The CBN and Institution Building, By Ifeanyi Uddin

The pyrotechnics notwithstanding, the hijinks last week around the fate in office of the governor of the Central Bank of Nigeria (CBN), did have a useful part. For an economy like ours, with its many pretensions to greatness, we cannot place too high a premium on the quality of our institutions, and the enforceability of contracts.

In the CBN governor’s case, (and on the first count), the Jonathan administration has failed, abysmally. Five years ago, we all knew that the first term of the current CBN governor would end by June this year. We were also aware that the new law under which he was appointed (concerned to guarantee the operational and legal autonomy of monetary policy management) provides for the appointment of a governor by the president, subject to the Senate’s confirmation.

Actually, the live telecast of Sanusi Lamido Sanusi’s (the current governor of the central bank) Senate confirmation hearing (the first of its kind for that office, as far as I am aware) was one of the highlights of 2009. In addition, and to his credit, Mallam Sanusi did make it clear, and quite early, too, that he was not interested in being re-appointed for another term in that office.

In other words, we had plenty of time to prepare for the appointment of his successor. We did not. Instead, government pussyfooted.

Over the last five years, the CBN under Mallam Sanusi turned out to be the most important cog in the machinery that supports the economy’s smooth running. Its quasi-fiscal interventions across key sectors of the economy were welcomed with ballyhoo that belied government’s claims to be working. AMCON (funded almost without recourse to taxpayers’ funds) and its huge portfolio of bad debts, and bonds was a “new frontier” initiative. The CBN’s balance sheet ballooned out of all proportions as the apex bank bought treasury bills (through its open market operations) in a bid to manage money market volatility. Moreover, the tight money policy that has held the policy rate at 12% for more than a year, forced inflation into the psychologically important single-digit range, and supported an inflow of portfolio investors (any value between US$10bn and US$12bn).

If it is important that the Nigeria Stock Exchange has yielded a year-to-date return of around 43%, and if it is true that close to 45% of activity on the exchange has been supported by this inflow of speculative cash, then the moral of the CBN tale is clear. We cannot afford to act in a way that spooks the market into precipitate flight! There are other lessons.

We need to build institutions (not around, but) with competent personnel. And we need to ensure that these institutions work in ways that everyone understands. This is the bit about transparency, which often sees it cast as part of the bulwark against corrupt practices. However, useful, though, this particular reading of transparency is, the biggest boon of predictable ecosystems (no matter how large) is that they anchor all parties’ expectations properly.

On this score, again, the Sanusi-led CBN did a number of useful things. Government boosters may well point to inflation having remained in the single digit range for much of last year as evidence of the unusual effect of the Jonathan administration on domestic macroeconomic outcomes. Some of us mutter, sotto voce, that in declining output numbers lie the main explanation for falling consumer prices. If the people are getting poorer, and not buying as much as they used to, prices would fall, of course. Still, it is hard to ignore the role played by the Monetary Policy Committee (MPC, the CBN’s rate-setting body) in anchoring domestic price movements.

Not just did this committee hold its meetings as scheduled. It published communiqués on each meeting’s deliberations in the afternoon after the meetings’ close. It also included in its communiqués, each voting member’s arguments in support of their vote. This process helped the markets understand the rationale for each meeting’s decisions, and allowed those who cared about such things anticipate where policy was headed. It was beautiful as well as very useful.

Again, the government may have missed the import of all of this. By appearing to want to force Mallam Sanusi (whatever his other shortcomings might be) out of office ahead of the agreed timelines, the federal government will hurt the CBN’s efforts over the last five years to build some degree of transparency and predictability into its operations.

Worse, by failing to renew the appointments of the five members of the MPC, whose tenures expired in December 2013, the federal government missed a decent opportunity to indicate its support for the efforts at building quality institutions in the country.

On January 20, the MPC meets for the first time this year. The markets are looking to the outcome of that meeting. Without those five (independent) members, the meeting’s quorum will comprise central bank bureaucrats. Can we trust these farther than we can throw them? On the other hand, however desirable it might be, would an MPC meeting with those five members present be properly constituted?

Mr. Uddin, an economic historian and finance expert, is a columnist for Premium Times and he writes from Lagos.


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