Bismarck Rewane, a leading Nigerian economist and CEO of Financial Derivatives Company, dissected CBN governor Olayemi Cardoso’s landmark speech at a gathering of bankers on Friday during an interview with Arise TV. Here are excerpts:
What were the main highlights from Cardoso’s speech for you?.
First and foremost, I think it was a very candid and honest view. I think it was professional and I think that it came across as a professional Economist and Central banker.
Today we’re going to talk about what he said, the impact of what he said on investor confidence, impact of what he said on consumer price because that’s what happens at the end of the day and what’s going to happen to the naira exchange rate in the foreign exchange markets, and in the end, what’s going to happen to Nigeria’s growth and macroeconomic stability.
Firstly, let me point out, my takeaway first and foremost was that he is back to basics. He is going back to the orthodox monetary policy and Central Bank Act and management. In other words, the Central Bank is a bank of the government, the bank of the banks, provides sound advice to the government, issues the legal tender and protects the exchange and the external reserves.
I will also go into what he did not say which we wanted to hear. But what he said, one, was that Nigeria’s economy is more globally interconnected. In other words, global events have a greater impact or more than proportional impact on domestic activities. So there are things within our control and things outside our control; it was clearly stated.
He also said that the imponderables in the global market including conflicts was pushing up interest rates in advanced economies especially the US dollar and if the dollar appreciates in value automatically, other developing economies currencies will depreciate in value. That’s true.
Number three is that commodity exporters, African countries in particular, suffered from the cyclicality of prices and therefore our performance as an economy was also dependent on those cyclicality. Cyclicality means that things go in a direction and then recover.
Then he also acknowledged, which was important, that the Nigerian economy is performing suboptimally because of impediments and constraints. And, of course, again, you need to de-bottleneck the economy and make sure the constraints are dealt with.
He reiterated that there are three rules for monetary policy. One is called the discretionary rule, the other one is the fixed rule and the third one is called the feedback rule. I heard him say, he didn’t say specifically, that the feedback rule, in other words, I’m going to be consulting with stakeholders, I’m not going to come out willingly and say this is the new, so there’s going to be consultation; that means feedback rule.
Feedback rule has its advantages because there’s a lot of consultation but the point is that by the time you get the feedback and act, whatever the opportunity or the danger could have gone away. I think that’s important, but because of the lack of credibility of the previous dispensation in the central bank, it was actually heartening to hear that kind of comment.
He alluded many times to the medium term; but what the market wants to hear is what are you doing tomorrow?
He also said, rightly so, that the minimum number of times the Monetary Policy Committee has to meet is four times a year. But one of the problems in Nigerian ingenuity is the minimum cannot be the maximum. And when there’s a crisis, and we are and he alluded to the fact that the economy is challenged, in fact you should meet more times than the minimum.
When you say that the minimum score to pass is 40, and you say okay yes, I’ve got 40 and I’m okay, that was a flag that I picked, which I was not so happy about.
But having said that, the question is that he talked about the importance of tightening and he talked about explicit inflation targeting. Explicit inflation targeting is a monetary policy framework. But when you get there, you have to anchor expectations and there are two possible anchors. One is the interest rate. If it’s effective, that’s anchoring and then the exchange rate is also.
So basically, you use those two to manage liquidity, two also, to make sure that people do not get concerned, anxiety. So the speech lowered anxiety, and came across very clearly that we’re not going to be doing a lot of the crazy things that were happening in the past.
The speech also addressed and said that bank system stability is not just about audits, it is about stress tests that show that in case of stress, the banks will need to increase their capital. So that is a signal. That is a dog whistle for saying shareholders funds need to be increased to make the Nigerian banking system solid and competitive across Africa.
There is a kind of fundamental rule that if the size of the central bank balance sheet is in excess of 24 or 23 percent of the GDP, then it means that the central bank of that country does not have the resources to intervene in case of a system wide crisis. Our balance sheet now is in excess of that level.
At the beginning of the speech, he said it was necessary to have high interest rates, mobilize savings and in the end, the last comment was that we need low interest rates to actually help the bottom of the pyramid; private sector and the small and medium scale enterprise. No.
Interest rates are used to actually moderate inflation; it’s not the only tool but it’s one of them. I think that clearly, you can’t be increasing interest rates on one hand, and also offering subsidised rates. The subsidised rates will come through special channels; those institutions that are made for that purpose, but we need to actually mobilize savings.
The National Savings ratio in Nigeria is approximately almost 28 percent. Comparable in other countries, you have national savings of 50, 60, or 70 percent. If savings equals investment, investment will then multiply and give you output growth.
Those are the things that work.
I also noticed that he talked about proper coordination between the fiscal and monetary authorities. There, you would have monetary conditions consistent with monetary policy and also act as an enabler to ensure that we have optimal growth.
Talking about the recapitalisation of the banks, one of the things that he had mentioned is that the banks had been subjected to mild to moderate stress tests. He was clear to say that banks would need to increase their capital. So what specifics were we missing? What do you think the banks, the CBN will be doing in relation to the banks?
There is a kind of fundamental rule that if the size of the central bank balance sheet is in excess of 24 or 23 percent of the GDP, then it means that the central bank of that country does not have the resources to intervene in case of a system wide crisis.
Our balance sheet now is in excess of that level. Therefore, what you have to do is to be preemptive. I think that what he’s saying is that we now need to ensure that we don’t get into a crisis. And so the stress test; mild, moderate, or high stress tests means that if there are shocks, especially exogenous shocks, can the banking system withstand that?
