Tinubu faces ‘political motivation’ vs. ‘independence’ choices for CBN governor

When the curtains are drawn today, August 21, 2023, a new head of the Nigerian treasury, officially designated ‘Minister of Finance’, Wale Edun, would have fully taken charge after being sworn in earlier in the day by President Bola Ahmed Tinubu.

But in the quest to see that all the levers of economic policy management are well aligned, the attention of analysts and others following the unfolding direction of the Nigerian economy, will shift from tomorrow to  the person to be appointed substantive governor of the Central Bank of Nigeria (CBN), and consequently, the person to lead monetary policy during the President Tinubu’s administration.

Finance minister Edun’s assumption of office has already raised high expectations, which will now be taken higher, with regard to the management of the fiscal policy side of executive governance, say multiple economic and financial analysts, many of whom hold the strong view that in the eight years that former president Muhammadu Buhari held sway in the political administrative landscape of Nigeria, he was abysmally short on fiscal policy governance, with his two appointed ministers of finance arguably among the worst to have held the position in the country.

Edun is being sworn in today not only as Nigeria’s finance chief but also with an additional supremo responsibility as coordinating minister of the economy, a position that many analysts persistently called on Buhari to appoint someone to handle following the success achieved by Ngozi Okonjo-Iweala, who was appointed to the position by then President Olusegun Obasanjo.

Interests in who becomes the next substantive governor of the CBN are driven by the current state of the economy, especially the monetary policy approaches of the last nine years under embattled suspended governor, Godwin Emefiele, with regards to inflation, interest rates, exchange rate, foreign reserves management and other monetary policy drivers of the economy believed to have largely been badly handled.

Many analysts believe that Folashodun Shonubi, the acting governor of Nigeria’s central bank, appointed to replace Emefiele after he was suspended, is not likely to be appointed to the substantive role when the Tinubu administration sorts out the legal angle with Emefiele’s position. Emefiele’s tenure ordinarily ends in June 2024. 

A lot of the interest in who becomes the next substantive governor of the CBN stems from the need to re-establish the independence of the bank and its number one central banker, the governor, who also has responsibility to drive monetary policy and work with the fiscal authorities to have an economy that works for the country and its citizens.

Even more, following Emefiele’s dabble into politics, including attempting to contest the presidential primaries while still in office, under the ruling political party, All Progressives Congress (APC), and the widely held view that he was unusually too close to the Presidency and that such closeness costs the apex bank its autonomy and independence, as demonstrated in his opening the vault of the CBN to the federal government to borrow, through Ways and Means, more than N22.7 trillion, analysts say they are keen to see whether President Tinubu will, through this appointment, move to bring in someone whose independence would not be in any doubt.

“The choice itself is the issue,” says Gregory Kronsten, a London-based consultant on Africa Finance and Economics with 40 years’ regional experience in investment banking, stockbroking, macro analysis and publishing. 

“This is particularly the case in the emerging markets universe, where foreign investors can be unforgiving when central bank autonomy is seen as undermined. 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,” he added, to underscore the need to appoint an independent individual.

Even more concerning is recent research showing a correlation between politically motivated appointment of a central bank governor and the state of inflation.

“Politically motivated appointments reflect lower de facto independence and are associated with worse inflation and financial stability outcomes,” the research found. But the genuine concerns that have been expressed are to do with politicians making such an appointment deliberately seeking to take advantage.

“One way in which politicians may seek to retain control over monetary policy is by ‘getting their own people into the top jobs,” the authors wrote.

A politically motivated governor appointment is described as one where the appointment is skewed towards a candidate who is more loyal to the executive making the appointment rather than the central bank mandate. Many would like to suggest that the reappointment of Emefiele for a second term by the Buhari administration was not too far from this description.

Anthony Goldman, a London-based political and economic risk analyst,  says these appointments are often political.

“Well… it is usually a political appointment, dressed up as a technical process,” Goldman told Business A.M.

He, however, noted that the CBN is no ordinary bank. “Only a very particular person can do a good job, and for progress on the economy, it needs a good governor. The trick will be to see if there is someone who fits both the politics and the technical skills required. I know in the past there have been attempts to look outside Nigeria. It’s a bold idea but no one before has fitted the bill,” said Goldman.

Ahead of the appointment of a substantive governor for the CBN by the Tinubu administration, research points to areas that would need to be critically examined to establish if it is a politically motivated appointment.

One index in this regard seeks to characterise whether, at the time of the appointment, the governor is perceived as being independent of the executive and elected politicians.

If the administration is politically motivated in its appointment of the next substantive governor of the CBN, analysts say research findings would expose this in three ways.

The first, say analysts, would be through biographical information, which includes ties with the executive branch of the government through prior employment, shared ideology with the ruling party or personal links, such as known friendships and family ties; as well as information about the nature of succession (for example, whether the governor replaces a governor who was forced to resign), and the formal credentials of the governor (education and prior work experience).

The second source of information captures the perception of the international press on the political independence, or the lack of it, of the appointed governor.

The new governor’s independence could, thirdly, be gleaned from information that captures the opinions of independent academic experts about the perceived political independence of a particular governor at the time of appointment.

For an economy in need of the best hands for revival, market watchers say it would be a bad signal to international investors if the next governor of the CBN were to be appointed on the basis of political consideration by President Tinubu.

Research shows that there are important policy implications to be considered before appointing the next CBN governor.

According to the findings of a research study, undue political influence on central bank appointments reduces the credibility of a central bank and, therefore, potentially allows the time inconsistency problem to resurface, regardless of the level of de jure central bank independence.

The study also found that following the global financial crisis and the Covid pandemic, central bank mandates have expanded from inflation targeting to financial stability, liquidity provisions, and quantitative easing that increased central bank balance sheets to historical records.

“In addition to these macro-prudential and financial stability roles, central banks have been taking over new responsibilities in banking supervision and bank resolution. Their powers are only expected to expand as they develop policies towards climate finance and digital currencies. The design of the institutional architecture of a central bank and central bank decision-making will need to be further scrutinised for political accountability and credibility in the future,” the study noted.

It added that the results of the study “illustrate that legal independence is not sufficient to guarantee that the central bank is not captured by political interests,” and that “recent evidence shows that central banks are receptive to political pressures and care actively about justifying their policies.”

The researchers noted that the results of their study “illustrate one channel via which external pressure or interference may occur – political appointments. As central bank powers increase, it is likely that incentives to appoint political allies, with the explicit or implicit aim to affect future central bank policies, will increase.”

Beze Adogu, a professor based in the United States, is of the view that “to pick the right candidate, the CBN Act must be changed.”

According to him, currently, the suzerainty of the governor over commercial banks is unseemly and prone to corrupt conversion, adding that the CBN governor’s office should be separated completely from the executive, stressing that “he [or she] has no business at Aso Rock for any reason under the sun. He should be as removed as the chief Justice in a democracy.”

Peter Umoh, a professor of finance, said hitherto, CBN governors had been appointed on recommendations of interested parties without formal interview. “It is necessary to shortlist some qualified candidates and subject them to some assessment. The most promising should then be recommended for appointment,” he said.

Uche Uwaleke, a professor of capital markets and finance said “the next candidate for that position, given what the job entails, should not only be a seasoned economist but also an experienced banker who has headed a regulatory institution in the financial system.”

According to him, “this is because the CBN governor not only supretends monetary policy but also financial system stability.”