CBN’s key policy benchmarks slip as fiscal burdens weigh

By Charles Abuede

It is well past 5 years and counting since the Central Bank of Nigeria (CBN) announced plans to control inflationary pressures in the economy and bring this key monetary policy objective back to a single-digit, within a target range of 6-9 per cent.

But with the recent efforts by the apex bank to intervene in every sector of the economy, eye brows are being raised in many quarters, forming a ball of criticisms leading to suggestions that it is being motivated by factors outside its core remit for which its independence cannot be assured. One sarcastic observer asks: “Who’s chasing the rabbit” and influencing its policy behaviour and assumptive messiahnic stance?

Indeed, the CBN’s many moves to intervene in some areas of the economy have been labelled in some quarters to mean an abandonment of its monetary duties and meddling or usurpation of the fiscal side of the economy, it has been robustly defended on this score by some who laugh at the utter incompetence of the fiscal management since 2015 when President Muhammadu Buhari came to office.

It is obvious that Nigeria’s fiscal side is weak, prompting the CBN to partially take over the fiscal responsibility of dissipating a lot of energy creating all manner of funds and spending on variegated intervention projects. Yet, the primary responsibility of the CBN as contained in the CBN Act remains to ensure monetary and price stability, of which inflation and exchange rate are key drivers.

Key monetary policy areas are suffering

The monetary tightening strategy introduced by the apex bank has brought some benefits though. Since CBN cut interest rate to 12.50 per cent from 13.50 per cent in May 2020, inflation has rallied around 12 per cent on the average, from reaching a low of 11.02 per cent in august 2019 to 12.56 per cent for a tenth straight month in June 2020.

Conversely, since inflation doubled from 9.5 per cent in 2015 to above 12 per cent in 2020, CBN has attempted to use a contractionary policy strategy to reduce it to a single digit, which till date it is yet to achieve. Although it can be easily argued that there are factors outside the control of the CBN, but many counter arguments include that the apex bank appears not to be concerned since it does not really get asked to show its report card especially as its functions are clearly spelt out in its Act. As a country that mostly trades and does not produce or invent things, a lot of things get buried in the details. Don’t ask; Don’t tell!

But does it really mean that the CBN has abandoned the responsibility of containing inflation and bringing it to that single digit object and that its Governor could spend 10 years on the thrown and not be bothered whether or not this is achieved?

A number of analysts Business A.M. spoke to for this story offered divergent positions on this concern.  According to Uche Uwaleke, a financial economist and professor of capital markets at Nasarawa State University Keffi, “CBN’s inflation rate target band of 6-9 per cent represents the desired level, but may not be realizable in the near term in the light of the present structural bottlenecks in the economy especially the overall poor state of power and transport infrastructure which contribute to the high cost of goods and services.

“Also, the insecurity situation, incessant farmers-herders conflict and its negative impact on agriculture represent downside risk to inflation. Even the inflation rates projections of over 10 per cent  in the 2021 – 2023 Medium Term Expenditure Framework which has just been submitted to the National Assembly acknowledges this fact,” Uwaleke explained in defence of the defence of the CBN’s inability to attain its monetary policy mandate.

Recently, the CBN veered completely off Route 65 (an imaginary route that leads to good monetary policy behaviour), by attempting to go into healthcare research. It released guidelines for healthcare research and development, which many have said ought to have been appropriately handled and executed by the health ministry in conjunction with NAFDAC and other stakeholders in the health sector.

However, CBN Governor, Godwin Emefiele, in collaboration with the federal government (fiscal authorities) set up the board of experts (BoE) chaired by the NAFDAC director-general. This further sparked reactions given that the research initiative is to be fully implemented by the CBN, citing that FG has shifted focus on non-existent items, while the monetary authorities focus on FG’s functions. In attracting all these to its plates, many say the CBN may have inadvertently taken its eyes off the balls – key monetary policies.

John .C. Anyanwu, a professor of economics and retired lead research economist at the AfDB told Business A.M in response to questions for this story that there was an ironic abandonment of monetary policy by the apex bank.

“The CBN has ironically abandoned monetary policy and had been unproductively meddling with fiscal policy and so-called development projects,” Anyanwu said.

