Cardoso’s Maiden Speech: Stretching the Financial Sector

In difficult economic times such has as plagued the Nigerian economy in 2023, it is quite necessary and important that corporates, businesses and other similar stakeholders have consistent and intermittent forward guidance from the Central Bank. In light of this, Dr Yemi Cardoso, the new Central Bank of Nigeria (CBN) governor, unveiled the monetary policy thrust and economic outlook for 2024 at the annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN) on Friday 24th November 2024.
The speech revealed the CBN under the new governor would pursue monetary policies that constitute a stark departure from those implemented by the CBN in recent years. Specifically, in his speech at the dinner, the CBN governor outlined looming recapitalization of Nigerian banks, renewed focus on core inflation targeting, among others. This article seeks to analyze the monetary policy thrust of the CBN governor’s speech.

Key Issues Addressed and how it affects the economy.

● Recapitalization of Nigerian Banks: According to the CBN governor, the CBN will be directing banks to increase their capital, i.e. recapitalize. Recapitalization simply means providing the banks with new capital/shareholders fund. The last time Nigerian banks were mandated to recapitalize by increasing their shareholders funds, the minimum capital for national banks increased from 2 billion naira (about US$15 million) to 25 billion naira (about US$190 million). Today, the 25 billion naira is the equivalent of US$27.8 million (using the 23 November 2023 closing NAFEX rate of US$1/N899.17).

This is coming as necessary measure considering the growth of the Nigerian Economy from 2005 till date and the devaluation of the naira in the forex market. It also comes as a prospective measure for the current administration, led by President Bola Ahmed Tinubu, that has set a target of growing the annual GDP of Nigeria to US$1 Trillion over the next seven years, and the CBN governor admits that the capital base of Nigerian banks must increase to service the banking needs of a US$1 trillion economy.

The Nigerian banks have grown in net assets and obligations in the years since the last banking consolidation and recapitalization exercise in 2005 when the capital requirement was increased to 25 billion naira and the dollar to naira was about 130 naira. Currently, in November 2023, with the naira-to-dollar exchange rate of US$1/N899.17 naira in the parallel market, the value of the 25billion naira capital requirement has depreciated by 85% in US dollar terms since 2005. 

As of Q3 2023, the tier one banks in Nigeria, which includes; First Bank, United Bank for Africa, Guaranty Trust Bank, Access Bank and Zenith Bank, popularly known as the FUGAZ banks, have total shareholders’ funds that far exceed the regulatory minimum capital requirement. Records reveal that Zenith bank has the highest shareholders fund with N1.9 trillion in net assets while GTCO has the lowest with N1.2 trillion in net assets. The average shareholders fund for tier one banks is N1.54 trillion, and about N348 billion for the tier two banks. If the CBN aims at the naira equivalent of the initial USD value of the capital requirement in 2005, the capital requirement will be about N216 billion which produces a $192 million capital requirement. However, the growth in foreign denominated assets and liability from 2005 to date would require more than a $192 million capital requirement as the lowest expected capital requirement would be $210 billion. Tier 3 banks are faced with a larger risk of unavoidable merger and acquisitions or a complete murmuration of the tier 3 banks. The banking sector due to this will go through a phase of tightening personnel expenses and layoffs of workers that will further increase unemployment.

In addition, an increase in capital base will improve the capital adequacy ratio of Nigerian banks and further enhance their capacity to create risk assets. The Single Obligor Limit (SOL) requirement, which restricts lending to a single company or related group of companies to a maximum of 20 per cent of shareholders’ funds, will also increase in Naira terms, with an increased capital base for the banks.

Furthermore, it is expected that the forbearance given by the CBN to various commercial banks and has resulted in improved Capital Adequacy Ratio (CAR) and Non-Perfoming Loans (NPL) ratios for the banks, might be relaxed or withdrawn or not renewed henceforth. Should this happen, there would be movement of funds from the general reserves to the regulatory risk reserves of the banks to provision for the bad loans that had hitherto enjoyed CBN forbearance. This would further deteriorate the qualifying capital of the banks and makes recapitalization more expedient.

