Other than the perilous state of the Naira and the Nigerian capital market, another finance related issue that has generated considerable debate in recent time is whether the incumbent Central Bank of Nigeria {CBN} Governor, Prof. Chukwuma Soludo’s tenure, which expires in May of this year should be extended or not.
The anti-Soludo force appears to hinge their displeasure of his tenure on the basis that using conventional parameter for judging failure or success of Central Banks, Soludo’s tenure has been a woeful failure. Indeed if you have to judge Soludo by the success or otherwise of his monetary policies, then you might be inclined to assert that he has not covered himself in glory. In most advanced market based economies, the core functions of Central Banks are two-fold- to manage interest rates {deposit & lending} and to control the rate of inflation {or deflation, as the case may occasionally be}. Using these twin indices of monetary policy control, it is fair to say that Soludo has not improved the lots of the Nigerian economy. Only recently, the CBN pegs maximum deposit and lending rates at 15% and 22% respectively. Even leaving aside the practical difficulty of monitoring compliance,{the banks could apparently comply with this direction whilst at the same time levying other charges on loan applicants} I fail to see how the real sector of the economy could be stimulated when small businesses {the drivers of real economic growth} are expected to source for funds at 22%, especially so in an economy where such businesses have to pay through the nose for other basic infrastructures like power generation, transportation, etc. This is further exacerbated by inflation rate that appears to remain in double digits.
However whilst the above concerns are valid, It seems to me unfair to judge Soludo’s performance on the above indices alone. Indeed unlike most Central Banks of commensurate and higher standings, the Nigeria’s Central Bank has to exercise such ranges of supervisory duties that would have tasked even the most capable of Central Bankers. In my opinion the CBN has been saddled with too many tasks that it, ipso facto lost its ability to focus on what should be its fundamental tasks. A look at the statutory responsibilities of the CBN as stated on its Website and a quick comparison with those of its UK counterpart, the Bank of England should drive home my point: At the home page of the CBN Website, its functions are set out:
‘The statutory mandates of the CBN are as follows:
- To issue legal tender currency
- To maintain external reserves
- To safeguard the international value of the legal tender currency
- To promote monetary stability and a sound financial system in Nigeria
- To act as banker and financial adviser to the Federal Government.
The Monetary Policy in Nigeria is best understood from the stance of the mandate set for the Bank, which includes:
- Maintenance of Nigeria’s external reserves to safeguard the international value of the legal currency.
- Promotion and maintenance of monetary stability and a sound and efficient financial system in Nigeria.
- Acting as banker and financial adviser to the Federal Government; and
- Acting as lender of last resort to banks.
Consequently, the Bank is charged with the responsibility of administering the Banks and Other Financial Institutions {BOFI} Act 1991 as amended, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system.
In addition to its core functions, CBN has over the years performed some major developmental functions, focussed on all the key sectors of the Nigerian economy (financial, agricultural and industrial sectors). Overall, these mandates are carried out by the Bank through its various departments.’
Now compare with Bank of England’s mandate:
‘The Bank has two core purposes – monetary stability and financial stability. The Bank is perhaps most visible to the general public through its banknotes and, more recently, its interest rate decisions. The Bank has had a monopoly on the issue of banknotes in England and Wales since the early 20th century. But it is only since 1997 that the Bank has had statutory responsibility for setting the UK’s official interest rate. Interest rates decisions are taken by the Bank’s Monetary Policy Committee. The MPC has to judge what interest rate is necessary to meet a target for overall inflation in the economy. The inflation target is set each year by the Chancellor of the Exchequer. The Bank implements its interest rate decisions through its financial market operations – it sets the interest rate at which the Bank lends to banks and other financial institutions. The Bank has close links with financial markets and institutions. This contact informs a great deal of its work, including its financial stability role and the collation and publication of monetary and banking statistics.’
The point is the CBN has been exerting its energies on tasks that perhaps should be handled by other agencies. It seems to me that some of the allocated functions of the CBN ought to be properly exercised by the Federal Ministry of Finance and other statutory agency. The CBN should not be administering and regulating banks & other financial institutions and Soludo’s achievement in the area of bank consolidation should not be under-praised. Although the global financial crisis is inevitably adversely affecting Nigerian banks, it is fair to note that the Soludo inspired consolidation and recapitalisation have ensured that the Nigerian banks are weathering the storm in apparent rudder health than they would have had they remained in the pre-Soludo mode. The main challenges being faced by the Nigerian banks are not structural deficiencies but relate, in part to the collateral damage of lending monies to capital market speculators whose fingers are now being burnt. This has led to the banks sitting on assets which are currently dormant, i.e. so called ‘toxic assets. You can hardly blame Soludo for this. An agency like the UK’s Financial Service Authority {FSA} should be created whose functions should be to fully regulate the financial sectors incorporating banks, insurance companies and other players in the financial sector like Bureaux de Change, Finance Houses etc. This should free up the CBN to concentrate on its core responsibilities of managing interest and inflation rates.
Even in the area of management of the value of the Naira, it seems unreasonable to blame Soludo for the travails of our national currency. The Naira has enjoyed relative stability in the last few years not as a result of, but in spite of CBN management. The key determinant of the value of the Naira has been the amount of forex in the Nigerian market. Without having to do so much, Nigeria, together with other members of OPEC, had enjoyed unprecedentedly huge income accruable from high price of barrel of oil in international market. That burble has now burst and a barrel of oil which sold for $140 less than a year ago, now sells for under $40. Soludo is not responsible for lack of vision of our successive governments to diversify the Nigerian economy from its fatal dependence on income from petroleum. Indeed there is a valid argument that Soludo’s consolidation of the Nigerian banking industry has engendered foreign interest in Nigeria and has encouraged foreign financial institutions to place funds in the country’s money market, although such funds are now being repatriated back home due to the global financial crisis.
The tenure of the leadership of a Central Bank is one that should be treated with utmost circumspection. The key is continuity. The immediate past chairman of the American Federal Reserves, Alan Greenspan was appointed to the post in August of 1987 by the Republican government of Ronald Reagan. He remained in the post even during the eight-year rule of the Democrat, Bill Clinton and was there until his retirement in January 2006. The incumbent Governor of Bank of England, Mervyn King was appointed to the post in 2003, replacing Edward George who held the post between 1993 and 2003. No one is asking for Mervyn King to be replaced despite the dire health of the UK financial industry. It is insightful to note that Alan Greenspan became globally renowned as a consummate central banker and well-acclaimed as perhaps the most respected American Central Banker of all time. Yet Greenspan did not have the best of start to his tenure and had to survive the stock market crash {the so called ‘Black Monday’} of 1987 and the dot-com burst of 2001. Clearly the Greenspan legendary status would not have been achieved had he been replaced after the expiry of his first term.
One of the banes of the Nigerian political and economic polity is our lack of policy continuity. We are a country in perpetual state of Work-in-Progress. Every incumbent feels the need to abandon all the policies and projects of their predecessors {whether good or bad} and start their own, even though the previous governments might have expended billion of Naira in these now abandoned projects. The argument of course is not that there are no other Nigerians capable of taking over from Soludo and as General Charles De Gaulle once said, ‘the graveyard is full of indispensable men’. However what will be the point of replacing Soludo now? Soludo indeed faces a lot of challenges, but the way I see it is that he has spent his first term solidifying the base of Nigerian banks and would have learnt useful lessons in the process. These lessons should stand him in good stead in the next five years as he strives to consolidate the modest gains of the last five years. Replacing him now will simply perpetuate the Nigeria’s proclivity to policy musical chair.
Adebayo Kareem
Solicitor, Stratford London