According to him, “The CBN is dissipating energy in creating numerous funds and spending lavishly and directly on so-called projects (normal fiscal and executive actions) that are white elephant in nature, with little or no coordination with other relevant agencies. Very soon, the NDDC-like stories will break and some people will be faking fainting,” Anyanwu said.

But Uwaleke, who holds a contrary view to Anyanwu’s, told Business A.M that: “I think the CBN has performed fairly well in the discharge of its functions, especially in recent times. I do not think the CBN Governor has taken his eyes off the ball. On the contrary, the apex bank is very much on track with respect to having a grip on the three prices: inflation, exchange rate and interest rate, there is a limit to what a Central Bank can do.

“At best, the CBN can only control the two and not the three at the same time. I am referring to the Monetary Policy Trilemma which all central banks face. In the case of Nigeria, the situation is made worse by the poor transmission mechanism owing in part to a relatively weak financial sector,” Uwaleke, who is also a chartered accountant and former finance commissioner (a fiscal manager), explained.

In the words of the capital markets professor, he does not consider the various CBN interventions in critical sectors of the economy as interference in the fiscal space, but rather complementary since the CBN Act also recognizes that the apex bank equally has a development role to play in the economy.

On the other hand, the ban on importation of maize, following in line with the restriction of forex access on the importation of about 42 items by the central bank, has in recent times steered stakeholders’ reactions who say the ban will negatively impact the poultry farmers who largely depend on the production or importation of maize for their poultry birds’ feeds.  This follows the foreign exchange restriction policy that has been in place, including for dairy products importation.

“As a matter of fact, the country’s recovery from the last economic recession of 2016-2017, was made possible by the massive interventions by the CBN especially in the area of Agriculture value chain. In this regard the Anchor Borrower scheme, which resulted in massive rice production locally stands out. Remember too that the restrictions placed on 42 items from accessing forex was part of the CBN’s demand management strategy to conserve external reserves and also support the import substitution policy of the federal government, which yielded some positive results following a considerable drop in food imports,” Uwaleke further explained.

The professor further reiterated that the managed exchange rate regime and CBN’s interventions in the forex market have been dictated by the need to ensure liquidity in the market, given the constraints imposed by a mono-product economy in which crude oil revenue accounts for over 90 per cent of forex receipts. “Hence, given the present threat to external reserves occasioned in part by COVID-19 and the need to fix BOP difficulties, the plan by the CBN to unify exchange rates across all segments of the forex market is a welcome development,” Uwaleke said in support.

Notwithstanding the divergent positions, one of support and the other disagreement with the CBN’s approach, however, the central bank in its own policy thrust bulletins highlighted the major agendas to be pushed during the first tenure and second tenure in office of Governor of Emefiele.

In 2014 highlighted the following 9-points agenda as the major policy focus of the bank. These ideas can be summarized as follows:

1.  Gradual reductions in key interest rates, and include the unemployment rate in monetary policy decisions;

2.  Maintain exchange rate stability and aggressively shore up foreign exchange reserves;

3. Strengthen the risk-based supervision mechanism of Nigerian banks to ensure overall health and banking system stability;

4. Build sector-specific expertise in banking supervision to reflect loan concentration of the banking industry;

5. Abolish fees associated with limits on deposits and reconsider on-going practice in which all fees associated with limits on withdrawals accrue to banks alone;

6. Introduce a broad spectrum of financial instruments to boost specific enterprise areas in agriculture, manufacturing, health, and oil and gas;

7. Establish Secured Transaction and National Collateral Registry as well as establish a National Credit Scoring System that will improve access to information on borrowers and assist lenders to make good credit decisions;

8. Build resilient financial infrastructure that serves the needs of the lower end of the market, especially those without collateral;

9. Renew vigorous advocacy for the creation of commercial courts for quick adjudications on loan and related offences

Five years later, the CBN reiterated its focus on key macroeconomic variables and key growth agenda. In its policy thrust of 2019, the CBN stated it will remain committed to fulfilling its mandated objectives of:

1. Price and exchange rate stability.

2. Safeguard the stability of our financial system,

3. Supporting the development of a payment system infrastructure

4. Improve access to credit for all eligible Nigerians, with emphasis on supporting greater growth of our economy and in reducing unemployment, through targeted interventions in the agricultural and manufacturing sectors.

5. Grow external reserves