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Opinion: The GEJ Central Bank of Nigeria, the Nigerian Economy and the Buhari Cross By Dele Awogbeoba

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On the third of June 2014, Godwin Emefiele became the governor of the Central Bank of Nigeria. Godwin Emefiele heads a Monetary Policy Committee where 10 of the 12 members (the permanent secretary of the ministry of finance and the Accountant-General of the federation being the only members appointed by President Buhari) were appointed by former President Goodluck Jonathan. The CBN governor and the four deputy governors have a 5 year term (CBN Act of 2007) and the directors have a 4 year term in office. 80% of the members of the Central Bank of Nigeria board and the Monetary policy committee were appointed by the erstwhile President Goodluck Jonathan.
The first curious decision of the Emefiele in January 2015 (5 months before Buhari became president) led CBN was to introduce forex controls by taking measures that cut the daily trading of the naira to less than a tenth of its previous levels rather than allowing the Naira to float to its true market value. This continued practice despite warnings from the JPM Index continued until Nigeria was removed from the JPM index around September 2015. That removal ensured that huge foreign currency inflows stopped coming into Nigeria. Not done, the CBN then removed or prevented many businesses from directly accessing official forex purchases and those businesses were compelled to purchase forex needs elsewhere. The impact of that decision led to massive industry closures, industry lay offs and reduced production. The army of the unemployed rose significantly increased, the level of industry production fell, the rates of taxes derived from state governments fell and the rate of VAT obtained by FIRS for the benefit of the federal government significantly fell.
Still oblivious to the connection between CBN monetary policy decisions and the economic fortunes of Nigeria, four months ago, the Emefiele led Monetary Policy Committee of the CBN (in the middle of a weak domestic economy and in the absence of any fiscal injection from the federal government) increased the MPR (Nigerian interest rates) from 11% to 12% and raised the cash reserve ratio (CRR) by 250 basis points from 20.00 to 22.50. In one fell swoop, the CBN had depleted a liquidity challenged domestic economy of over a trillion naira. As Nigeria does not attract “hot money” from overseas that seek higher interest rates for its money nor is current inflation caused by excessive domestic demand or domestic wage push inflation, it was curious that the CBN would use high interest rates as a tool to combat imported inflation due largely to the fall in the value of the Naira (which in part was caused by the misplaced forex policy of the CBN started in January 2015 which has discouraged Foreign direct investment into Nigeria and had resulted in Nigeria’s expulsion from the JPM Index).
The CBN decisions had made it extremely difficult for businesses to perform profitably in a demand challenged domestic environment (as they have to deal with the fact that most people don’t have jobs and therefore have less money to spend on things other than the bare necessities, but their costs of production increases as the amounts to be paid on debt service increases significantly). Additionally, new businesses will be discouraged from accessing bank loans as the costs of the loans would render most new business ventures difficult in the best of times. Consumers will also be discouraged from borrowing from their banks to purchase things like cars and houses. Those consumers that have already taken on borrowings will see more of their disposable income being paid in increased interest charges on existing debt with less money in their pockets to spend on buying goods that keep existing businesses in business.
That apart, any businesses compelled to require access to bank loans will itself have difficulty doing so because of the reduced liquidity at the banks as a result of the CBN increased CRR levels.

It does not take an economist to understand that the use of contractionary monetary policy (usually used in economies where the domestic economy is excessively strong and employment levels has reached its peak with the consequent risk of run away demand based and wage based inflation being serious risks) will significantly contract the domestic economy. When such policies are applied to an already weak demand challenged domestic economy, the effects will be economically catastrophic to the country in which it is being applied.
One was therefore surprised about the recent surprise of the CBN when informed by the Nigerian Bureau of Statistics that the Nigerian economy was now in recession. What was surprising was Emefiele (following the CBN decision to evolve to a more flexible forex policy) attributed the imminent recession to the “slump in global oil prices” and “delays in passing this year’s federal budget” as opposed to the consistent cocktail of inimical and harmful restrictive and contractionary policies that have been coming out of the CBN over the last year and a half despite the fact that the recent Nigerian budget had not been passed and the price of oil had fallen to around $40 dollars a barrel. What was also worrying is that Emefiele attributed the rise in the Nigerian inflation partly to increased unemployment!
The budget has now been passed. The non oil revenues accruing to the federal government through FIRS, Customs and the Nigerian Ports Authority have fallen significantly due to the impact of the policies determined by the Emefiele led Monetary Policy Committee. Additionally, Nigeria has to pay 1.45 trillion Naira a year in interest payment on the massive debt bequeathed to the federal government by the Okonjo-Iweala managed finance ministry and economy. The Niger Delta Avengers have cut in half the estimated 2.2 million barrels a day export estimate. The Federal government will be lucky to have any money left to spend paying its workers once it has paid its required yearly debt service interest payment obligation.
Nigeria’s famed Keynesian budget will barely be able to finance recurrent expenditure despite the best intentions of the federal government. The CBN, despite knowing that the current indicators suggest that the implementation of the budget is unlikely to have a positive stimulative impact on the economy for reasons stated above, has maintained the CRR and MPR levels at present levels!
The clear trends within the Emefiele led CBN indicates that it is unaware of the consequences of its decisions, surprised by the subsequent impact on the economy of its previous decisions and is unable to analyze real time data in order to take real time decisions that may require real time adjustments to its current monetary policies. This raises critical questions about the monetary expertise of those appointed to the CBN board and the Monetary Policy Committee of the CBN by former President Goodluck Jonathan.
A change is required at the CBN or a change is required to the CBN Act of 2007. An incompetent and defeated President should not be allowed to impose his or her defective choice at the CBN on a new president for the duration of his term in office. The CBN Governor and CBN board were predominantly selected by a defeated PDP president and approved by a defeated PDP led Senate. The consequences of its ill-thought out decisions are affecting the fortunes of the recently elected APC federal government which (and ironically so) raises the prospect of giving rise to a new PDP government in 2019.

Dele.awogbeoba@gmail.com

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