Appraising CBN’s Monetary Policy Accomplishments Under Cardoso

Though some of the recent monetary policy directions of the Central Bank of Nigeria may have brought hardship to the ordinary Nigerian, they have nonetheless, helped to reposition the economy on the right path to achieving key macroeconomic successes that had eluded past administrations in recent times, James Emejo writes

U

nderstandably, not many people are comfortable with the monetary policy choices of the CBN under the leadership of Mr. Olayemi Cardoso.

Amid the current hardship experienced in the country following key policy reforms initiated by President Bola Tinubu’s administration, including the removal of fuel subsidy, liberalisation of the Foreign Exchange (FX) segment, particularly the floating of the naira, almost at the same time – the apex bank’s resolve to pursue a contractionary policy stance was particularly troubling for the common man and small businesses as well.

Cardoso, who was appointed CBN Governor on September 15, 2023, by President Bola Tinubu for a term of five years, and confirmed by the Senate on September 23, 2023, had raised the Monetary Policy Rate (MPR), the benchmark interest rate that determines the cost of borrowing from commercial banks for five consecutive times since he assumed office. The MPR is currently at 27.25 per cent.

As a result, the real sector continued to groan under higher costs of credit from banks as local companies lost their competitiveness. On the other hand, the ripple effect of monetary tightening was also being borne by consumers amid a high inflationary environment.  

The CBN governor had severally acknowledged the central bank’s policies may have caused great discomfort for Nigerians and businesses, assuring that the pains were only temporary.

He said, “And I accept the fact that many outside are finding things very difficult. They are finding it very difficult. But I want to say that the things we are doing are set to put the economy of this country on a trajectory, where we shouldn’t go back and see some of the inefficiencies we’ve seen in our system over the recent past.

“So, these, I believe, are short-term pains, and eventually we will get out of the situation we are in now.”

Cardoso explained that the high inflationary pressures, occasioned partly by massive liquidity injection into the economy by his predecessor, needed to be curtailed at all costs. While urging Nigerians to bear with CBN, he said all he was doing was to try to correct past mistakes by previous administrations and to set the economy in the right direction, noting that he inherited a bad situation whereby confidence in the economy had plummeted.

Background of Policy Choices 

In his maiden interview with ARISE NEWS Channel, the broadcast arm of THISDAY Newspapers, Cardoso had revealed that about $2.4billion out of the acclaimed $7billion outstanding foreign exchange liabilities of the federal government – which he inherited – were not valid for settlement – adding that the CBN had settled verified FX requests which amounted to $2.3 billion and that current total outstanding FX obligations remained at $2.2billion as at February 2023.

He explained that loans and advances in the economy stood at about N40 trillion of which CBN interventions accounted for about 25 per cent, noting that such liquidity injections were responsible for the current distortions including inflation in the economy because they were not properly managed.

It was against this backdrop that Cardoso resolved to focus on its primary mandate of price stability rather than continue to intervene in various sectors of the economy.

Cardoso said, “By way of background, it is important for me to state clearly and unequivocally that I have nothing against interventions. It is done all over the world; in times of crisis, intervention does take place, so, I am not saying it is necessarily a bad thing.

“I am just saying that it needs to be done in a well thought out manner and in a manner that does not distabilise the economy.

“If you push in too much liquidity in a relatively short space of time and it is not managed properly, then the distortions that we’ve had are bound to happen; it’s just as simple as that and nobody should be surprised that they are happening. So, that has grave implications for the monetary policy and the exchange rate and of course, inflation.”

Restoring Confidence, Trust in Economy

Apart from pursuing the central bank’s primary mandate, the CBN governor initially committed to restoring confidence and trust in the bank and economy at large by ensuring that all the valid FX liabilities were fully settled.

Earlier in March, the Cardoso-led CBN announced that all valid FX backlogs owed to various sectors of the economy had been settled, a fulfillment of a key pledge of the CBN governor, to process an inherited backlog of $7 billion in outstanding liabilities.

He had reassured investors, “We made clearing the FX backlog a priority to restore credibility and confidence in the Nigerian economy. We needed to go through an independent and credible process that would determine the authenticity of those obligations, and, at this point, I can tell you that we have now cleared all genuine, verifiable transactions.”

He added: “This encumbrance to market confidence in the country’s ability to meet its obligations is now totally behind us.” This could be seen as one of the major accomplishments of Cardoso within a year in office.

Recently President Bola Tinubu disclosed that his administration had received over $30billion in commitments from foreign investors in less than two years of his administration, further demonstrating that his policies have yielded positive results, making the country increasingly attractive to domestic and international investors.

Essentially, the policy reforms and policy initiatives by Cardoso have led to more transparency in FX market operations as well as earned the apex financial regulatory institution improved ranking by global ranking agencies as well as commendations from the World Bank.

Asked about his greatest achievements in office, he told THISDAY, “It’s that of trust, and we appreciate that ours is a business of trust. And I appreciate that as the governor of the central bank, I am in a position of trust. I appreciate that. And we have done a great deal in restoring credibility to the central bank and regaining the trust in the institution.

