- Cautious optimism for new apex bank’s team
There is a consensus that the Dr Olayemi Cardoso-led new management of Central Bank of Nigeria (CBN) must move quickly to address the triad of foreign exchange (forex), inflation and interest rate to support the nation’s economic recovery.
Cardoso was sworn in as the Acting Governor of the CBN at the weekend, alongside four deputy governors – Sani Dattijo, Mrs. Emem Usoro, Philip Ikeazor, and Bala Bello – pending confirmation by the Senate. President Bola Tinubu had penultimate week nominated the five new top management members, in line with extant laws.
As the new management resumes their first full working day today, experts were unanimous that the immediate tasks before the new management were provision of clear policy directions and strong implementation templates to address key macroeconomic issues including forex, inflation and interest rate.
Finance and economy experts and public policy specialists surveyed by The Nation yesterday had a common central theme: arduous tasks, cautious optimism. They were also mostly in agreement in what should be the priorities of the new CBN management.
Although many experts noted that Nigeria’s macroeconomic challenges were more of fiscal than monetary, most agreed that the new CBN could work with the fiscal authorities to provide a comprehensive policy directions and working templates to address most of the issues.
Experts particularly pointed out the long-standing role of the apex bank as a catalyst for fiscal and monetary changes, noting that the fact that new top management members were selected by the pro-reform Tinubu’s administration raises hope of a congruence between fiscal and monetary authorities.
The experts included President, Chartered Institute of Stockbrokers (CIS), Mr. Oluwole Adeosun; Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe; Executive Director, Investment Banking, Cordros Capital, Mr. Femi Ademola and President, Association of Capital Market Academics of Nigeria (ACMAN), Professor Uche Uwaleke.
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Others included Managing Director, APT Securities and Funds, Mallam Kasimu Kurfi; Managing Director, Globalview Capital, Mr. Aruna Kebira; Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf and Managing Director, HighCap Securities, Mr. David Adonri
Experts were unanimous that the new CBN management has the requisite knowledge and experience to steer the affairs of the country’s apex bank, but they noted the urgency of the current macroeconomic tides and the need to quicken the pace of policy thought, formulation and implementation.
Adeosun said the floating of the naira must be better managed, especially now that the currency has gone as low as N1,000 per dollar.
“No country in the world allows its currency to go on total free float, and certainly, a developing country like Nigeria cannot afford it. We need to manage the float more strategically at this point, while we work on improving our local production base.
“The most effective way to strengthen the naira and arrest inflation is to significantly increase domestic production in the economy, and to do that you need long term financing and a strong public private partnership. To achieve these, you need a strong and virile capital market, and that should be one of the cardinal objectives of the CBN, working in collaboration with the SEC,” Adeosun said.
Amolegbe said the top priority for the new CBN team would be “to get a quick handle on the forex situation by defining clearly what the government policy is regarding exchange rate as well as working to improve supply in other to achieve stability”.
“This should help also encourage foreign investment and also get a handle on run-away inflation,” Amolegbe, a former president of Chartered Institute of Stockbrokers (CIS), said.
He added that the Acting CBN Governor would also have to design strategies to lower interest rate as highlighted by the president in order to improve production and manufacturing.
“He will also have to keep an eye on ensuring financial system stability as the industry faces medium term challenges from the impact of recent policies,” Amolegbe said.
Kurfi said the immediate tasks would be to “address the devaluation of naira and reduce inflation” through combination of monetary and fiscal policies.
Kebira said what should be paramount in the minds of the Acting CBN Governor and his deputies should be how to stem the escalating inflation and “to stop the fight between the naira and dollar from degenerating into another thing.
“Whether the stemming of inflation is best through the Monetary Policy Rate (MPR) or through CBN intervention should occupy their minds. Anything short of this is an indication that they did not hit the ground running. If the Nigerian economy is going anywhere, those identified issues are at the front burner,” Kebira said.
Ademola, however, noted that the responsibility of stabilising the economy is not that of the CBN alone, but agreed that the most significant issues are inflation, exchange rate and revenue shortages.
According to him, the responsibility lies more with the fiscal authority because the activities of the CBN is short term in nature and at this point, there is no quick fix to the issues at hand.
“The most significant issues at hand are revenue shortages, inflationary pressures, and exchange rate instability. All the three issues are more linked to fiscal policies than monetary at the moment since their root cause appears to be security challenges in the country.
“Revenue shortages is due to insecurity and oil theft while inflationary pressure is mostly due to food shortages and infrastructure deficiencies as a result of the continuous insurgency in the agrarian parts of the country. Exchange rate problem is also linked to revenue shortages due to insecurity.
“What the above suggest is that the continuous use of interest rate to fight inflation may not be optimal as it continues to put pressure on costs and thus lead to more inflationary pressure. The use of high interest rate to attract foreign investment may also be counterproductive as it may only succeed in attracting ‘hot monies’ rather than the needed foreign direct investments (FDIs).”
