With the appointment of Folashodun Shonubi as Acting Governor of the Central Bank of Nigeria (CBN), he faces a multitude of challenges in the realm of monetary policy. This article delves into the complexities he must navigate, including tackling inflation, managing cash reserve ratios, fostering a credit-friendly environment, and driving economic growth.
Folashodun Shonubi, formerly a deputy governor of the Central Bank of Nigeria (CBN), will now serve as the Acting Governor, facing significant challenges in the bank’s history. As the new Chief Executive Officer and Chair of the Monetary Policy Committee (MPC), Shonubi must address high inflation and navigate monetary tightening policies. The President’s mention of a low-interest rate regime to boost the private sector adds complexity to the situation.
The cash reserve ratio (CRR), a prudential and monetary tool, is currently at a high level of 32.5%, described as one of the highest in the world. Additionally, the effective CRR, known by insiders, is even higher at 50%, further limiting lending capabilities. There is a need for a more dynamic CRR that adjusts based on real-time changes in deposits to ensure flexibility and support a credit-friendly environment.
Reducing the CRR and recalibrating the system to prevent arbitrary deduction and freezing of deposits would be crucial in supporting the fiscal authority and promoting credit culture. However, unlocking credit may lead to increased money supply and potential inflationary pressure. Despite this, the President’s focus on economic growth highlights the need for affordable and accessible credit.
The CBN’s significant overdraft, amounting to N23.72 trillion, has been a point of contention, with the International Monetary Fund (IMF) and other institutions urging compliance with restrictions and timely repayment. With limited government debt allowances, high borrowing costs, and a large budget deficit, there may be a temptation to rely on the W & M window for funding, posing a test for Shonubi’s leadership.
Experts argue that the money supply’s impact on inflation includes the significant W & M financing. Shonubi, with his engineering background and finance expertise, must consider the bigger picture and make appropriate decisions, despite lacking an extensive economic background like other CBN professionals.
The fate of the naira redesign, a point of contention between Emefiele and the President’s campaign team, remains uncertain. The Supreme Court’s ruling on the validity of the old notes, scheduled for December 31, 2023, adds to the complexity. The Acting Governor must swiftly decide on the controversial policy, commonly referred to as “naira confiscation.”
However, the economic direction of the government must be clarified before debating monetary policies. Fiscal guidance is crucial in resolving issues like W & M, determining the CRR and MPR rates, and formulating an effective monetary policy. Shonubi’s appointment is seen as an extension of Emefiele’s tenure until the CBN undergoes necessary reforms.
Rate convergence has been a long-standing goal for the CBN, but different rates persist, leading to market rigidity and malpractices. The President emphasized the need for harmonization, placing a significant responsibility on the Acting Governor. Achieving exchange rate convergence involves trade-offs that could impact the economy, such as devaluation potentially worsening inflation and fuel prices.
To work towards a single exchange rate, suggestions include increasing forex supply from the Nigerian National Petroleum Corporation (NNPC), encouraging exports through partnership programs, supporting the Dangote Refinery, and establishing intervention funds for refineries and gas assets. The CBN should manage forex demand while gradually easing restrictions as the country’s supply grows.
Despite international pressure to remove trade restrictions, the CBN must balance forex demand management and gradually ease restrictions to avoid sudden shocks as the country’s supply increases.