Yemi Olayemi Cardoso, the new Governor
Olayemi Cardoso, the new Governor of CBN, who was recently, together with his four Deputies, confirmed by the Senate, wrote an article titled ‘Preliminary Assessment of Challenges facing the CBN.’ In the article, he laid his vision of the CBN, what he intends to do and how to go about providing solutions to the numerous problems facing the CBN and the economy.
One of the areas of policy reversal by Cardoso, was the re-admission of 43 items hitherto, prohibited from the list of eligible items that can source foreign exchange from the CBN official window. The items include, but not limited to cement, rice, palm oil and palm kernel oil, toothpicks, industrial machinery etc. For details of the 43 items, please go to CBN website.
The re-enlistment of these 43 items to qualify for funding through the Investors and Exporters (I&E) window of the CBN, has both Naira exchange rate and macro- economic stability implications. Hence, I have decided to discuss this policy reversal by Cardoso.
Governor Emefiele, the predecessor of Cardoso at the CBN, removed those 43 items from the eligible list probably because of the large foreign sector of the nation’s economy. The huge import bills, have put undue pressure on the Naira exchange rate with the attendant negative effects on Naira volatility, its stability, prices, inflation, output and employment. Emefiele, probably felt that domestic industries should be protected from dumping from the more efficient overseas producers whose production costs, are relatively lower than the less efficient domestic producers. With lower production cost, these overseas producers, would attempt to dump goods in Nigeria at prices that are cheaper than prices of equivalent locally produced items.
Cardoso in his paper, indicated that the CBN will work to support the fiscal policies of the Tinubu Administration with the goal, of achieving $1.0 Trillion GDP in 8 years. That the CBN will focus on its traditional role of maintaining price stability, financial system stability, exchange rate stability and providing advice to the Federal Government of Nigeria (FGN). Cardoso went further, to compare BRICS and MINT countries of similar population with Nigeria namely: Brazil, Indonesia and Mexico, who, have achieved a GDP of $1.0Trillion or more. He concluded by saying that, those countries were able to hold inflation rate at about 4 percent.
CBN Gov Cardoso probably believes that for inflation to come down, the exchange rate of the Naria has to appreciate and the economy has to be opened to allow international flow of goods and capital. With that, domestic prices of goods will come down. CBN, Cardoso promised, will provide more liquidity in the foreign exchange market, improve on its regulatory and supervisory functions in the financial system, particularly with reference to operators in the foreign exchange market. Hence, by re-enlisting the 43 items, it will increase the market breadth, increase competition, permit Willing buyers and Willing sellers to determine the exchange rate of the Naira at the I&E window. Cardoso, predicated the success of his policy on the effective implementation of the fiscal policies of President Tinubu Administration’s economic deregulation. Tinubu’s economic policy, is tilted towards the Brenton Wood Institutions’ -IMF and World Bank prescriptions of Neoliberal economic thought.
The neo-liberals advocate free enterprise, competition, deregulation, limited government intervention in the affairs of individuals and markets, free trade and greater efficiency in the allocation of scarce resources. They further, advocate a faithful implementation of these prescriptions. The Neoliberals believe that these prescriptions and their subsequent implementations, are the panacea for the myriad of problems bedeviling developing countries and they will usher in prosperity and wealth creation at the end.
To Cardoso, deregulating the foreign exchange market and allowing more goods to be imported into the country, in the light of the existing backlog in foreign exchange repatriation and huge import bills are essential for the economy. He probably believes that domestic prices of goods will come down, there will be increase in international capital inflow and possible increase in foreign direct investment. The expected decline in inflation rate and domestic prices due to this policy, will stimulate demand for goods and services, allow producers to make additional investments in procuring raw materials and acquisition of new machinery, employment of more labor and produce more efficiently. The local producers that cannot produce efficiently, will be forced to close down and resources will go to those that can use them better for the benefit of the entire society. The increase in production even for domestic consumption, will reduce the import of those goods and improve the Naira exchange rate.
With this mind-set of the CBN Chief, one may tend to speculate that non-bank financial institutions such as BDCs, Mortgage Bankers, Stockbroking Companies, Micro- Finance banks etc. maybe admitted into the I&E window in the future as a way, of increasing the breadth of the foreign exchange market. Mr. Governor Sir, I beg to differ with your re-listing the 43 items hitherto excluded from the CBN foreign exchange window. My reasons are as stated below:
1) Allowing an increase in the number of eligible items, especially cement and rice that are foreign exchange guzzlers, will cause the exchange rate to further depreciate.
