making history

CBN’s Emefiele: ‘The Nigerian situation is a challenging one’ says analyst

in depth

This article is part of the dossier:

The governors of Africa’s Central Banks

By Ruth Olurounbi

Posted on August 4, 2020 10:46


In the second part of our series on the governors running the Central Banks of West Africa, we take a look at Nigeria’s Godwin Emefiele.

This is part 2 of a series.

Nigeria’s Central Bank Governor Godwin Emefiele may have made history as the only governor to have been reappointed for a second term office since the West African nation’s return to a democratic rule,  however, “he will be more remembered as the CBN governor that surrendered much of the bank’s independence and ran a monetary policy that had record negative impact on the Nigerian economy,” Tunde Ajileye, Partner, SBM Intelligence tells The Africa Report.

Losing independence

“Emefiele’s tenure has seen the erosion of the independence of the central bank. The bank has been shown to be funding the Nigerian budget to a degree that not only violates the Fiscal Responsibility Act but also potentially impairs its own balance sheet as an audio leaked to the press showed. Monetary policy under him has been a mix of conflicting signals and has left many stakeholders extremely befuddled many times,” says Ajileye in response to emailed questions.

READ MORE Nigeria’s Central Bank move complicates life for First Bank

The bank’s unorthodox as well as interventionist model that moves away from just ensuring price stability drew the ire of analysts who see the bank’s chief as a largely answering only to one master.

“Over the years, our experience here in Nigeria is that CBN governors have sometimes taken positions that rankled the government. But we haven’t experienced such under him. This has led to some labeling the CBN under him as the government’s piggy bank,” says Bongo Adi, Professor of Economics at Pan Atlantic University in Lagos.

According to the economics professor, “the prosocialist bent of Aso Rock appears to be backed by his monetary policy which they refer to as unconventional and find reasons in their enabling act to justify at each call. Some economists contend that the policies under him constrain the market and undermine competitiveness which further damages the economy – the same criticism against the government of the day.”

Five year plan

Shortly after his reappointment as the central bank’s governor for the second term in May 2019, Emefiele announced a five-year plan that targets double-digit growth in one of Africa’s largest economies. The plan included:

  • Domestic macroeconomic and financial stability
  • Fostering the development of a robust financial payment system infrastructure seen as increasing access to finance to all Nigerians, thus, raising the financial inclusion rate in the country.
  • Continuing work with Deposit Money Banks (DMBs) towards improving access to credit for smallholder farmers, MSMEs as well as consumer credit and mortgage facilities.
  • Extend intervention support to the creative industry, as well as interventions that encourage deposit money banks to direct more focus on supporting the educational sector.
  • Growth in external reserves, and
  • Support for the agriculture and manufacturing sectors.

Emefiele’s approach to policy implementation has left many in doubt, raising questions on how his key policy move, especially in the context of management of the exchange rate, benefits the economy, and the naira he sought to protect.

READ MORE Nigeria: Buhari’s multiple headaches

“The CBN has pursued a ‘strong naira’ policy and had sought to dampen imports. Well, imports have not declined and the naira is far from ‘strong’. One wonders if the import restrictions on items and capital controls were necessary or of the CBN should have devalued the naira earlier. I will say Nigeria did not benefit from the capital controls regime,” says Kalu Ajah, chief executive officer at AfriSwiss Capital Assets Management Limited in Abuja.

Questionable lending policy

The regulatory bank’s aggressive lending policy has been called into question as well, causing some concerns over the bank chief’s stewardship of the banking sector. “The CBN is forcing banks to lend, and penalizing non-lenders. These are shareholders funds being deployed via fiat,” says Aja.

In October last year, the central bank fined 12 banks, including Citibank, First Bank of Nigeria, Guaranty Trust Bank, and Standard Chartered Bank N499 billion for failing to meet lending targets.

The cash sum of $1.3bn (N499.1 bn) removed from the vault of the banks was held at zero percent interest rates, as “penalties” in the dozen banks’ failure to meet the minimum Loan Deposit Ratio (LDR) of 60%.

Perhaps, sandwiching between the devil and the deep blue sea may not be a choice to be made, after all. It might be the only way in Nigeria’s context.

