By Jerry Uwah
Godwin Emefiele, the new governor of the Central Bank of Nigeria (CBN),is walking a tight rope. And he knows it. There are wild expectations from the money and capital markets. Even fund users in the larger economy expect him to ease CBN’s merciless grip on money supply and start Nigeria on the road to single-digit interest rates. Like everyone else, Emefiele knows that the road is treacherous.
But he has set for himself the arduous tasks of shoring up the nation’s flagging foreign reserves, stabilizing the exchange rate of the naira, stimulating job creation and pursuing gradual reduction in key interest rates.
Price stability was conspicuously missing in his policy objectives.It could therefore be argued that he is willing to sacrifice price stability on the altar of low interest rates and job creation.
In an election year, Emefiele would need the maximum cooperation of politicians and the men in Aso Rock to stabilize the exchange rate of the naira and effect a climb down on interest rate at the same time.
Besides, the dubious men in the Nigeria National Petroleum Corporation (NNPC) would have to be compelled to remit all of the nation’s earnings from the sale of crude oil for him to shore up the foreign reserves.No one can guarantee that at the moment.
But Emefiele is poise to gamble. He might start with a gradual climb down on the outrageous cash reserve ratio (CRR) of 75 per cent on public funds. CBN might climb down to 50 per cent and probably yank off the 15 per cent CRR on private sector funds.
Emefiele’s plan to ease CBN’s grip on money supply in the face of intensive pressure on the naira in the foreign exchange market is a dare-devil experiment. The CBN had all along premised its campaign against inflation on the perception that excess liquidity in the banking system was behind the woes of the naira.
But there are other key factors to the inflationary trend and poor showing of the naira. The high cost of generating power, the mounting security challenges in the country and the political uncertainty of an election year are all contributory factors. Investors are responding to the uncertainty about 2015 by converting their funds in the money and capital markets to dollars. That transforms todevastating pressure on the naira.
Besides, the federal government borrows money for its bread-and-butter projects from the same money market at 15 per cent.That development prices small and medium enterprises (SMEs) with greater potentials for job creation, out of the market. With government debt instruments practically risk-free, bankers would rather lend money at 15 per cent to government, than lend at 25 per cent to a high risk fund user in the mould of the nation’s SMEs.
Emefiele has to contend with that as he treads the precarious path to his promised single-digit interest rates, which is expected to open the flood gates of investment into the largest economy in the Dark Continent.
The risk is that the contending factors could trap the freed funds from reaching the SMEs which are the engine room of the economy when it comes to job creation. Where that happens, Emefiele might end up flooding the economy with liquidity without creating the needed jobs.
Those hard facts were probably behind his guarded utterances last Thursday. As the former managing director of a bank with one of the largest balance sheets in the country, Emefiele would like to see a banking system liquid enough with cheap funds to lend at single digit. He would like to satisfy the capital market’s demand for a level playing field in which money market instruments do not price the equity market out of business.
However, he would be taking a risk by adding the pressure of higher money supply to what capital flight is already doing to the naira.
He has concluded that we have reached a point where inflation rate might have to climb by a few notches in exchange for more jobs. That probably informs the commendable decision to add unemployment rate to the apex bank’s performance index.
There is a relationship between unemployment and inflation rate. Like interest rate and exchange rate, no one can control the two at the same time. They almost always move in the opposite directions. Exchange rate climbs down when interest rate surges.
In a similar vein, unemployment surges when inflation rate climbs down. In other words,lower inflation rate is attained mostly atthe expense of depleting jobs. Many believe that the CBN’s ruthless war against inflation in the last four years was responsible for the alarming unemployment rate.
Even bankers are convinced that no SME can break even at a lending rate of 33 per cent. Ironically, the SMEs have the potential to create more jobs than multinationals.
Emefiele is poised to create jobs at the expense of price stability.A higher rate of inflation with a less boisterous labour market is a lesser evil under Nigeria’s circumstances. But the experiment has a very slim margin of error. It just must succeed. The consequences of failure would be calamitous.