● Inflation Targeting Framework: In pursuit of one of the CBN’s primary mandates, the CBN governor mentioned the adoption of an explicit inflation-targeting framework (which is in its final phase) to enhance the effectiveness of monetary policies. This framework seeks to ensure price stability in the economy as the current inflation rate continues to rise. The key tools currently employed by the apex bank to achieve this is the Open Market Operation (OMO)and sustained Cash Reserve Requirement (CRR) debits. An OMO auction recently held by the central bank established a stop rate of 17.5% for one-year treasury bills. The auction received bids exceeding N350 billion, demonstrating a strong investor interest in government debt instruments. The governor announced another round of OMO has been approved to further reduce excess liquidity. Consequentially, this means there will be reduced liquidity in the banking system and support government fundraising. Also, this goes to show that the central bank is directly facing the continued rise in the rate of inflation from a realistic point.

The governor also hinted that the CBN has begun working on fixing the dislocations affecting the efficiency and efficiency of the transmission mechanisms for monetary policy tools, with the aim on ensuring that monetary policy pronouncements result in desired objectives. However, despite the light seen from this measure put in place, implementation is what matters most.

Our Expectation

We expect in the near term that the central bank of Nigeria makes public announcement for specific period, annually or quarterly for the growth in inflation rate or the targeted inflation rate to provide forward guidance to other players or stakeholders to plan and to work towards achieving the inflation targets. Inflation for 2024 is expected to grow but not as rapidly as the inflationary pressures that characterized the 2023 economic landscape. For the common man this does not translate to the reduction of price of goods and services but the reduction in the incremental rate of change of inflation rate, which has already begun with a slope in the rate of change of inflation in the last two months compared to the last five months when exchange rate and fuel subsidy disrupted the economy. Month on Month inflation rate from the latest NBS data, has showed a decline, with a growth rate of 0.67% in October compared to 0.97% previously recorded. We expect the inflation targeting framework to further reduce the inflation growth rate.

● Monetary Policy Committe (MPC) Meetings: Citing the CBN Act 2007, the CBN governor stated that MPC meetings are required to hold at least four times a year, asserting that the CBN has already satisfied that requirement for 2023. Consequently, we expect that there will likely be no further MPC meetings in 2023 and there will be fewer MPC meetings in 2024 than obtained in recent years. The stated aim of reducing the frequency of MPC meetings is to ensure that the meetings are useful and effective.

● A Return to Orthodox Central Banking and an End to Quasi-Fiscal Activities at the CBN: Mr. Cardoso, the CBN governor, in his speech, emphasized a refocusing of the CBN on its statutory obligations which includes price stability, issue of legal tender, maintaining external reserves, banker of last resort, banker of the federal government, according to the Central bank of Nigeria Act 2007.

The orthodox banking refers to the ways the central bank as an independent body uses monetary policy instruments to ensure price stability, financial stability and economic growth in the economy. In the past the CBN moved away from its core banking mandate by engaging in quasi-fiscal activities, injecting over 10 trillion naira directly into various sectors of the economy, including agriculture, aviation, power, and youth programs, which is an unorthodox practice. These interventions diverted the CBN’s attention from its core objectives and ventured into areas where its expertise was limited. The CBN is set to make a U-turn and will make use of Orthodox banking practice that will see them focus on monetary policies instruments, to ensure price stability and control liquidity in the system efficiently.

The department majorly responsible for all the other economic development interventions by the CBN is The Development Finance Department (DFD). This is a key department within the Central Bank of Nigeria (CBN) responsible for promoting sustainable and inclusive economic growth through targeted development finance interventions. The DFD’s primary mandate is to catalyze investments in critical sectors of the Nigerian economy, such as agriculture, manufacturing, micro, small and medium enterprises (MSMEs), and infrastructure. As regards the CBN’ governors outlook, this department will nearly remain functionless or gone for the CBN to focus on its core objectives

Our Expectations

In the face of rising inflation and interest rates, prices of goods and services are subjected to market forces and speculations which is causing price instability and economic hardship for the common person, also corporates and small businesses have difficulties planning for businesses in the short and long term. In the next couple of months, we expect the CBN to revert to formulating policies that will guide and moderate prices of goods in the market to protect consumer’s interest. However, this might not necessarily lead to a reduction in the price of goods but a moderation of the change in prices over time.

