Thursday, June 19, 2014
Memo to Godwin Emefiele
I will not attempt to be unduly prescriptive in this memo-you are a first class banker of many years standing and you have worked in one of Nigeria’s most successful financial services groups for over two decades getting to the top thereof. My preferred approach will be to raise issues which I believe you will have to address and suggest what I think the critical variables are. I believe as governor of Nigeria’s Central Bank, you will have every resources at your disposal to enable you set the right policies once the right questions are asked. I will outline first what you are NOT as CBN Governor as recent developments may have obscured the role and implications of that position! You are not a politician, philanthropist or media celebrity! Neither are you a leader of an NGO or social activist. You are supposed to enjoy autonomy from the executive especially in relation to monetary policy and financial sector supervision, but you are not an alternative or parallel government! You are certainly not an ethnic, religious or regional crusader. And you are no longer a staff of Zenith Bank! You are now charged with managing Nigeria’s reserve banking and monetary policy, contributing to its economic development and supervising its financial sector. In this role I believe the key underpinnings are or should be achieving sustainable economic development and diversification; dealing with Nigeria’s socio-economic crisis of poverty, unemployment and inequality; and growing a safe, strong and competitive financial sector that discharges its primary role of financial intermediation and economic development. Given this background, I completely endorse your initiative to focus on employment as a key macroeconomic variable to be tracked by the bank and its monetary policy committee and commend your recognition that growth and employment along with stability perhaps, but certainly not stability alone and for its own sake should be the primary goals of macroeconomic policy in our current context. I also understand why you seek the other objectives you outlined in your inaugural speech-reduced interest rates; strong foreign currency reserve buffers; stable exchange rates; and probably low inflation as well. The problem as I’m sure you understand is that macroeconomic management involves difficult trade-offs and the agenda you have outlined will clearly involve you and the Bank having to make some tough ones, sooner or later! It certainly will be difficult for you to simultaneously reduce interest rates, maintain exchange rates at current levels, and “aggressively” grow external reserves! It is probably impossible so to do! I suspect that you may have to choose which of these objectives you are willing to sacrifice and to what extent in the weeks and months ahead. The substantive questions you have to answer are whether current exchange rates are sustainable and how? What is the cost and opportunity cost of keeping exchange rates and inflation at current levels? Is our reserves management strategy sensible and optimal given that reserves have largely been dissipated to support the currency? How can we boost economic growth and make it more inclusive? What policies within the ambit of the central bank can help generate large scale employment and reduce poverty? I wholeheartedly support your strategy of supporting micro, small and medium enterprises based on the aforesaid. I have for instance advocated that banks and financial institutions may be encouraged to voluntarily (or otherwise!) agree to increase lending to SMEs such that each bank’s lending to that category of borrowers must be equivalent to their share of deposits. I am reluctant however to endorse specific programmes you will adopt to encourage lending to MSMEs until you unveil their details because I am wary of a situation in which the central bank becomes a retail lending institution or active participant in the retail lending process. The role of the bank must in my view be leveraging policy and appropriate instruments to influence the flow of finance to such targeted sectors. In terms of sectors I share your desire to see increased flow of capital into some sectors-power, oil and gas, agriculture, health and manufacturing. My personal priorities are growing housing and mortgages; sustaining and deepening agriculture reforms and manufacturing; and boosting local and international investments in solid minerals, construction and hospitality sectors. I am particularly interested in these sectors in addition to some of those you outlined because of their potential for large scale employment consistent with your priorities. My reservation in terms of not turning the CBN into a primary lender who distorts financial markets (and potentially becomes a source of moral hazard) however applies to whatever mechanisms you decide on for targeting sectors. In relation to sectors, I wonder whether it is within CBN’s remit to consider the competitiveness of our economic sectors as I fear the slow but steady emergence of monopolies and oligopolies within many sectors. I have written of the need for a competition law and policy regime to prevent monopolies and anti-trust behavior in Nigerian markets. I will also suggest that you revisit the merits or otherwise of the Soludo proposal to pay allocations to sub-national entities in foreign currency. With regard to financial sector supervision, I am quite impressed with your resolve to grow sector-specific specialization within the central bank as a tool for improving risk management and supervision in the industry as well as your intention to strengthen risk-based supervision. The most important challenge of the CBN is relation to financial sector supervision is actually to match the high standards the regulator often sets for the industry with equivalent efficiencies and innovation in the bank itself. The other recent trend which I hope you will reverse is the inclination of the last two governors to dictate the strategy of all banks within the industry from the central bank. The financial sector regulator’s role is to impose minimum regulatory standards and enforce them not to standardize firm strategy and create a homogenous and undifferentiated industry!