Sunday, November 10, 2013 / By Ray Echebiri and Alex Ekemenah
We no longer need someone who only knows how to govern the banking industry as governor of the Central Bank of Nigeria; we need an all-rounder who can govern a complex economy; someone who understands the interplay between economics/financial markets and politics. With this kind of person, we can be sure that the CBN will be more involved in the management of the macro-economy.
The role of the Central Bank of Nigeria (CBN) in the management of the financial services sector and the overall national economy is yet to be fully appreciated. This stems from a historical void. It was not until recently that the role that the CBN should play in the management of the economy came to the fore. This is because the history of the bank itself is written in a similar fashion: half-wit performance until recent times.
The failure of the political leadership in this regard is undisputable. The present desire to see the Nigerian economy rise from its weak-knee status to join the top-twenty world economic powers has exposed the missing link in managing the economy. This has created an urgent need to channel the enduring entrepreneurial energies of the Nigerian people towards the biggest dream in history.
The CBN holds the ace card in the entire financial system. What then should be the role of the bank and the banking industry as a whole in achieving this lofty goal? Is it too much to require the bank to play a significant role in the task of achieving this lofty economic goal - based on the limited traditional functions of the bank?
The traditional functions of a central bank include formulating and implementing monetary policy, determining interest rates and directing money supply - to achieve price stability; regulating and supervising the banking and financial systems, managing foreign reserve and ensuring the stability of financial markets.
In recent years, the debate has been on as to whether a central bank should play more active roles other than its assigned traditional functions of overseeing the financial services sector of the economy. This debate was sparked by the belief that even the traditional roles of the central bank impact heavily on the entire economy via the transmission mechanism.
In some countries of the world, central banks have assumed active roles in protecting national economies from major crises that could have driven the economies over the cliff.
Such roles came to the climax during the last financial crisis. Consequently, the use of monetary policy has become of critical importance in ensuring a proper functioning of an economy.
The lessons are clear that the room has been enlarged for central banks to play more crucial roles in the national economic decision-making and implementing processes. This is particularly so as the economy grows more complex with massive internal and external linkages.
In Nigeria, we see things trending towards this direction in the last one decade i.e. the CBN playing a more active role in the nation’s economy. The bank itself has enjoyed more visibility in the last one decade than it has ever achieved in history. This was brought about by its intervention in the economic life of the nation through major reforms in the banking sector.
The debate on what should be the role of the central bank has been tilted heavily in favour of greater involvement in the overall economic policy making and implementation by the events of the last financial crisis. The crisis dragged central banks around the world from the orbit of their traditional roles right into the centre of macro-economic management of nations. In Nigeria, the inclusion of the present CBN governor in the Economic Management Team [EMT] falls in line with this important global development.
The role of central banks in a developing economy is even more demanding than the crisis management we have witnessed in developed economies. The faltering development processes of the Nigerian economy and the need for professionalism in economic policy formulation and management clearly justifies the call for the CBN to become more actively involved in macro-economic policy matters.
Questions begging for answers
Many questions beg for answers in a manner that shows that an integrated approach to central banking governance is now warranted. What is the state of the economy and the financial services industry before and during Sanusi’s era? How has what he has done in the banking sector helped or hindered the rest of the economy. Can we see now that there is something that somebody will do as CBN governor and ordinary pepper sellers will close their shops?
What is the state of the industries? What about the housing sector and what can we say about the insurance business? How else should these important sectors get the funds they need to survive if somebody who directs the flow of money and credit does not recognize them as part of his area of responsibility? Because economic sectors have become largely integrated, central banking governance must of necessity involve wider responsibilities in the economy.
The objectives of monetary policy will therefore need to be enlarged in the coming years? How do we manage inflation in all without hurting production, grow output with employment and reduce interest rates without discouraging foreign investment? How do we achieve adequate credit flow to small- and medium-scale industries even when we need to check government excessive spending?
How do we ensure that we put our money into productive work without flooding the nation with inflationary stock of money? How do we ensure that agriculture in which most of our people are engaged get a significantly increased share of bank credit?
There is a direct relationship between the banking sector and the capital market. Are we able to maximize the benefits of this relationship or have we broken it to our disadvantage? How can benefits of stable financial markets be achieved and maximized?
Answers to the above questions would without doubt constitute a new economic dirigisme which the CBN must come to grapple with in the coming years as it gets more involved in the management of the economy. These are the central issues that should be the focus of the incoming CBN governor. We no longer need somebody who knows how to govern the banking sector; we need an all-rounder who can govern a complex economy.
The New Advocacy
The advocacy for a central bank’s involvement in economic policy management is based on the need to infuse professionalism into the economic policy formulating process which, in turn, is based on its cognate experience at managing economic and financial problems over the years. This advocacy is within the context of the failure of national economic planning authorities (Ministry of National Planning, National Economic Advisory Council, National Economic Intelligence Council, Ministry of Finance, etc) in arriving at a sustainable strategic economic development plan, which has become apparent in recent years.