2) You promise to periodically, intervene in the market by providing liquidity. My question is, where will you source the foreign exchange? We know that the country is facing oil theft, which, has reduced the inflow of dollars and the subsequent negative impact on our reserves position. Even if, there is an increase in the production and export of oil, the revenue generated, has other charges to it, like foreign debt service payment, FGN expenditure programs, obligations of sub-national governments etc. What is left, is then channeled to the CBN official foreign exchange window.
3) Mr. Governor, you came from the banking sector and you know that the demand for foreign exchange at the official window, does not reflect the true demand. Most often, it is inflated for purposes of round tripping. Most of the so-called importers of these items are not likely to bring actual goods worth the amount given to them as to bring down prices. It is more profitable to round trip, than face the hassle of paying import duties, price fluctuations, risk of loss due to insecurity, multiple levies by local government authorities etc.
4) Mr. Governor, you know that proceeds from non-oil export like agricultural products, have not been sufficient enough to meet the huge import bills associated with our preference for imported goods.
5) Mr. Governor, if you depend on borrowing to fund the market, it can only last for a short period.
6) The anticipated capital inflow associated with your current market deregulation program, may not bring the amount of foreign exchange to cause the Naira to appreciate in value. The reason, being that foreign investors are highly averse to our Nigerian way of life. Most of them, see us as criminals, dishonest and corrupt bureaucrats.
7) Where they decide to invest in our country, most of them, would prefer to be in the lower end of the risk spectrum. In that regard, they will prefer to make portfolio investments that would allow them, take out their capital as soon as possible. Foreign direct investment would still remain a tall dream.
8) One of the assumptions of the neo-liberal economic thought, is that as a country opens its market to international trade, that goods and capital will flow in, prices will drop and inflation will ameliorate as exchange rate will appreciate. Inefficient domestic producers would be forced to either improve on their operating efficiency or die. This assumption, is based on a sound fiscal program that will support the foreign exchange market deregulation such as a) provision of adequate infrastructure such as roads, electricity, water etc. b) Government should provide security of lives and property. c) Minimum bureaucratic red tape in approving or licensing of businesses. Reduction in the cost of doing business. Ease of entry and exit of firms and their ability to take out their funds if necessary.
9) The private sector is robust enough as to absorb any policy shocks and survive any cyclical downturn.
10) The economy is able to build huge amount of capital in the form of equipment and machinery. That is, there is huge capital formation going on in the country to support production activities.
11)The labor force is large and skilled enough to support activities in the real sector of the economy.
12) The educational system is such as to produce quality, skilled and experienced workforce that supports the real sector.
13) Management has the right entrepreneurial traits and skill set, to provide the right leadership, appraise inherent risks together with the associated returns to make the right investment decisions.
14) There is a legal framework to enforce contract rights and obligations and protect both physical and intellectual properties rights.
Mr. Governor Sir, you can bear with me that our country, is grossly deficient in majority of the above requirements for deregulation to work as prescribed by the Brenton Wood institutions.
Those countries you mentioned that are of comparable size in population with Nigeria and have achieved about 4 percent inflation rate with about $1.0Trillion in GDP, the goal of Tinubu’s Administration, have met most of those requirements.
I will like to further, drive home this point by using one of the items re-enlisted as an example. Allowing importation of palm oil and palm kernel oil for example, will put local processors of this agricultural produce out of business. The reasons being as follow:
1) Companies like Dangote, BUA Group, Olam are the major importers of these products. They bring them mostly from Malaysia where the production cost is lower due to higher operating efficiency. They usually sell at prices below the local processors because of scale economies.
2) Labour cost for farm workers has been rising due to inflation in the country.
3) Rural roads are terrible and not motor-able and they affect cost of transporting farm produce from the farm to the mills.
4) Fuel cost, such as diesel to run generating sets, is too expensive and it increases processing cost.
5) Public power supply is very costly to obtain. In most cases, the processor will have to buy electric Transformer, Cables and Poles to draw energy/power from the public grid.
6) The processor will also, provide water supply by sinking borehole.
7) In most cases, the processor will equally provide access road to the mill.
8) The processor will on his own, pay for the services of a security company. First, to protect him from being kidnapped. Second, to protect the company assets.
9) Palm oil and palm kernel oil prices do not rise proportionately with the increase in processing cost. Thus, while processing cost is rising due to inflation, you do not see such arise in output prices.
10) Where the processor takes a loan from a financial institution, the interest rates are really suffocating.
Before former President Buhari closed Nigerian borders and restricted influx of imported oil, palm oil and palm kernel oil millers were experiencing huge loses due to depressed prices.
