The appointment of Godwin Emefiele as CBN governor in July 2014 may well have turned out to be Goodluck Jonathan’s (GEJ) most far sighted appointment ever and PDP’s ultimate plan B. In a classic move worthy of mention in a Shakespearean tragedy, GEJ may well have noted a number of important trends in July 2014. The alliance between the political North and the political South West put him on the political back foot. The only candidate that the APC could logically put up (that was capable of winning the 2015 election) was Buhari. Once he was able to convince the political South West to trust him, his victory was assured.
GEJ may also have known that Buhari is the ultimate tragic literary hero. Many a play has centered around a central character similar flaws that besets president Buhari. He is nationalistic, determined, idealistic, powerful, simple, arrogant, tyrannical, economically ignorant, inflexible, incapable of learning from past mistakes and intellectual lazy. It was these same qualities that allowed his former military colleagues to effortlessly overthrow him in August 1985. Godwin Emefiele on the other hand appears to be simple, harmless, humble, soft spoken, powerless and cunning. Nigerians are being served up a live Shakespearean play where the lead character and tragic hero is being led to his destruction by the simple, powerless yet cunning underling.
At the time Buhari took over from GEJ, the federal government finances had been completely ruined. Its savings obliterated, an inherited yet unmanageable debt service obligations incurred by the reckless acquisition of debt by an incompetent former finance minister, low oil prices, challenges in selling its oil to willing buyers, a stubborn costs structure of the FG bureaucracy and a war with a savage Boko Haram. The challenge was to prevent a FG revenue challenge from becoming a significant impediment to the fast growing Nigerian economy.
In the past, the Nigerian state used fiscal and monetary policies in ways that checked excesses. The CBN in 2011 adopted its policies in a manner that prevented over heating of the economy when the fiscal side of government policy (through reckless government spending) was pumping a lot of money into Nigerian economy. At that time, the CBN tempered the economic implications of FG spending by increasing interest rates and withdrawing liquidity from the economy.
FG Fiscal Position
Presently, Nigeria is facing an acute demand challenged economy. There is very little money in the system. The oil price is just shy of $40 a barrel at the time of writing. It costs Nigeria $32 a barrel to produce its oil. It still has challenges finding an end market for all its oil. Its 2016 budget shows that following years of debt acquisition (from the former PDP finance minister who proclaimed that Nigeria had a low debt to GDP level and consequently was able to acquire more debt in its boom time in “line with international best practices”) its debt service obligations is now a stubborn 1.45 trillion naira a year. The Federal Government’s budget hopes that it would be able to raise 2.2 trillion naira from oil sales at $38 a barrel. That means that 65% of Nigeria’s estimated oil revenue will be paid to its lenders as interests on debt. What is left over from FG revenue will absorbed by the over-bloated government bureaucracy (government workers, elected officials and political appointees). The FG hopes to borrow 2 trillion naira that will be used to stimulate the economy. No foreign lender or investor market will advance money to a borrower that spends 65% of its optimistically projected oil income on debt service obligations. Nigeria will barely get 10% of its projected borrowing aspirations met and will be unable to stimulate growth using fiscal measures (such as spending on capital projects). Nigeria’s economy was not helped by the timing of the implementation of the TSA by the FG which took 3 trillion naira out of circulation from the economy.
CBN’s Moves
Shortly before the swearing in of President Buhari, the CBN had started implementing its notorious forex policy. It started to implement a crude policy of exchange control by intentionally and significantly limiting the amount of naira available for purchase. This made many foreign investors already in Nigeria concerned that any money in Nigeria will be hard to extricate and it discouraged potential investors from bringing into Nigeria critical foreign investment and foreign currency into the Nigerian economy. JPM was so concerned, that it warned Nigeria that it faced expulsion from its index and with such expulsion will go billions of foreign currency inflows. Bloomberg’s Paul Wallace wrote an article on this issue on February 5, 2015 (before President Buhari’s swearing in) titled Nigeria’s woes deepen as central Bank Missteps on Currency (http://www.bloomberg.com/news/articles/2015-02-05/nigeria-woes-deepen-as-jpmorgan-hits-emefiele-with-debt-warning).