“In addition, the high interest environment also discourages domestic investment in the productive sector which has been sustaining the economy since foreign investments start to dwindle. It would appear that exchange rate stability will require an improved supply of foreign currency which can only be achieved through improved export of goods and resources out of the country.
“In conclusion, the immediate priorities of the new CBN administration would be to assure the public that the country has a strong plan to meet all short-term obligations and to clear the backlog of “genuine” foreign exchange requests. In addition, the monetary authority would need to channel investments into the productive sectors rather than encourage trading activities only,” Ademola said.
Yusuf, who outlined a 10-point agenda for the new CBN team, said the most important task before the new team is “restoring confidence to the forex market”.
“This is perhaps the most urgent task before the Acting CBN Governor. Dr Cardoso is assuming the leadership of the CBN at a very crucial time in our economic history. There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira. The economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that needs to be cleared and debt service obligations that need to be redeemed. Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered,” Yusuf said.
Uwaleke said the Acting CBN Governor needs to pursue the mandate of monetary and price stability in the context of inclusive economic growth by deliberately engendering a low interest environment which promotes increased access to capital by firms.
He explained that the change in approach is against the backdrop of the fact that monetary policy tightening has not been effective in taming inflation given supply-side non-monetary factors driving inflation in Nigeria.
“I also expect the Acting CBN Governor to work closely with the fiscal authorities, especially the relevant government agencies, in carrying out the bank’s development finance functions whether in the agricultural sector and small and medium enterprises (SMEs) among others.
“It goes without saying that the banking sector still has traces of weak corporate governance. I expect Cardoso to step up its enforcement as well as overall banking supervision to ensure that the banks are playing by the rules including those designed to maintain the stability in the exchange rate of the naira.
“The new CBN Governor should move fast to sanitize the Bureau de Change (BDC) segment of the forex market by compelling mergers and acquisitions through an increased capital base requirements and setting new minimum operating standards,” Uwaleke said.
Adonri said the Acting CBN Governor is starting from a better pedestal given recent policy changes by the apex bank, urging them to step up the tempo.
“They should be participant in the foreign exchange market just like any economic element, as buyer or seller as the case may be. They should stop selling hard currency at FMDQ below parallel market rate so as to curb the mis-allocation of forex. Under the new team, CBN should divest itself off commercial and development banking, and also banking supervision,” Adonri said.
Adeosun said Cardoso and his team must first carry out an internal re-orientation of the Central Bank of Nigeria noting that the CBN Act of 2007 provides that the CBN shall be a fully autonomous body in the discharge of its functions, with the objective of promoting stability and continuity in economic management.
According to him, the autonomy and objective of CBN imply that the bank must act with impeccable professionalism, detaching itself from the political class. The decisions of the Central Bank of Nigeria must be solely based on sound economic principles, in the best interest of Nigeria’s overall economic progress.
He said the objective of CBN also implies that the central bank is not just there for the banking system alone, but set up to oversee the entire financial system as an integral part of macroeconomic management.
“The monetary economy-money supply and fiscal economy-production and trade are two sides of the same coin and efficiency of the macro economy will be better achieved if both work harmoniously,” Adeosun said.
He called for harmonious policy formulation and implementation between the money and capital markets.
“The CBN had regulatory control of the entire financial system from independence. Although the emergence of the capital market necessitated the creation of the Securities and Exchange Commission (SEC) in 1979, the Central Bank of Nigeria still has far greater control of the Nigerian financial system. The structural dimensions of the economy also means that the policies emanating from the CBN will invariably affect both arms of the market; money and capital, short and long term.
“The developed countries of the world are advanced economically because their money markets -banking system and capital markets-securities industry, grow side by side in a complementary manner, unlike in Nigeria where the system is predominantly skewed towards the banking system.
“We must therefore have a CBN that actively and pro-actively supports the well-being and growth of the Nigerian capital market. The CBN should work in close collaboration with the Securities and Exchange Commission (SEC). MPC meetings should have a few stockbrokers in attendance to give authoritative analysis of the Capital Market in relation to the financial system realities, so that when decisions are taken on interest rates, inflation etc, they would factored in the implications on the capital market,” Adeosun said.
Yusuf outlined that there is an apparent deceleration in the pace of economic reforms as the outcomes are at variance with expectations, noting that the social costs of the reforms were substantially higher than anticipated, resulting in push-backs from the civil society.
“The economic management orthodoxy of market forces is being called to question in the light of the social outcomes of the market-oriented reforms. There is a measured re-emergence of political economy with the reappearance of fuel subsidy and divergence in exchange rates. This is evidently an economic management quandary that the new economic team would have to manage, and urgently too. And the CBN has a key role to play in this.
“Meanwhile, the CBN must ensure strategic and transparent intervention in the forex market to minimize volatility, as far as the reserves can support. In addition to the I and E window, it has become necessary to create an autonomous window in the banking system where the currency can trade freely without any encumbrances. This is necessary to avert the diversion of remittances to other jurisdictions or the black market. We cannot afford to live in denial at this time. The clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors,” Yusuf said.
