Achieving Financial Stability Amid Increasing Headwinds

James Emejo writes on the ingenuity of the Central Bank of Nigeria in engendering financial stability and implementing people-centered policies to stimulate growth when it should have done otherwise.

One of the biggest challenges of any central bank is to aim at price stability amid torrents of local and external headwinds that threaten its very mandate.

Despite the vulnerabilities in the global economy, occasioned by the war in Ukraine which has distorted the commodity supply chain with the resultant high energy prices and imported inflation into various economies including Nigeria, the latter is yet to feel the full wrath of these developments.

The Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, had since unveiling his Five-year Policy Thrust of

The apex bank (2019 – 2024), done everything possible to follow through with the framework.

Emefiele had promised to run a people-focused institution whereby the welfare of Nigerians is made a top priority in any policy intervention.

Little wonder why the CBN under Emefiele held the monetary policy rate constant for about two and a half years even when conditions warranted an increase.

Nigerians have come to realise that safe for the people-friendly central bank, the resulting economic hardship occasioned by developments in the global economy would have been unbearable.

As rightly pointed out by the CBN governor recently, but for the bank’s policies, both inflation and exchange rates would have been unimaginable.

But Emefiele had made financial system stability his watchword, finding a balance between the need to safeguard the economy and the welfare of Nigerians.

The CBN had been severally criticized for clinging to unorthodox means of managing monetary policy even though he had positive outcomes to show from his choice of management.

The central bank continued to play active roles in the liberation of the economy in times of turbulence as witnessed during the COVID-19 pandemic when it unleashed a flurry of development finance interventions that helped to stimulate consumer spending at a period when the federal government’s finances were grossly imperiled.

·      Wading through murky waters

 The central had been battling continued upward pressure on inflation, rising cost of debt and debt servicing by the fiscal authority as well as deteriorating fiscal balances which may undermine the smooth path to a faster recovery, according to Emefiele.

Yet amid these bottlenecks, which should ordinarily weaken monetary policy and impair financial stability, the bank had continued to demonstrate resilience ensuring that Nigeria continues to look attractive for investors through the proper management of the exchange rate regime – even though as an import-dependent country, the options are limited.

·      Regulatory prowess

 No doubt, the financial stability in the Nigerian economy has come at a cost amid inflationary trends in most major economies.

Analysts are still wondering why and how Nigeria was exonerated from the recent banking crisis in the US given the country’s exposures to the international market through the activities of major domestic financial institutions that are now plying their trade at the global level.

At the recent meeting of the CBN Monetary Policy Committee (MPC), Emefiele said recent bank failures in the US and Switzerland, an event that occurred following the persistent interest rate hikes in the US, and how this has adversely impacted the broad portfolio of banks in the US.

He said whereas MPR was increased by 500 basis points in Nigeria, from 12.5 per cent in 2022 to 17.5 per cent in January 2023, the Financial Soundness Indicators (FSIs) in Nigeria showed that the Nigerian banking system remains resilient.

This was due largely to the stringent prudential guidelines put in place by the CBN which has resulted in a strong build-up of not only the Cash Reserve Ratio (CRR) in Nigeria, but also the Liquidity Ratio and Capital Adequacy Ratio.

He said, “In the light of these strong FSIs, MPC was comforted that its various decisions in increasing MPR have had a moderate impact on inflation, given that the rate appears to have plateaued in Nigeria.”

Emefiele said, “We have put in place a couple of prudential guidelines to regulate the Nigerian bank and we see and make bold to say that the financial soundness indicators in the Nigerian banking industry which show that the banking industry remains very resilient compared to what we find in other climes.

“For instance, the capital adequacy ratio, which is meant to be between 10 per cent and 15 per cent; today it is about 13.7 per cent. Non-performing loans ratio has dropped to 4.2 per cent, liquidity ratio is about 43 per cent. Return on equity is at least 21 per cent, which we think is reasonable.

“Cash reserve today, aside from treasury bills that we are keeping, we are today holding close to about N14 trillion in cash reserve deposits from banks.  This is good liquidity that is meant to actually act as insulation.”

·      Buffers for stability

The apex bank had implemented an array of policies that have contributed to achieving financial stability in the economy.

As pointed out by the MPC, the continued impact of exchange rate pressure on domestic price levels had called for policies to attract both portfolio and foreign direct investment to Nigeria.