By September 2015, JPM had expelled Nigeria from its index. Billions of foreign exchange flowing into Nigeria as a result of Nigeria’s inclusion in that index dried up. Other foreign investors have stopped further investment into Nigeria. This is because any huge inflow into Nigeria will be exchanged into Naira via Nigeria’s banking system at the unrealistic government driven official exchange rate which is 40% more than the black market rate. Foreign investors will effectively being paying 40% above market rate for any Nigerian valued investments. Many foreign investors have opted to use their hard-earned money optimally and have passed on Nigeria for that reason. This in turn further exacerbates Nigeria’s foreign currency challenge and puts further downward pressure on the Naira.
Emefiele had played to President Buhari’s inherent nationalistic pride, arrogance and economic illiteracy. He had managed to convince Nigeria’s then sole administrator to equate a strong Naira to the outward manifestation of Nigeria’s economic strength and independence irrespective of the underlying economic fundamentals prevalent at the time. Buhari, before long, became the face of this disastrous policy and its chief proponent in chief. At one time, he dared anyone to convince him of the merits of “murdering the naira”. At that point, he was perceived to be the driver of the policy rather than a President limited by the terms of the CBN Act of 2007 and the independence of the Governor of the CBN as enshrined in that Act.
Emefiele had (before our very eyes) been transformed to the powerless, respectful and simple CBN governor taking instructions from an incompetent all powerful President rather than the reality of a cunning and incompetent CBN governor leading a stubborn and nationalistic but economically ignorant President down the road to political ruin.
Not done with the exchange control regime, the CBN governor then implemented a restricted imports strategy vis a vis foreign currency acquisition by the domestic manufacturing market that has now led to the unprecedented growth of unemployment in Nigeria and the future large scale collapse of many domestic manufacturers.
The CBN has now delivered the ultimate knock out punch when the barely reported decision by the CBN to increase interest rates and to pull 744 billion naira from circulation within the economy through the banking system. This was done at a time in which Nigeria has no fiscal injection into the economy from the federal government, there is a significant absence of demand within the economy and Nigeria is facing a near recession. Elementary economics demand that in times of near or actual recession fiscal and monetary policy should be expansionary and not contractionary. Every western country that was affected by the economic downturn over the last couple of years have significantly slashed interest rates. The worry in the west is a negative interest rate environment not a double digit interest rate regime. High interest rates are imposed where an economy is overheated and needs to be cooled down. There is no precedent for high interest rates and contractionary monetary policies at a time when the economy is devoid of demand and the FG is devoid of cash that can be used to stimulate growth within the economy by spending money. The result will be the most debilitating economic downturn ever experienced in modern history.
One can only surmise that this new CBN policy was implemented to deal with rising inflation. However, Nigeria’s inflation is caused by the fall in the actual value of the Naira that has flowed into the price of imports sold in Nigeria or goods produced in Nigeria that consists of imported materials. Nigeria’s inflation is not caused by an excessive demand relative to supply driven inflation. The medicine prescribed by the doctor cannot cure the ailment that afflicts the sick patient. The patient’s health will deteriorate further because of the lack of knowledge of the doctor.
Aware that the CBN Act of 2007 ensures that the CBN governor is independent of the FG and can only be removed by the President with the assent of the National Assembly, Emefiele has insulated his position by bribing the major power centres within Nigeria by giving their wards unmerited appointments within the CBN. Buhari is effectively stuck with a CBN governor that will facilitate his quick transition from messier to the most hated and unpopular head of state in recent memory. Mr Tinubu (seemingly worried about the popularity of the APC federal government and its effect on his hard won south west political empire) aimed his missile at the wrong person. The minister of state for petroleum is not the existential threat to this APC government. It is the CBN governor.
Asiwaju Bola Tinubu’s hard won political empire’s further rise or fall is in the hands of that simple, respectful yet cunning man that occupies the seat of the Governor of the Central Bank of Nigeria. What an interesting irony. I have always loved Shakespeare’s works. It appears that Emefiele does too.
Hmmm. Interesting piece.