Mr. Governor, with the above narratives, you can see the basis of my differing with your re-enlisting those 43 items.
I will suggest you rather, pursue a guided, structured and gradual deregulation of the financial system especially, the foreign exchange market.
That may require you to begin, if you must do it, with re-enlisting those items of raw materials and machinery that will support domestic production. And suspend for now, items like tooth picks and consumption related items.
Governor Sir, re-admitting the 43 items into the I&E window or now renamed Nigeria Autonomous Foreign Exchange Market (NAFEM) is to me, a false start. I will suggest that you reconsider this decision except, if it a condition precedent to drawdown on the IMF loan that is being speculated that the FGN wants to take.
There is another monetary policy issue that Mr. Cardoso, raised in his article ‘Preliminary Assessment of Challenges facing the CBN’ that I would like to comment upon.
Mr. Cardoso in his article, said that he will pursue the Orthodox approach to monetary policy by emphasizing those traditional tools like the Discount Rate, Open Market Operations (OMO), Quantitative Easing. He further, said he will not use Development Finance (DF) as a tool of monetary policy unlike his predecessor. He considered DF as an Unorthodox tool and that we should allow fiscal policy measures to address direct interventions in the economy.
I agree with Cardoso against the use of an unorthodox approach as a tool of monetary management to an extent. In my article published in the Daily Sun newspaper of February 8, 2023 and titled ‘Central Bank of Nigeria (CBN) Governor Emefiele’s Unorthodox Monetary Policy: The Fallacy of His Igbo Ethnic Identity Denial.’ I criticized Emefiele for the manner he allocated credit to the various sectors of the economy through the Development Finance Department.
Specifically, I accused him of allocating more financial resources to regions that have the lowest marginal efficiency of capital at the expense of those that know how best to use capital.
Having said that, I do not think that CBN should not use DF as a tool to intervene in those sectors that the traditional tools may not effectively and efficiently allocate financial resources.
I will state below, the reasons why the CBN should apply the DF approach when it is absolutely necessary to do so.
1) Orthodox monetary policy operates best in a highly enabling environment. The attributes of an enabling environment will include but not limited to the followings: a) A well-developed financial system/market. b) Robust private sector with high absorptive capacity to take in money supply and apply it efficiently for the growth of the economy and wellbeing of the society. c)Operators in the financial system are subject to proper regulation and supervision and they are sanctioned for breaches. d)Monetary Authorities in those climes are independent of the Executive arm of government. e)Management of monetary authorities should avoid possible conflicts of interest between their individual goals and the institutions they serve.
2) Nigerian environment is not all that enabling as to permit the reliance on only the orthodox method. Our financial system is still developing with many obstacles and limited breadth.
3) The transmission path of monetary policy is bedeviled with impediments that increase the lag in the transmission of monetary policy and often in some cases, make the policy impotent.
4) Monetary authorities in Nigeria a-times, tend to apply the wrong tool to solving the right problem with no appreciable result. Most often, decisions are taken to serve self interest or appease the masters.
5) Deposit Money Banks(DMBs) who are the major conduit for implementing monetary policy may have conflicting goals than that of the monetary authorities.
6) DMBs are known to have risk preferences that determine their asset allocation decisions. Most often, their asset allocations and portfolio adjustments may not be in congruence with the sector specific desire of monetary policy.
7) The agricultural sector by its nature is very risky. Most lenders especially the DMBs, shy away from extending credit to those in the Agric-value-chain. Hence, it does not matter the traditional tool of monetary policy adopted by the monetary authorities to extend credit to that sector, will remain impotent because of lack of cooperation from the DMBs.
8) The private sector in Nigeria is small relative to the oversized public sector. The sector is heavily under funded and most often, crowded out by the public sector. The result is that a lot of people with good investment opportunities that command an expected rate of return that is greater than the cost of capital may not have the available funds to embark on such projects due to paucity of funds.
9) Studies have shown that availability of credit is more important in Nigeria than the cost of credit. Hence, any monetary policy that relies on the Discount Rate as an effective tool to allocate credit in the economy may be misplaced. The multinationals and few indigenous conglomerates may respond to changes in the Discount Rate and therefore, alter their demand for credit. The majority of users of credit are more concerned with the availability of credit than the cost of credit. Thus, interest elasticity for demand for credit tends to be inelastic for most people in the loanable funds market.
Finally, I will like to use the electricity power supply analogy to demonstrate the reason why the CBN may have to adopt the DF approach to reach some under-banked areas that the traditional tools maybe impotent.
