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SPECIAL REPORT ON THE CENTRAL BANK OF NIGERIA - MONETARY POLICY: A STABLE COURSE.

Summary: Faced with a difficult balance between promoting exports and limiting inflation, the CBN combined a commitment to maintaining a stable exchange rate with innovative reforms to the monetary system. Central banks are under ever greater expectation from governments and people to provide answers to difficult questions of economic growth and development. While the tools available to central bankers are limited, and their ability to influence economies is measured through a narrow range of metrics, the pressures of ideolog y and economic theory are complex.

The governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, measures the institution's success in terms of the most basic indicators.

"We have achieved stability.

We have brought down inflation. We have maintained the exchange rate. We have fixed the banks," he said in an interview in late 2013. "But the monetary stability that we have is vulnerable in the absence of fiscal consolidation and in the absence of significant process on the structural side."

When the financial crisis hit and growth forecasts fell considerably, the CBN reduced the monetary policy rate (MPR) by 175 basis points and slashed its liquidity and cash ratios. It attempted direct controls, including interest rate caps and exchange controls. These monetary easing measures, similar to those employed in the developed world, had little impact. The economy did not respond, in part, experts say, because the country's underdeveloped financial system weakened the transmission mechanisms of monetary policy.

Monetary stimulus has been a popular policy in developed and developing economies over the past few years, as central banks try to unblock liquidity shortages in the financial sector, which in turn was hitting the availability of credit to the real sector.

Under Sanusi, the CBN has mostly kept monetary policy tight, focusing on maintaining price stability in order to create an environment that is conducive to growth and investment. Maintaining a high monetary policy rate typically translates into high interest rates in the real sector, which may limit growth in key sectors of the economy, such as agriculture and manufacturing. This in turn adds complexity. To escape its trap of dependence on imports and primary commodity exports, the economy needs to develop a manufacturing base that is competitive.

Rather than aggressively lower rates, the bank deter mined early on that the high interest rates offered to companies in the market were partly due to the inefficiencies within the banking sector. Since the last quarter of 2012, the bank has kept its benchmark interest rates at 12%.

The CBN's focus on maintaining its exchange rates came against the backdrop of a changeable global economic environment, characterised by fluctuations in risk appetite and an oversupply of liquidity in the US, caused by the Federal Reserve's policy of quantitative easing. Continued slow growth in industrialised markets meant that investors, flush with dollars, looked to emerging markets. Nigeria's relatively high interest rates and strong growth meant that it attracted "hot money" portfolio flows - $12bn in 2013.

When the Fed began to signal that it would slow its money printing and "taper" its quantitative easing, other leading emerging economies saw their currencies depreciate sharply, under pressure from the withdrawal of that hot money.

The country, like other developing economies that rely heavily on primary commodity exports but import basic goods, fuel and staple foods, faces difficult choices in monetary policy. Allowing the depreciation of the currency at any given time would, in theory, boost exports; at the same time, however, it could cause genuine economic hardship for a population that remains sensitive to import prices. Nigeria resisted the temptation, maintaining its policy of defending the naira and using its currency reserves to do so.

Sanusi said at the time that the traditional argument for allowing devaluation did not apply to Nigeria, whose exports are predominantly hydrocarbons, and hence denominated in dollars. The value of the naira has little bearing on the export of oil. The country's dependence on imported goods stems from a seriously underdeveloped manufacturing base, meaning that increasing the cost of imports would merely translate into higher costs for consumers, rather than import substitution with domestic production. In the context of the highly politicised debates over the continuation of a subsidy regime that was bleeding the country's oil funds dry, preventing any further price rises had to be a key consideration for the governor.

Although it was at times controversial - the small manufacturing industry and several chambers of commerce have routinely taken aim at the policy - the banking industry has mostly supported Sanusi's approach.

The central bank has also been sensitive to changes in the international currency system. Under Sanusi, the CBN was the first African central bank to take a serious allocation to the Chinese renminbi, with the long-term view that the Chinese currency was moving towards becoming an international reserve asset. It was also, Sanusi has said, a speculative bet that the currency would rise as China's economy reformed.

Learning about other emerging markets' strategies has been a pillar of the current administration's work. The CBN's annual board strategy retreat has become a regular field visit to understand best practices in overseas institutions. In 2009, the board visited Malaysia, to examine the Malaysian Central Bank's approach to managing the Asian financial crisis. In 2010, the offsite was in Brazil; in 2011, South Africa.

Throughout the financial crisis, the governor has maintained that the apex bank's work is not enough to maintain growth and stability.

"Monetary policy cannot take the place of sound fiscal and structural policies. What we can do is, at the very best, buy time for things to work. But in the end, things do have to work," Sanusi said in an interview in 2013.

"There's a limit to how much you can maintain exchange rate stability by raising rates. We've got limited tools. We take extremely seriously our price stability mandate. We have tried to keep some money, and therefore if we feel there is a bit of fiscal exuberance, we tighten. If we feel that there is a pressure driven by money supply on exchange rates, we tighten, but we cannot tighten ad infinitum. This has to be accompanied by moderation in fiscal expenditures."

Key Achievements

* Introduced a f lexible, interest rate-based framework which made the monetary policy rate the CBN's operating target, enabling the institution to be proactive in countering inf lationary pressures; and

* Promoted the use of new technology for payments and money transfers, including a new "cashless" system to improve efficiency in the financial system.

Monetary Policy

Fiscal Tightening

9.75% on 01/10/2008

12% on 01/01/2014

The monetary policy rate

The traditional argument for allowing devaluation did not apply to Nigeria, whose exports are denominated in dollars

Maintaining Currency Stability $ Exchange Rate (Naira) 06 2009 01 2010 06 2010 01 2011 06 2011 01 2012 06 2012 01 2013 06 2013 01 2014

146.2 147.01 148 148.67 151.29 156.2 155.25 155.27 155.25 155.2

146.2 on 2009

155.2 on 2014

The central bank has also been sensitive to changes in the international currency system. Under Sanusi, the CBN was the first African central bank to take a serious allocation to the Chinese renminbi

By the end of the current governor's tenure

40% of senior management in banking and 30% of board level positions were expected to be occupied by women.

Institutional Reform

With an international reputation as a reformer, the outgoing governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, said that the changes made under his tenure have become part of the fabric of the institution.

"What I've tried to do over the years since I became governor is to put in place structures that will institutionalise and broaden the ownership of reforms," he said in an interview. "The bankers' committee has been transformed. It used to be a group that met once every two months ... to listen to a speech from the governor. Now it's become more of a collaborative group that maps out industry strategy."

Obtaining buy-in from the wider banking community has allowed the CBN to push forward with radical initiatives, Sanusi said.

"Everything that we've done on payment systems, ATMs and mobile payments, we've done as a group. Financial inclusion, things like lending to the real economy, lending to agriculture, lending to the power sector. Setting up a biometric database. These are all things that we have worked on as a collective."

Learning about other emerging markets' strategies has been a pillar of the current administration's work. The CBN's annual board strategy retreat has become a regular field visit to understand best practices in overseas institutions

Managing Inf lation

2005

Inflation 17.9%

GDP 5.4%

2011

GDP 6.2%

Inflation 9.9%

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Publication:African Banker
Geographic Code:6NIGR
Date:Feb 17, 2014
Words:1470
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