For the country this means we should be expecting an era of much-needed price stability as this practice will protect the purchasing power of consumers as prices begin to stabilize due to the reduced economic uncertainty. Consequentially this will result in prolonged investment in consumer goods that normally cause the continuous rise in inflation rate. 

Human Development Index (HDI)

In 2023 nearly 12% of the world population that are in extreme poverty lived in Nigeria considering the poverty threshold at $1.90 per day. Unemployment in Nigeria remain high despite unemployment rate at 4.1%. All these metrics and others contribute to the human development index in Nigeria. As regards this the central bank governor is focused on ensuring that decisions are made based off a matrix that they can track to build a positive HDI. To achieve inclusive economic growth that genuinely improves the lives of our citizens, the central bank plans to gather accurate data on human well-being and implement appropriate policies based on this data. Granting human condition data, the same prominence as macroeconomic data is essential to guarantee that the anticipated economic progress benefits everyone and helps lift them out of their current difficulties. It also seeks to address the low purchasing power of the people which was caused by the continuous rise in the inflation rate.  This plan by the CBN serve as a catalyst for economic growth and development, which will ensure improved access to finance for MSMEs and enhance financial services for the underbanked. 

In a nutshell, the central bank seeks to focus on human development index directly ensuring financial needs are met by engaging with key stakeholders and experts involved to unlock dormant capital in land and property holdings, facilitating accelerated access to consumer credit, and expanding financial inclusion to reach the masses. All of these is to stay in line with the administration’s goal of $1 trillion economy in the next 10 years. 

New foreign exchange guidelines

On foreign exchange he announced new guidelines will be developed after extensive consultation has been done with key players like the banks and FX market operators. As the markets already reacted positively to the part payment made to 31 banks to clear the backlog of FX forward obligations, He assured this will continue and the apex bank will bring transparency to the system by ensuring only valid transactions will be Honored. On the issue of the ban lifted on 43 items, he disclosed this the apex bank only imposed restrictions on their access to foreign exchange. It was noticed the measure eventually caused an increase in the demand for FX in the parallel market, leading to the depreciation of the exchange rate and resulting in widening the gap between the parallel and official market. Since this era is focused on ensuring price stability through monetary policies, he clarified that trade policy is primarily the responsibility of the fiscal authorities, and delving into such matters falls outside the purview of the Apex bank. It is quite important the central bank governor clears the air on this issue, which will bring more confidence to the FX market which is volatile already because of the lack of transparency experienced in the past. 

Analysis/Conclusion

There are high expectations that these new policies and guidelines will be implemented. His speech revealed in all honesty how there has been dislocation the monetary transmission mechanisms rendering the MPC meetings largely ineffective, and it is quite important decisions from MPC are critically reviewed to ensure an effective Monetary policy. It is a lot of ambitious moves and as the central bank aims to achieve a 10% year on year increase in economic growth, the greatest enemy here is inflation rate because the value of the naira has continued to decrease alongside the purchasing power of Nigerians due to its rise. The recapitalization of banks signals a direct approach to building bigger banks and ensuring producers have access to more funds to boost their production and ensure more supply for the high demand which is pushing prices up. As supply increases, employment rate, and the purchasing power of the people will increase. Economic growth can be achieved no doubt, but the apex bank must stand firm with policies that will ensure inflation rate remain stable. Transparency is key to investors’ confidence, emphasis on this by the governor was well needed looking at how foreign direct investments had continued to decline in past months. Fingers crossed on implementation, overall, it was a well delivered speech and good information for the market.