I think he alluded to the fact that some of the banks have foreign currency obligations, and if they are to meet those obligations and the exchange rate moves in a particular direction, they could be exposed. And therefore, it is important to raise capital and raising capital requirements also leads the industry into further consolidation. But when the rules of capitalization of 25 billion naira were put in place by Soludo in 2004, I think the exchange rate was about N118 to $1, and ever since then, it has multiplied by 10.
One thing that I had wanted the CBN Governor to come out clearly, what is the true level of Nigeria’s external (net) reserves?
What was N25 billion then is actually N2.5 billion naira today meanwhile their assets and their obligations have actually increased. So it is not rocket science to know that that is necessary and many of the Nigerian banks have actually gone into Sub-Saharan Africa.
They have cross border exposure, which means that you need to raise your capital base at home, because bank failures in Nigeria have actually been linked more to cross border exposure. It happened during the refund, it happened during the subprime mortgage crisis.
The banking system stability is just as important as the sovereign country’s stability, that is Nigeria as a country.
What do you make of the fx liquidation management committee? Is that an orthodox type of tool that’s used by central banks around the world? How will that work exactly? And then the other comment is this dynamic around tracking Human Development indices, which is a bit of a new narrative coming out of the CBN. What do you make of those?
First of all, I think his definition of liquidity management is not about forex. When banks fail, they fail because of governance breakdown, erosion of confidence, but most importantly, is the fact that when there’s a liquidity challenge.
The doors of a bank closes when people cannot get their money out. So are you going to wait for that to happen? But he’s looking at a system where money supply growth is far in excess of the target range, and coming back to one of the things, he said ‘explicit inflation targeting without announcing a target.
I guess it’s work in progress. There’s no question about it. The purpose of the broadcast was to soothe nerves, calm anxiety, and tell people that we are in charge of things. To that extent, goal achieved.
Secondly, he does not want to over promise and under deliver, which is good, because that’s the personality of the man.
Thirdly, we are coming from a position of trust deficit. Therefore, I can’t be seen to be making wild speculations. So I think that this is a safe pair of hands, he knows what he must not do and I think that’s more important than just saying what you’re going to do.
One thing that I had wanted the CBN Governor to come out clearly, what is the true level of Nigeria’s external (Net) reserves?
We need to know what the reserves are and if the reserves are truly $33 billion and your backlog is $7 billion or $8 billion, just write a check.
Are you suggesting dipping into your reserves to settle your debts?
No, it depends on what our unencumbered reserves are. If the CBN governor was to make a statement different from that which is published, it may even raise concern.
If the purpose of the speech is to calm nerves, then you don’t want to stir things. But whether we like it, what we say or what we don’t say, what’s important, those are the concerns that investors and analysts have that they have, that what is the true position of things.
There were questions of data integrity. Another thing he came across very clearly was that he was not going to play games, smokes, and mirrors.
But the other thing which is very important to notice is that the central bank is not an extension of the executive arm of government. Central bank is an independent autonomous body that keeps all of us in check in terms of our financial system stability.
I have never heard Alan Greenspan make a reference to Reagan, Carter or anybody. This body is independent and autonomous, and therefore it has nothing to do with the policies of the politicians.
It is the policies, financial system stability, that is where their term exceeds that of an electoral cycle.
The CBN Governor also talked about the low income segment of the population, that they will play a catalytic role that would help to support the bottom of the pyramid, and even things like daily monitoring of wage levels for low income communities. That was a slant to the entire speech. What did you make of that?
To be honest with you, I was a bit disturbed about that because the last time I checked, there is a Ministry of Labor and the Ministry of Human humanitarian affairs and all that. I think that’s a specific responsibility of those institutions. The central bank is focused on price stability.
Once you moderate inflation, which is what he’s focusing on, by implication, you have actually improved the welfare of the people. The biggest thief of value is inflation.
So if you focus on fixing inflation, you don’t need to start looking at what wages are because that’s the job of some other people. So I found that a bit worrying and I am sure that the governor will be focused.
His plate is full so there’s enough to do in terms of managing liquidity, the banking system, foreign exchange, exchange rate and money but at the end of the day, what’s going to happen to the price of rice?
It is now N61,000 a bag, and this is December coming, diesel is N1200 per liter, more than anything else. The price of flour is at N47,000 which means a loaf of bread is N1500, look at the price of tomatoes.
If you break it down, there is no other way than to look at the price of these retail items and see how you can bring those prices down.
When there is a moderation of inflation, it doesn’t reduce prices, it actually reduces the rate of increase and what I did hear from that speech was also that the rate of rot in the economy has reduced.
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In other words, since the exchange rate has stabilised in the parallel market, at around N1,100 to N1,200, you find that the level of price increases, the difference between September inflation and last month’s inflation was only about 1%. Therefore in December we are going to see maybe a difference of 0.5%. If inflation is moderating, and the price levels begin to decline sometime, then you have actually essentially helped the people.
Nobody’s interested in whether you’re tracking wages, what they are interested in is how they can now buy a loaf of bread at a cheaper rate.
Inflation expectations
First and foremost, I think that they have added N35,000 to the N30,000. So 65,000 right?
When we had a minimum wage in 2019, it was about $75 or $80. To do $80, you will now need N80,000 or N90,000.
So if that were to happen, and companies are not making money, one, if you increase wages, you actually will increase unemployment because people have to lay off people. Therefore you need an increase in output.
The increase in output is going to come from fiscal intervention and removing bottlenecks.
But once we get to a point where the output begins to increase and money supply begins to get constrained, you’ll find our inflation naturally moderate, then everybody will be happy.
But do not expect anything magical immediately. The earliest you’re going to get the feel, depending on the first quarter of 2024, maybe second quarter.
