous article that it will be challenging for the CBN to manage in the short term the unholy trinity or monetary Policy Trilemma, which states that a country can only choose two combinations of exchange rate stability, monetary independence and open capital mobility or financial integration.

The actual outcomes on monetary and price stability, exchange rates stability, open capital mobility, and foreign reserves objectives have been very much in line with the proposition outlined in the article. Inflation rate has increased from 8.1% in June 2014 to 8.7% in April 2015. Following a J-Curve phenomenon with a small dip to 7.9% in November 2014, there have been five consecutive increases in inflation. The IMF predicts that the inflation rate will reach double digit at 11.5% by the end of 2015.

Rather than pursuing a gradual reduction in interest rate as espoused in Governor Emefiele’s agenda, the spread between prime and maximum lending rates has remained elevated at about 9.5%. The interbank borrowing rate shot to over 70% at one point. The Monetary Policy Committee (MPC) increased the monetary policy rate (MPR) from 12% to 13% in November 2014, mainly to induce foreign portfolio investors.

The era of capital feast has been followed by capital famine from 2013 when foreign portfolio investors started taking a flight and continued throughout 2014. The National Bureau of Statistics (NBS) recently notes that capital imports into Nigeria in 2014 fell by over $570 million to $20.7 billion. Capital imports fell by nearly one-third to $4.5 billion in Q4 2014 from $6.5 billion from the preceding quarter.

The objectives of maintaining exchange rate stability and shoring up foreign reserves have eluded the CBN in the past one year. Capital flight and falling oil prices, which declined by over 60% from a high of $115 in June 2014 to below $50 in early 2015 put downward pressure on the exchange rate.

At its November 2014 meeting, the MPC adjusted the mid-point of the official retail Dutch Auction System (rDAS) rate from N155 to N168 per U.S. dollar, while widening the band from ± 3 to ± 5 per cent. The CBN subsequently took a more drastic measure to price the exchange rate at N199 per U.S. dollar and closed the rDAS window.

In spite of these measures, exchange rate differential between the inter-bank and parallel markets’ rates remains stubbornly high at about N24.

The reality of a Policy Quadrilemma also sets in, as the dwindling foreign reserves now became a major constraint to maneuvering around the Policy Trilemma. External reserves fell from $43 billion in January 2014 through $37 billion in June 2014 to $29.6 billion in May 2015, representing 4.7 months of imports and declined from a high of 30% of GDP in 2007 to 6% of GDP, the second lowest since the 1980s. The Policy Trilemma also explains the resistance to the initial attempt by the CBN to have capital controls on the exchange rate, which poses risk for exclusion of Nigerian bonds in the JP Morgan index.

The IMF Article IV Consultation Report on Nigeria released in March 2015 appears to affirm the Monetary Policy Trilemma proposition, noting that “recent developments have highlighted the challenges facing the monetary authorities, and risks to the current monetary and exchange rate policy framework. Monetary policy is driven by the CBN’s commitment to maintain a stable official exchange rate. Thus, international reserves have to adjust to balance supply and demand in the foreign exchange market, and the CBN has less room to manage its inflation target via monetary expansion or contraction.”

Financial Stability Trilemma
The second set of goals relates to financial stability, safety and soundness by pursuing risk-based and sector-specific supervision, macro-prudential measures, and addressing issues relating to information asymmetry via collateral registry.
The CBN has started implementing the BASEL II Accord to ensure that banks are adequately capitalised with enhanced risk management systems. The CBN had undertaken the Risk Asset Examination of 24 banks as at December 31, 2014. Further, an enhanced framework for regulation and supervision of domestic systemically important banks (DSIBs) has been put in place with higher capital adequacy requirements, solvency and liquidity stress tests, an expanded reporting requirement and recovery plan.

As part of efforts towards reducing information asymmetry, the National Collateral Registry (NCR) Bill is underway. The enrollment for the Bank Verification Number (BVN) for banks’ customers is estimated to have increased from 15,000 in early June 2014 to over 11,140,000 towards end of May, 2015.

In July 2014, the reform of the Bureaux de Change (BDCs) resulted in 2,501 BDCs with caution deposits and capital base of N35 million each; yet the Bank found 121 BDCs, accounting for over 90% of 130 sampled BDCs, were in breach of the provisions of its guidelines.

During the period under review, the CBN has maintained domestic financial stability and prevented systemic risk, which is the risk that an event will trigger a loss of confidence in the financial system. However, challenges relating to Financial Trilemma, distinct from Monetary Policy Trilemma, are emerging. According to Dirk Schoenmaker, “the Financial Trilemma states that financial stability, financial integration and national financial policies are incompatible. Any two of the three objectives can be combined but not all three; one has to give.”

•To be continued tomorrow.
•Dr. Oshikoya is CEO of Nextnomics Advisory based in Lagos.