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The reappointment of Emefiele as CBN Governor 15 May 2019

Against prevailing patterns, Godwin Emefiele was reappointed last week to serve a second term as governor of the Central Bank of Nigeria. Until then, no CBN governor had been reappointed since 1993. By choosing to retain Emefiele in his current position, President Muhammadu Buhari will now be the first president in 20 years to not appoint a new CBN governor.

Emefiele looks set to be the first CBN governor to serve under three democratically-elected presidents. His second term of five years beginning from June 3rd, 2019, subject to senate confirmation, will outlast Buhari’s second term, which will run till May 29th, 2023. The two presidents Emefiele has already served under were elected from two different political parties. Clearly, his reappointment is historic. For that reason, Emefiele should be congratulated.

CBN Governor of the Opposition

Emefiele was first appointed CBN governor in 2014 by President Goodluck Jonathan. Buhari was in the political opposition at that time. He went on to win the 2015 presidential election. But the portent of his victory was tenure insecurity for Emefiele.

Buhari had won the election mainly because his party, the All Progressives Congress (APC), successfully labelled the then-incumbent administration as very corrupt and inept, and Buhari as anticorruption. In no time after Buhari’s inauguration in May 2015, his government alleged that the immediate past National Security Adviser, Col. Sambo Dasuki, had inappropriately sourced about $2.1 billion from the CBN under Emefiele. A substantial part of the fund, which was earmarked for procurement of arms for the military, was diverted to the re-election campaign of President Jonathan.

But Emefiele was not axed by the new government. President Buhari was dilly-dallying with forming his cabinet and making other major appointments. While at it, the argument that the statutory professional independence of the central bank should be respected gained ground. Simultaneously, but contrariwise to affirming the independence of the CBN, Emefiele aligned the foreign exchange policy of the apex bank to the populist stance of President Buhari, who had said the naira should not be devalued because it would hurt the poor; and more true was his claim that Nigeria lacks the industrial base to take advantage of devaluation by increasing exports.

No less a personality than Emefiele’s predecessor at the CBN, Lamido Sanusi (as he then was), later alleged that the CBN forex policy was serving powerful interests. According to him, the people who were able to buy huge amounts of dollars at N197 from the central bank after a phone call to the bank and immediately sell same at N300, were the ones who didn’t want the naira to be devalued. This suggested that the politically-powerful individuals, leveraging the populist body language of President Buhari – which has largely been a substitute for coherent policy – had held CBN’s forex policymaking captive and Emefiele in his seat.

Problematic Success

A putative headline success of Emefiele-led CBN is that it has been able to stabilize the forex market and the exchange rate. For three years now, the dollar has exchanged in the main window of the central bank at N305. This rate has been the benchmark in the last three federal budgets. In the parallel market, the price of the dollar has stabilized at around N360. Before settling at this threshold, the exchange rate had gone as high as N490 in 2016, during the recession and dollar illiquidity caused by the collapse of oil prices.

However, when Emefiele assumed office on June 3, 2014, the official dollar exchange rate was N154.73. There was near-convergence of rates, with the dollar selling for around N162 in the parallel market. But, of course, the rates were maintained by high Brent Crude oil prices that averaged $96.6 between 2011 and 2015. The CBN was also heavily subsidizing the exchange rate at the time. As Sanusi would later justify the interventionist forex policy when he was the CBN governor: “we could afford it at the time.”

Even so now, favourable oil prices, which have helped to raise the foreign reserves to over $44.8 billion in early May 2019, suggests the CBN can afford to maintain the current regime of forex subsidy. But if the policy proved to be unsustainable before, it is a matter of time for it to prove problematic again. That time will come with the next sustained downward trend that takes oil prices to around $30 a barrel, like it happened in 2008 and also in 2016. Apart from cyclical collapse in oil prices, collapse in oil demand caused mainly by transition to renewable energy around the world is capable of dragging oil prices closer to this threshold permanently.

Emefiele, like any past CBN governor, or any of the world’s central bank governors, cannot be blamed for the vicissitudes of oil prices. Geopolitical dynamics and the modulation of oil supply and demand are outside of the direct control of central banks. In actual fact, the CBN can do no more than use its foreign exchange policy to enhance price predictability, and create a level-playing-field for investors and consumers. At best, the policy would serve as a mechanism for building investors’ confidence. The real leverage of high oil revenue is with fiscal policy, through saving in the sovereign wealth fund and earning financial and developmental returns on the fund’s investment.

