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Perspectives on Central banking

By Arize Nwobu

THAT central bank is of crucial importance to national economic health cannot be overemphasized. It is the supreme monetary authority in every country and the heartbeat of the economy. As the heart pumps blood to give life to the body, so does the central bank pump and regulate money supply in the financial system to maintain a healthy economy. Central bank policies can either make or mar the economic life of a people, thus the need for in-depth economic research, formulation of rationally comprehensive policies and strategic sensitivity for sharpness of perception.

Experts have offered insights into the modus operandi of central banks. PwC noted that: “Central banks need to not just adapt to changing conditions, but anticipate the shifts ahead and how they are going to change the playing field for monetary policy and financial stability.” And KPMG noted that central banks must evolve to keep pace with economic, technological and market place developments, especially in the world’s high growth countries.

It listed seven major priorities facing central banks: stepping up governance, risk management and internal controls, supervising stability and regulatory compliance, organising technology and processes, protecting integrity and tightening up security, overseeing payment systems, reliable, efficient out-and-in-sourcing, international cooperation and currency unions and accountability and transparency.

Central Bank of Nigeria headquaters, Abuja

Central banks have a phobia for inflation and avoid it like the plague because it offsets the benefits of growth. Because inflation raises price for consumers, increases cost for businesses  and eats up any profit, central banks keep rates high to prevent it.

Broadly, their traditional functions include directing money supply to achieve price stability, formulating and implementing monetary policy, determining interest rate, regulating and supervising banking and financial system, managing foreign reserves and ensuring financial markets stability. But central banks in developing countries perform both the traditional and non-traditional roles. They perform developmental and promotional activities especially because of the absence of vibrant capital markets in their economies.

Sweden created the world’s first central bank, the Riks in 1668, followed by Bank of England in 1694 and Banque de France, created by Napoleon in 1800. The Federal Reserve Bank of America followed in 1913, Bank of Canada in 1938, while German Bundesbank was established after the World War II.

The Central Bank of Nigeria, CBN, was established by CBN Act of 1958 and commenced operation in 1959 with the vision “to be one of the most efficient and effective of the world’s central banks in promoting and sustaining economic development.”

The mission is “to be proactive in providing a sustainable framework for the economic development of Nigeria through the effective, efficient and transparent implementation of monetary and exchange rate policy and management of the financial system.”

CBN has had  11  successive governors since its inception to date. They are Roy Pentelow Fenton (1958-1963), Aliyu Mai Bornu(1963-167), Clement Nyong Isong(1967-19750), Adamu Ciroma(1975-1977), Ola Vincent (1977-1982)and Abdulkadir Ahmed(1982-1993). Others are Paul Agbai Ogwuma(1993-1999), Joseph Oladele Sanusi(1999-2004),Charles Chukwuma Soludo (2004-2009), Sanusi Lamido Aminu Sanusi (2009-2014) and the incumbent, Godwin Emefiele (2014-to date).

Emefiele’s idea is to create a “people-centred” central bank that would not only perform the core mandates of central banks, but would also pursue complementary developmental functions towards giving Nigerians ‘’better and more fulfilled lives’’. He had noted that ‘’CBN cannot afford to sit idly by and concentrate only on price  and monetary stability. Additional measures would be required towards identifying productive sectors of the economy and channeling credit towards those sectors  while  imposing proper monitoring and performance.”

The apex bank has demonstrated a strong commitment to development banking, serving as a financial catalyst with interventions in various sectors of the economy, including agriculture, Medium, Small and Micro Entreprises, MSMEs; Power and Airline Industry and others.

It has been noted that central banks are often unpopular in their efforts to heal the economy.

The solution is in effective communication. Structured carefully and communicated effectively, information can create a proper value perception and enhance public trust. Communication has become as important as financing, monitoring and management to effective central bank operations. If it is done well, communication can strengthen understanding of central bank objectives, help shape the market mood and provide reassurance in times of stress, PwC has noted.

Key policies evolved by the last three governors of CBN – Charles Chukwuma Soludo, Sanusi Lamidi Aminu Sanusi, now the Emir of Kano, and the incumbent, Godwin Emefiele, which aimed at  healing the  financial system, and recreating and redirecting the economy for good were criticised but later created the desired impact for the greater benefit of the economy.

The Banking Consolidation exercise under Soludo did not stand a chance, but the successful implementation created landmark transformation in the banking industry. It was the same with Sanusi’s effort to instill best practices in the industry and Emefiele’s exclusion of 41 items from the interbank foreign exchange market.

Resulting from unbridled importation of virtually everything, including toothpicks and other items that could readily be produced locally; a development that tended to make Nigeria the ‘junk yard of the world’ and exerted undue pressure on the foreign reserve, CBN excluded 41 items from the interbank foreign exchange market in an effort to conserve the reserve, change the structure of the economy, revamp local manufacturing and expand job creation.

The policy drew a lot of flak from various quarters. As Emefiele remarked, ‘’we were called all manner of names.’’ But the benefits of the policy manifested in the decline of the import bill from an average of US$5 billion monthly to US$2.1billion in 2016 and US$1.9 billion by half year 2017. It also helped to stabilise the foreign exchange market and partly contributed to the accretion in the foreign reserve of which the major drivers are the successful Eurobond offerings and higher oil production and prices.

Other CBN policies that have created notable impact include the Import and Export, I&E, FX Window and the Anchor Borrowers Programme, ABP. The establishment of the Window is one of the most acclaimed policies of CBN. The effect was magical and powerful, it resolved the chronic challenges of foreign exchange scarcity almost in a twinkle and revamped a hitherto cooled off economy that plunged into recession.

It also improved Nigeria’s rating in the ease of doing business, boosted investors’ confidence and eased market sentiment among other benefits. The ABP sparked off the rice revolution towards self- sufficiency in rice production, and created jobs. More than N45bnillion has been committed under the programme with active participation of 30 states of the federation.

Nwobu, Chartered Stockbroker and Business Journalist wrote via arizenwobu@yahoo.com. Tel. 08033021230

 

 


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