The central bank has to be seen to be autonomous

BY GREGORY KRONSTEN

Gregory Kronsten, a London-based Consultant on Africa Finance and Economics, has 40 years’ regional experience in investment banking, stockbroking, macro analysis and publishing. He was chief economist at FBNQuest Capital until December, 2021

The dramatic fall from grace of Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), raises questions of procedure as well as his conduct in office. He has been suspended rather than dismissed, which would have required the backing of the legislature. The deputy governor for operations and a member of the monetary policy committee (MPC), Folashodun Shonubi, has been appointed acting governor.

Similarly, Lamido Sanusi was suspended by President Goodluck Jonathan, in February 2014 and a deputy governor, Sarah Alade, appointed acting governor in his place. Jonathan moved quickly: Emefiele started work in June 2014, and was one year short of the end of his second and final term when he was suspended.

That the CBN governor is appointed by the president is not in itself unusual. The chair of the US Federal Reserve is nominated by the president, subject to confirmation by the Senate. The governor of the Bank of England is appointed by the chancellor of the exchequer with the approval of the prime minister and the monarch.

The choice itself is the issue. This is particularly the case in the emerging markets universe, where foreign investors can be unforgiving when central bank autonomy is seen as undermined. (We need look no further than Turkey or Argentina to reinforce our argument.) The CBN dominates the MPC, is responsible for bank regulation, has created a large role in development finance and covers the ever-increasing unfunded deficits of the federal government. Other than the deficit financing, the other functions have parallels with respected central banks. The Bank of England, for example, is responsible for the prudential aspects of industry regulation. External members are generally a minority on MPCs.

The initial mood-music from the Tinubu presidency is highly positive. We learnt from the new president on handover day (29 May) that fuel subsidies would be halted, and from his côterie that exchange-rate unification was imminent (12 June) and that the CBN was to remove all trading restrictions on the ‘official’ rate for the naira (June 14). The naira closed at NGN664 per US dollar on the I&E (investors and exporters) window on 14 June, compared with NGN474 the previous session. Sovereign Eurobonds issued by the FGN have firmed and the all-share index on the NSE gained more than 7 percent in just two sessions. We note that bank stocks rebounded particularly strongly.

We do not have a favoured candidate to replace Emefiele, whose tenure is surely irrecoverable now that the state security services are involved and that his protector is no longer head of state. Certain character traits and skills to handle the broad mandate of the CBN spring to mind, however.

The Tinubu manifesto pledged to preserve the independence of the central bank so it is a concern that major policy changes have not been announced by the appropriate authority (NNPC, CBN etc) but by the presidency. There is room for improvement in the CBN’s accountability. The website in the Emefiele era has veered towards hagiography. The CBN’s liquidity management has been arbitrary such that deposit money banks have been confronted with large debits without warning in clearing to meet their said obligations under the cash reserve requirement.

Ideally, the new governor will improve transparency and bring stature to the post internationally. For Africa’s largest economy, it would be a welcome change if he/she was visible, prominent even, at IMF/World Bank meetings. Among the tasks for immediate attention are the future of Emefiele’s flawed currency reform and the very large loan book created in the CBN’s development finance role.

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