Loss of confidence

But the foreign exchange policy regime of the CBN under Emefiele has continued to erode investors’ confidence in the Nigerian economy. The indicator for this is foreign direct investment (FDI) inflows. As the investment firm CardinalStone observed in its recent research note: “Annual FDI has hovered between $900 million and $1.3 billion since 2015, compared to $2.3 billion in 2014 when Emefiele was appointed. Current FDI inflows account for 0.2% of GDP, compared to 0.8% in 2014 and an average of 1.8% for Sub-Saharan Africa.”

The CBN is not solely responsible for FDI trends in the country. Fiscal policy and overall governance environment may actually be more influential for long-term foreign investment in the real sectors. But quite clearly, the Buhari administration, in its first term, has done precious little that is positive to attract investment.

Perhaps for the fiscal policy doldrums, Emefiele’s CBN, decidedly, has been incentivizing foreign portfolio investment (FPI). In 2018, FPI reached $8.5 billion from $1.0 billion in 2014. This flow of hot money, which will easily be divested upon the slightest negative market development, has also helped accretion to the CBN’s foreign reserves and created a sense of stability in the forex market.

That Nigeria has in the last three years attracted FPI in multiples of FDI, indicates the collective failure of Emefiele and President Buhari who has reappointed him as CBN governor. While Nigeria remains attractive for investment as an oil producer and a large consumer market, neither fiscal policy nor monetary policy was able to harness these potentials to attract investments that create jobs and support economic growth.

The CBN under Emefiele is even very deliberate in using its relevant policy tools to support short-term investments. It increased the Monetary Policy Rate (MPR), which influences bank rates, to 14% for 30 months before dropping it by 50 basis points to 13.5% in March 2019. The high MPR provides decent inflation-adjusted returns on money market instruments and government bonds. But it ensures loans are priced above the level that manufacturers and small businesses can afford.

Development finance

During his confirmation-hearing by the senate in 2014, Emefiele identified development finance to be a crucial area of intervention by his regime. He was right. The need to use low-cost development finance to de-risk a number of sectors in the economy, including agriculture, solid minerals and bringing much of the informal sector to formality, was apparent. So, it was good news that he wanted to work with the state-owned development finance institutions (DFI) to improve funding for manufacturing, agriculture, SMEs, and other sectors. The bad news was that the DFIs have failed to make any significant impacts in five decades.

The jury is out on the performance of development financing by the CBN in the last five years. The central bank claims success for its Anchor Borrowing Programme, which funnels money into agricultural production, particularly rice producers. But its claim has been disputed. In one disputation reported by Premium Times, many of the beneficiaries of the initiative were non-existent. Besides, the impact the programme has had on rice importation has been a subject of counter-claims by the government and the major opposition party. While the locally-produced rice is hard to find around the country, the price of 50kg of rice today at between N15,000 and N17,000 is up to 70% higher than it was five years ago at N10,000.

The CBN has further discredited its intervention in this regard by even suggesting that the Nigerian rice market can have a quick transition from import dependency to self-sufficiency. Such transition cannot happen without substantial private sector investment, whereas the domestic investment climate has been inclement.

Expectation for Second Term

There is the fear now that the reappointment of Emefiele as CBN governor is a harbinger of the normalization of mediocre performance by the Buhari administration. All the macroeconomic indicators, including GDP growth rate, exchange rate and employment rate, are worse off today than they were four or five years ago. The MPR was 12% in 2014 but 13.5% in 2019; unemployment rate was 7.4% in Q2 2014 but 23.1% in Q3 2018; and real GDP growth rate was 6.2% in 2014 but 1.9% in 2018.

The only valid claim of policy success with the stark statistics is that things could have been worse. But they could have been better as well.

Emefiele’s reappointment may also suggest that Buhari’s second term will mirror his first term, in terms of the quality of his cabinet. If that is the case, Emefiele would struggle to find the complementarity of fiscal policy and good governance to monetary policy. In which case, Nigerian business leaders struggling to grow their businesses, SMEs, the teeming unemployed youth and the poor masses would be welcome to business as usual by the fiscal and monetary authorities.

Jide Akintunde is Managing Editor, Financial Nigeria; he is also Director, Nigeria Development and Finance Forum.