Monetary policy — what is to be done?

If we agree that transparency is increasingly of the essence, then the Central Bank must also stop leaning against the wind. Collectively, as an economy, our main deliverable is to rely more on the markets and market-based tools. And this calls for a pilgrim’s focus on restoring the efficiency of the monetary transmission mechanism.

“The Central Bank of Nigeria has returned to using open market operations as a monetary policy tool. And we are beginning to see yields rise in the money markets. In other words, we are seeing a normalisation of monetary policy in the country — a perceptible if gradual shift away from the economic unorthodoxy of the recent past. As a result, I believe that the arbitrary cash reserve requirement burden on banks will be lifted at the next meeting of the CBN’s monetary policy committee”.

Thus, a commercial bank honcho spoke recently on the state of the domestic financial services sector. For colour, as he spoke, the naira’s exchange rate, for so long a fish (and underwater) looked like it had also decided to turn duck (and swim). It made noticeable gains against the greenback in the parallel market — at some point ducking beneath the psychological US$1:N1,000 mark.

The Central Bank’s recent decision to meet its forward obligations, by promising to improve banks’ foreign currency positions, convinced many a punter to sell part of their dollar holdings — a major contributor to the naira’s appreciation at the parallel market.

What was going on? For much of the period after its two major reform initiatives (the removal of the subsidy on the pump-station price of petrol, and the freeing of the naira’s exchange rate), the new federal government looked like a fawn, caught at night, in the headlights of a fast-approaching vehicle. The apprehension by security agents of the then-central bank governor, and President Tinubu’s claim that the governor had turned the financial services sector into a cesspool, if not of corruption, then of incompetence, had something to do with the ensuing stasis in the sector. Punters were persuaded that root-and-branch changes were afoot in the sector. The publication, after more than five years, of the Central Bank’s financial statements reinforced the sense of foreboding even further.

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Nonetheless, the main monetary policy challenge before the new federal government was not a question of keeping its powder dry. The cupboard was bear. Toss in high and rising domestic prices, and the one-way bet on the naira looked like the only game in town. Whereas the finance minister should have articulated a vision for getting the country out of the financial cul-de-sac that it is in, instead he struggled to be credible. Confronted by a market that remains persuaded that fundamental fiscal adjustments are necessary if the economy’s haemorrhage is to be staunched, the federal government’s recourse to additional borrowing looked like applying a bandaid to a chancre. Having skipped a meeting of its policy committee in this chaos, the newly constituted board of governors of the Central Bank was less than reassuring.

The Central Bank’s recent decision to meet its forward obligations, by promising to improve banks’ foreign currency positions, convinced many a punter to sell part of their dollar holdings — a major contributor to the naira’s appreciation at the parallel market. In the end, the Central Bank could only meet, and not even fully, its obligations to foreign banks operating in the country.

Until it started making noises about settling its forward obligations to banks in the country. At some point under the Emefiele-led Central Bank, banks had swapped the dollar-denominated loans they obtained from their correspondent banks with naira from the Central Bank. We can only assume that the exchange of interest payments on these swaps was mutually beneficial. But we do know that at the end of the respective contracts, the banks were able to return the naira they got from the Central Bank back to it. The Central Bank, on the other hand, struggled to account for the dollars it had received. Some analysts insist that the resulting diminution of banks’ foreign currency liquidity contributed to the naira’s exchange rate crisis.

The Central Bank’s recent decision to meet its forward obligations, by promising to improve banks’ foreign currency positions, convinced many a punter to sell part of their dollar holdings — a major contributor to the naira’s appreciation at the parallel market. In the end, the Central Bank could only meet, and not even fully, its obligations to foreign banks operating in the country. The much bigger obligations to domestic money banks might be met tomorrow. This “management by announcement effects” was also evident in a corollary narrative. The Tinubu administration was expecting an inflow of US$10 billion — made up of an Afrexim loan of US$3 billion, and another US$7 billion from the securitisation of future dividend payments by Nigeria LNG to the federal government.

Inevitably, my thoughts turned towards the next meeting of the CBN and what one would expect to see on its agenda. Increasingly, what matters is no longer what the apex bank agrees to. After the snafus of the Emefiele years, the Central Bank’s ability to walk the markets through the convoluted thought processes by which it reached these decisions will matter more.

The markets were persuaded that these monies represent the arsenal with which the Central Bank was supposed to meet its outstanding currency swap obligations. But negotiations on the loan and securitisation arrangement are far from done with. So, the Central Bank may not have any money to hand over. This only complicates another question: Even if we had the US$10 billion, would meeting the swap obligations constitute the best use of increasingly scarce resources?

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Inevitably, my thoughts turned towards the next meeting of the CBN and what one would expect to see on its agenda. Increasingly, what matters is no longer what the apex bank agrees to. After the snafus of the Emefiele years, the Central Bank’s ability to walk the markets through the convoluted thought processes by which it reached these decisions will matter more. If we agree that transparency is increasingly of the essence, then the Central Bank must also stop leaning against the wind. Collectively, as an economy, our main deliverable is to rely more on the markets and market-based tools. And this calls for a pilgrim’s focus on restoring the efficiency of the monetary transmission mechanism.