While expressing confidence that Cardoso has the academic, cerebral and industry credentials to head the apex bank given the pedigree, disposition and character that the position demands, CPPE said deepening the financial system has also become an imperative in order to enhance the primary role of financial intermediation of the deposit money banks.
According to CPPE, this responsibility entails the mobilization of financial resources from the surplus end of the economy, to the deficit segment of the economy, as financial conditions remain very tight for the private sector amid challenges of access and cost of credit.
“Banking system credit to the private sector in Nigeria, as at 2022, was a mere 20.6 per cent of the nation’s GDP, as sub-Saharan average of 28 per cent and global average of 145 per cent. Besides, small businesses which account for an estimated 50 per cent of the Gross Domestic Products (GDP), have access to just about one percent of the credit in the banking system. The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy. Financing gap in the small business space has been estimated at over N600 billion.
“This anomaly needs to be corrected. All these underscores the need to deepen synergy and complementarity between the banking system and the economic players, especially the micro, small and medium enterprises (MSMEs).
“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; ratio of deposit liabilities to GDP; and ratio of money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical.
“There is need to reduce the ratio of non-interest income as a percentage of income of banks. The ratio was 42.5 per cent two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy. In most developing economies, the ratio is less than 30 per cent.
“This income structure is a reflection of the failure of financial intermediation in the economy. This therefore needs to be addressed. The core function of the banking industry is financial intermediation. A situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy,” Yusuf said.
He underscored the need to improve on the efficiency of the financial system noting that the spread between deposit and lending rates in the Nigerian banking system is too high, an indication of serious efficiency issues in the banking system.
Besides, Yusuf added that the minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency.
According to him, during the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion. The revised capital requirement was an equivalent of $187 million. Today, the same N25 billion is an equivalent of just $32.5 million. This is a clear indication of the phenomenal erosion of the capital base of the banks.
“Recapitalization of the banks has therefore become imperative. It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system,” Yusuf said.
He advised that the Ways and means finances of the CBN must be kept within statutory limits to avoid the damaging impacts of high-powered money on the macroeconomic environment, noting that the experience of the last few years must not be allowed to repeat itself.
He called for the indefinite suspension of the naira redesign policy, arguing that there was no real compelling argument to undertake the naira redesign in the first place.
He said the momentum for the cashless economy should be sustained without resorting to the crude methodology of cash confiscation adopted by the previous dispensation in the CBN, pointing out the past approach was very disruptive as it inflicted unbearable hardships on businesses and the citizens.
“The tenure of funds in the country’s banking system is extremely short. Over 85 per cent of deposits in the banking system are less than one year tenure. This maturity structure of funds cannot support economic growth. What it means is that long term investment cannot be supported by our banking system. Doing so will result in serious mismatch of tenure which could pose a risk to the banks stability. In 2021, the banking industry recorded a negative asset -liability mismatch of N45.6 trillion, according to the NDIC. This is not healthy for the banking system and the economy.
“This is why there has been a dominance of development finance in the economy. Such interventions funds have vulnerabilities that could create challenges for the economy. There is a need to address the macroeconomic fundamentals to correct this maturity structure of funds in the banking system.
“Lending rate in the economy is very high and detrimental to investment and economic growth. SMEs pay as high as 30 per cent interest on loans. For non-bank financial institutions, the rates are even more atrocious. This is not conducive for investment growth and job creation. Bringing down interest rate will require a mix of monetary and fiscal policies,” Yusuf said.
He said the concentration risk in banking sector needs to be addressed as a strategy to manage systemic threats to the banking system.
According to him, currently, the top 10 banks account for over 80 per cent of bank assets, total loans, and deposit liabilities, which poses systemic vulnerability risks.
“The Acting CBN governor needs to relate well with stakeholders, both in the public and private sector. This is without prejudice to its autonomy or regulatory effectiveness. Such collaboration would enrich the quality of monetary policy through beneficial feedbacks and empirical content. It will also provide insights into the peculiarities of the economy.
“The CBN should not have a territorial mindset. It should be ready to engage with other ministries and agencies whose activities impact on investment environment. It is gratifying that the administration has put in place a policy coordination framework with the designation of a coordinating minister for the economy.
“The Acting CBN governor must observe the high standards of corporate governance to preserve the credibility and integrity of the apex bank. There should be level playing field for all operators in the financial sector. Regulatory process must be transparent, fair, equitable and firm.
“The CBN should be apolitical. Involvement of the CBN leadership, any of its officers, members of the MPC and board members in partisan politics should be avoided. They should be completely above board. Involvement of the apex bank or its agents in partisan politics would do enormous damage to the credibility of the bank. An apolitical CBN would be able to relate with any incumbent government, irrespective of the political party,” Yusuf concluded.