Electricity power supply involves the following major players namely: a) The Generating companies (GENCOs). b) The Distribution companies (DISCOs) and the Consumers (CONSUs).
Similarly, monetary policy implementation has three major players namely: a) CBN. b) DMBs. c) CONSUs.
The GENCOs will generate the energy. The energy will be transported through the grid to reach the DISCOs. The DISCOs will distribute the energy to consumers (CONSUs).
In the same vein, CBN will decide the quantity of money that it intends to make available to the economy. CBN will use any of the tools of monetary policy to alter the reserve balances of DMBs which is the transmission path that is analogous to the grid. The DMBs will in turn make the funds available to the CONSUs of bank services. Those places that are not connected to the grid will not receive power supply irrespective, of the amount of energy generated. Similarly, those places or communities that do not have bank presence will not directly feel the impact of monetary policy.
If the CBN wishes to make credit available to the under-banked areas, it must have to do that through the Development Finance Department. CBN will send its officials to those areas to collect credit applications from the borrowers, process them and make credit avaliable.
Mr. Governor Sir, from the above narrative, you can see my rational for arguing that you may consider using the unorthodox monetary policy approach to reach certain segments or sectors of the economy when the orthodox method may not give the desired effect.
Mr. Governor, I will suggest that you take a tour of the country so as to get a feel of the pulse of consumers of financial services. You may visit some selected Chambers of Commerce, Trade groups such as, Nigeria Farmers Association, Manufacturers Association etc.
Mr. Governor Sir, a further review of your Inaugural speech as contained in the Article “Preliminary Assessment of Challenges facing the CBN”, the focus was mainly on reforming the operations of the CBN.
There is need in my opinion, to also embark on a structural reform of the CBN. This will help, reposition it as a viable and efficient monetary institution that will serve us better, especially in the light of the challenges that have bedeviled it in the recent past.
The restructuring may involve an amendment to the CBN Act which is outside your authority. But as a major shareholder, you can still make appropriate recommendations to the FGN.
Having said that, I will make the following recommendations some of which are already contained in my previous write-ups.
1) There is need to change the recruitment procedure of CBN Chief Executive from mere referral of a candidate to the President of Nigeria. The recruitment process, should be more rigorous and competitive like what is obtainable in the recruitment of CEOs of Deposit Money Banks (DMBs). Shortlisted candidates are submitted to the President who will select one candidate and forward to the Senate for confirmation.
2) The Independence of the CBN should be strengthened and the extent to which, the Executive Arm can get involved in the affairs of the CBN well spelt out. This frequent firing of the Governor of CBN on the assumption of office of a new government administration, should be stopped. The current CBN Act, spells out the procedure to follow when appointing a CBN Governor which will require the approval of the Senate. However, CBN Governors are kicked out of office without due process and approval of the Senate. It is okay for the President to recommend the Governor for confirmation but when it comes to firing, the same appointing authority finds it difficult to follow the dictates of the CBN Act.
3) The CBN Act, should be amended to make it a felony for the CBN management, to allow excess drawing from the National Assembly authorized limit on the Ways and Means.The President of Nigeria or any beneficiary of the illegal act of the CBN, should be held also accountable.
4) The Governor of CBN should not be the Chairman of the Board as it is presently constituted. There should be separation of board and management, to allow for checks and balances, in order to avoid the flagrant abuse of law and rules in the CBN as was recently witnessed.
5) The shareholders’ representation at the CBN should be increased to include, but not limited to the following:
a) Finance Commissioners in all the States of the federation. b) Representative of the Bankers Committee. c) Representatives of- Nigerian Economic Society, ASUU, Organized private sector, Organized labor etc. Presently, the only shareholder representative is the Federal Ministry of Finance who, represents the Federal Government , the sole owner of the CBN. With an enlarged shareholders’ representation, greater scrutiny will be made at the operations of the CBN. CBN under Emefiele, did not publish its Financial Statement for 8 years. This probably, would not have been possible with an enlarged representation. It is therefore, important to highlight the double standards applied by the Emefiele CBN. DMBs are required to publish their financial statements quarterly and annually. Erring banks are sanctioned for failure to do so. But CBN flouts it’s own rules with impunity.
Mr. Governor Sir, I have articulated my views on why the re-admission of the 43 items previously banned from the CBN foreign exchange window maybe premature. I will however, suggest that you approach the liberalization of the foreign exchange market with caution as your policies could turn out to be counterproductive.
Finally, I take responsibility of the content of this write-up and I welcome comments. Thanks.