The continued progress made with the RT200 FX programme, Naira-4-dollar, and other policies targeted at attracting diaspora remittances, it noted, would continue to help improve accretion to the external reserves and improve liquidity in the foreign exchange market.

However, while output growth remains on a positive trajectory, the MPC called for increased monetary and fiscal coordination to support the recovery in light of risks confronting the domestic economy.

·      Achieving fiscal balance

Given that the monetary authority alone could not successfully achieve stability without a complementary effort, the central had called on the fiscal authority to explore other avenues to improve non-oil revenue to reduce the fiscal deficit and public debt burden which are risks to financial stability.

Emefiele said, “Following new risks of financial contagion emerging from the scenario of failed banks in some Advanced Economies, members examined the possibility of shocks to the Nigerian banking system from these banks and concluded that the Nigerian banking system remains reasonably insulated from such likely contagion.

 “The CBN has been able to achieve this through stringent micro and macro-prudential guidelines that have ensured that individual banks and the banking industry in Nigeria have adequate buffers to ward off global contagion.

“In addition to this, the MPC examined the possible impact of further policy rate hikes on the stability of the banking system and was convinced that further hikes would not adversely impact the stability of the banking system. The Committee, however, called on the Bank’s Management to strengthen its regulatory oversight on the banking system to ensure that the banking industry remains stable and resilient.”

·      IMF’s major endorsement of CBN policies

Even amidst criticism by local analysts about the central bank’s monetary tightening regime which Emefiele had severally justified as key to maintaining financial stability,

the recent admonition by the International Monetary Fund (IMF) that the apex bank should maintain its monetary policy-tightening mood in order to cage inflation and achieve price stability was more than exonerating and showed the quality of policy interventions by the CBN.

Speaking during IMF/World Bank Spring meetings in Washington DC, Division Chief, Research Department, IMF, Daniel Leigh, described the Nigerian economy as an “economy with very high inflation as well and this is why we have a forecast of about 20 per cent inflation for 2023.

“And one of our main recommendations is to tighten monetary policy to ensure that this inflation comes down towards the more target levels.”

·      Justification for rate hike

At the completion of its meeting last week, the Monetary Policy Committee (MPC) of the apex bank, decided to maintain its contractionary policy stance by raising e Monetary Policy Rate (MPR) otherwise known as interest rate by 50 basis points to 18 per cent from 17.5 per cent.

Coming at a time the economy is bleeding – struggling with growth amidst high unemployment, rising inflation, and the already high cost of credit in the economy, local analysts had faulted the increase in MPR.However, Emefiele pointed out that if anything, the monetary authority said it was satisfied the tightening regime had started to reduce the rate of increase in prices, hoping that this would eventually lead to a decline in inflation moving forward.

He said, “But, the prospects for much lower inflation may not be immediately after all given that the current administration plans to end the fuel subsidy regime.

According to him, “subsidy removal has its own implication on prices, which is inflation. So, because monetary policy is not optimistic that prices will continue come down because of these measures, MPC feels that we need to continue to tighten and that’s what we did at this meeting.”

·      Quest for real monetary rate

One of the main concerns of the central bank and which also influences the resolve to tighten MPR is the fact that currently, inflation is far above the MPR which has serious implications for investment inflows.

The CBN appreciates the fact that the margin between the monetary policy rate and inflation had remained wide which is a negative real rate – a huge disincentive to investment.

“And so, everything has to be put in place by monetary policy authorities to see that we will reduce that margin or that gap in negative real rate by ensuring that inflation comes down and whatever needs to be done to rein in inflation, we have to continue to do so.”

He said, “So, that will continue to be the strategy but we’ll do it more moderately going forward because we’re conscious of the fact that when you over tighten just like we have seen in the US and in Switzerland that it could begin to have a contagion effect and negative impact on the banking system and financial system soundness indicators of financial system stability in an economy. 

“Those are the kind of balance that we’re looking at MPC to see that whereas we want to continue to tighten so as to rein in inflation, we must do it in such a moderate manner that we try to achieve moderation in the inflation rate, but at the same time without creating financial system instability in our economy.”

“Unfortunately, that is where we are because of the uncharted territory that we have found ourselves arising from various geopolitical tensions that we have seen all over the world.”