The advocacy of the central bank’s involvement in economic policy management rests on the premise that politics and markets cannot be separated. In fact, Adam Smith and David Ricardo, understood this perfectly. They never used the term "economics" in conjunction with politics and their subjects of study was the political economy. The behaviour of economies in recent times has demonstrated clearly that markets cannot stand alone and the only institution that stands in a position to mediate between the government and the markets is the central bank.
The matter at hand is one of understanding constraints - the things that neither the government nor the markets can do without the other. Government can’t create sufficient jobs without the markets neither can the markets function properly unless the economic and financial policies are right. This is the new scenario that has clearly defined the role of a central bank in a modern economy. A properly functioning central bank in today’s world must have one foot in government and the second in the markets.
A new agenda automatically unfolds itself before the incoming CBN governor. The bank can no longer afford to conduct business in the old fashion because a new era with new tasks have unfolded, which require innovative solutions. You see a man or woman who perfectly understands how to play the old game; he/she will fail as governor of the CBN.
A critical area that is crying for attention in this regard is the entire monetary policy framework which needs overhauling, re-engineering or re-calibration, as a development tool in the economy rather than a passive instrument of controlling macroeconomic problems alone. This calls for the reading of monetary policy within the domain of new or advanced developmental economics rather than neo-liberal or neo-Keynesian economics under which the Nigerian economy has been held hostage for the past thirty-fifty years. We have need to extricate Nigeria from this development impasse. And the CBN can be a strategic stakeholder in this endeavour and right in the vanguard of this task.
By keeping monetary policy passive, as it has been over the past four to five years, we are unable to join the global economic effort to rescue national economies from decline. With that the recovery and growth functions of the Nigerian economy are put under lock and key. The important developmental functions of monetary policy will need to be called into action for a stronger economic performance, Mike Uzor, a financial analyst recommends.
The Role of a Central Bank in a Modern Economy
Making economic development happen has become the job of the central bank. Mallam Sanusi Lamido Sanusi concurs that “economic development is about enhancing the productive capacity of an economy by using available resources to reduce risks, remove impediments which otherwise could lower costs and hinder investment”. Who directs the flow of the resources of the nation? It is the Central Bank.
The banking system plays the important role of promoting economic growth and development through the process of financial intermediation. Many economists have acknowledged that the financial system, with banks as its major component, provide linkages for the different sectors of the economy and encourage high level of specialization, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government. The objective is to achieve non-inflationary growth, exchange rate stability, balance of payments equilibrium and high levels of employment.
Kenji Fujita, et al, of the Monetary and Capital Markets Department of the IMF in their paper titled Central Banking: Lessons from the Crisis, highlighted the new role of the central bank. According to them, “The (global financial) crisis brought the financial system to the verge of systemic collapse and raised the prospects for depression and deflation. Central banks helped defuse these threats using exceptional measures”. Considerable efforts are now being made the world over to draw policy lessons from role of central banks in the crisis.
It has become important that central banks play a key role in the economy, whether or not they serve as the main regulator. This calls also for the development of full-fledged macro prudential frameworks, including operational tools and enabling institutional arrangements.
Financial crisis has shown that changes to central bank liquidity operations and broad crisis management frameworks are needed, including the need to address moral hazards. Changes to enhance the flexibility of central bank operational frameworks will improve the resilience of the system. Institutions and markets that are potential recipients of liquidity support in times of stress should be monitored and regulated whether or not they fall directly under the direct supervision of the central bank. A continued and sustained effort to improve payment and settlement systems and crisis management coordination is also warranted.
Preserving price stability and central banks’ monetary policy independence should be a key focus of the reform efforts. Institutional arrangements should ensure that the role of central banks in the design and application of macro prudential measures does not impinge on their ability to deliver price stability. The policy roles of the central bank, the government and other entities need to be clearly delineated in the wake of the broadening of the scope of their interventions during crisis.
Professor George Selgin said in his paper titled “Central Banks as Sources of Financial Instability” that financial crisis has made apparent both our utter dependence on central banks for ensuring the continuous flow of credit during a financial bust as well as their capacity to fuel financial booms that make severe busts possible in the first place. This places emphasis on the capacity of central banks in managing the growth of national monetary aggregates and in supplying last-resort loans to troubled firms in times of financial distress.
In our circumstance, the drivers of the balanced economic development we desire through an expanded role of the central bank could be accomplished through the combination of:
1.Smart Leadership: This corroborates appropriate vision, mission and determination for success that is broadly minded enough to give the entire economy a decisive driving force.
2.Smart Policies: Achieving economic progress by creating an enabling environment that empowers the people through appropriate incentives. People-centred policies built on clear vision and a central economic strategy is the tonic for policy success.
3.Smart Institutions: Involving reforms through which various economic operators are empowered and strengthened, output and consumption capacities enhanced with increased employment opportunities towards the national vision.
4.Smart Friends: Effective international partnerships needed as important catalysts for progress. For Nigeria to realize the 20- 2020 vision, it needs to ride on the back of international partnerships.
We look forward to receiving reactions to this article and nominations of persons that can best deliver on this mandate.