A day after, the Nigerian banking regulator increased the LDR for commercial banks to 65% with a compliance deadline of 31 December 2019; following an initial directive in July that mandated banks to lend up to 60% of their customer deposits with a 30 September ultimatum.

The bank is expected to yet again raise LDR to 70% this year, says Hassan Mahmoud, CBN Deputy Director, Financial Policy & Regulation Department.

“Emefiele is no doubt a seasoned banker but I fear he has not crafted any agenda devoid of input from the Executive, says Ajah. He adds that the CBN governor has simply “not shown enough independence from the executive.”

Banking industry: loan sharks

Emefiele’s steering of the economy cuts two ways. On the one hand is the banking industry which has become a little more than loan sharks by pursuing only low-risk ventures that needed taming. And on the other hand is his enforcement of the government’s political position and the real dictates of the market.

“There is little doubt that the inordinate focus of banks on profit needed taming,” says Adi. “Financial intermediation by banks has scarcely deepened the financial system. But most bank executives would tell you that they respond only to the incentives that the environment offers them. This environment is, however, one shaped considerably by a regulator that seems to be subservient to the powers that be…But has the situation improved under his policies?  I think the answer is in the winds. But in all, opinion seems to converge largely that he answers only to one master,” he adds.

Emefiele has come under fire for:

  • The controversial decision to fine MTN $8.1bn over alleged illegal repatriation to South Africa
  • His support for President Muhammadu Buhari’s protectionist decision to close the country’s land borders to goods in attempt to prevent smuggling
  • The bank’s decision to withhold foreign exchange through official channels multiple items from rice to milk and cement with the aim of driving local production and slashing imports.

“The thrust of his foreign exchange policy has been demand management, without what seems to be a care for how the economy fares at both macro and micro levels if the Buhari administration’s primary aim of a strong Naira is achieved,” says Ajileye.

According to him, the Central Bank, in many cases, delved into the activity that should not be under its purviews, “such as when Mr. Emefiele took it upon himself to inspect rice farms or embroiling itself with what amounted to the victimization of MTN and a few other foreign-owned businesses.”

“The Nigerian situation is a challenging one”

The bank under Emefile has shirked its primary responsibility of ensuring price stability and has embraced a more developmental role, in the hopes of naira stability.

“The CBN has also been aggressive in funding import substitution especially in the agricultural sector, how much of this is monetary policy and how much is supporting an executive agenda, irrespective of inflation fears,” adds Aja.

It is easy to criticize Emefiele, though, says Adi. “The fact, however, is that the Nigerian situation is a challenging one.  The market isn’t always to be trusted to work; the government needs to ‘improve the market outcome.’ But the experience is that the government can complicate the situation.  Perhaps, sandwiching between the devil and the deep blue sea may not be a choice to be made, after all. It might be the only way in Nigeria’s context. We have highlighted the macroeconomic misalignment over the years which he appears to have sustained.  I think this disjoint shows he is torn between the arbitrary.”

During his two terms of office, Emefiele has made a staunch effort to promote monetary policy and exchange rate stability, says Murega Mungai, trading desk manager at AZA, from Nairobi, Kenya. AZA is Africa’s biggest non-bank currency broker, transacting more than $1bn annually.

“We saw this very early on with the introduction of the investors and exporters window, which allowed investors to access foreign exchange at prevailing market rates. His policies have also focused on improving access to credit for MSMEs, intervention in the agricultural sector, and other ways to diversify the economy and cushion it against a crash in oil prices. As the banks’ regulator, he drove an increase in capital adequacy ratios from 11% to 16% last year and a 20% increase in liquidity,” he adds.

However, Emefiele has come in for criticism for not communicating with the market, most notably after devaluing the naira’s official rate recently, says Mugai.

“Clearly, there is a balancing act he needs to strike between giving enough information to build confidence in monetary policy and revealing the exact road map on exchange rate policy, which can then be used against the central bank by speculators. Given the pressure, the economy has experienced from COVID-19 lockdowns, supply dislocations, and oil price volatility, further devaluation seems inevitable and Emefiele’s job is to apply the brakes and ensure that doesn’t happen in a way that causes unnecessary damage. In this respect, it pays to have an experienced hand at the wheel,” he says.

*CBN spokesperson Isaac Okorafor was not available for comment.

For part 1: BCEAO governor Koné: Unfazed by controversy and quick to innovate

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.