“We are not there yet. It is a continuum. But without the success of rebuilding back the trust, all the other things that we want to credit ourselves with having done or wanting to do will not happen.

“And that is part of the reason I mentioned earlier on. I was asked this at a particular forum I went to why did you prioritise paying back the backlog? Why did you do that? Why couldn’t you have sort of found a way to stretch it out over some time?

“And the answer to that, quite frankly, is that it’s part of the building of trust process. People have to trust you. They have to know that irrespective of what has happened, there’s somebody in the saddle who is looking at things in a very dispassionate manner and will come to the conclusions that are in the best interest of all.”

The return of the central bank to orthodoxy practices remained one of the laudable accomplishments of Cardoso.

He said, “That is very important. And that is another thing that I will talk about, which is in the process of doing all these things we’ve done, we decided it was important to refocus the mandate of the central bank to orthodoxy.

“We are fully engaged in getting ourselves out of unorthodox means of running the central bank. And I’ve spoken about this on several occasions. It is all part of focusing on a core mandate which essentially will moderate prices as we have begun to the results and will eventually result in price discovery on the foreign exchange side.

“These are all linked together. You cannot take one without the other. And I must say that a year later, I’m very pleased to note that the rating agencies, for example, have given us a more positive rating than when we came in.

“And that in itself, as far as I can see, speaks volumes. Because, again, the rating agencies are not one given to emotion. They come in, they look at your books, they look at your numbers, they ask you the right questions, they see your projections, and based on that, they rate you accordingly.”

He said, “And we so far have been positively rated. So that, because I can sit down here talking for the next hour, great things that I believe I have done. I believe, again, we are not there yet.”

“We have also been very careful concerning transparency around our operations. And for those of you who don’t know, when we did the last foreign exchange intervention with RDAS, that was one of the reasons we used that because we felt it was important at that time to send a very positive, transparent signal out for everybody to know exactly what is going on and how FX resources were being expended.”

Tangible Policy Outcomes

While speaking at a recent symposium on economic reforms and the unveiling of the compendium, “Promoting Stability in an Era of Economic Reforms: The Journey So Far”, Cardoso took time to chronicle critical milestones in the bank’s ongoing economic reform agenda, including a new target to increase foreign remittances to $1 billion monthly.

Reflecting on the transformative policy actions of the past year, Cardoso emphasised the CBN’s steadfast commitment to stabilising the economy, curbing inflation, and restoring investor confidence.

Many had criticised the apex bank’s monetary tightening policy, claiming it has no impact on inflation. But the CBN governor had insisted that the policy was working, adding that without the rate hikes, current inflation would have worsened, further eroding purchasing power.

He, however, emphasised that the event was not a celebration but an acknowledgment of the bank’s milestones achieved in the past year, despite the crisis that prevailed when he and his team assumed office in 2023.

According to him, the bank has been able to address the credibility deficit it faced at the time with marked improvements in the FX market and a stabilisation of foreign reserves, which have now surpassed the $40 billion mark, the highest in 33 months.

He said inflation remained elevated, it was on a downward trend, signalling that the reforms were taking hold in restoring market equilibrium and fostering growth.

Cardoso further detailed the inherited economic challenges, such as the GDP growth slowdown to 2.31 per cent in Q1 2023, a significant decline from earlier years, and a sharp rise in inflation to 24.1 per cent by mid-2023.

He noted that the CBN had confronted these pressures with a robust policy response in the past 12 months, prioritising measures to enhance stability in the foreign exchange (FX) market, improve monetary policy and curb inflation.

The Governor of Lagos State, Mr. Babajide Sanwo-Olu, lauded the CBN management team for their dedicated effort toward stabilising the economy as well as the team’s commitment to self-assessment, noting their willingness to critically review their performance, ask candid questions, and seek constructive feedback from industry stakeholders.

Also, Governor of Imo State, Hope Uzodinma emphasised the importance of collaboration between fiscal and monetary authorities, underscoring the need for unified policymaking that communicates a cohesive goal and message to the public.

Cardoso highlighted the impact of the “Ways and Means Advances” by the CBN, which reached N22.7 trillion by mid-2023, necessitating urgent action.

Under his watch, the CBN further addressed the country’s capital importation challenges, with foreign direct investments and portfolio investments falling dramatically over the past decade.

The apex bank governor acknowledged the adverse effects of multiple exchange rate windows, which encouraged arbitrage, reduced foreign investment, and led to a backlog in FX settlements.

The revenue losses attributed to these exchange rate issues were estimated at N6.2 trillion in 2022 alone.

In response to these, he said the CBN had undertaken a series of impactful reforms, including a recalibration of the Monetary Policy Rate (MPR), raising it by 850 basis points to 27.25 per cent, alongside an increase in the Cash Reserve Ratio for commercial banks to 50 per cent.

These adjustments, Cardoso emphasised, were critical to addressing inflationary pressures and fostering a stable economic environment.