Emefiele held his first press briefing in his new role on June 5 after assuming office in the same week.
Overall, the new governor’s first public speech seems to have shifted the focus of the monetary authority’s objectives, and this will make it more difficult for the Central Bank of Nigeria (CBN) to support the naira and keep inflation stable.
Emefiele stated that while the bank’s policies have been successful in recent years in anchoring expectations and creating policy certainty, “there exists much room for improvement”.
(READ MORE: Emefiele unveils agenda for Nigeria's central bank)
A key theme in the new governor’s speech was the importance of developmental objectives alongside that of price stability.
He stated that “price stability can rarely be adjudged a goal in itself except cast against the ultimate objective of improvement in the quality of life”.
In this context, Governor Emefiele noted that the CBN will “pursue a gradual reduction in interest rates”. Specifically, Emefiele wants to reduce Nigeria’s Treasury bill rates to levels more aligned with other emerging markets, and in that way lower deposit and lending rates.
Nigeria raised 138 billion naira in 91-, 182- and 364-day Treasury bills at a short-term debt auction on June 5.
On aggregate, yields tilted higher at the latest auction, with the exception of the three-month marginal rate that held steady at 10 per cent. The marginal rates on the six-month and one-year tenors advanced to 10.45 per cent and 10.49 per cent respectively.
Forward guidance by the central bank of a reduced interest rate environment and subsequent downward adjustment in secondary market yields may ease pressure on primary market yields.
Taking the central bank statement that the monetary regulator will pursue a gradual reduction in interest rates at face value, a decline in a favourable interest rate differential may dissuade foreign investment in the primary capital market due to both lower yields on offer and increased currency risk.
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Emefiele also announced that the unemployment rate will begin to be used as a key variable when deciding on the stance of monetary policy. Despite (non-oil driven) economic growth averaging 7 per cent per annum over the past five years, the country’s unemployment rate increased from 15 per cent in 2008 to almost 27 per cent during 2013, with an accompanied increase in poverty.
However, despite these comments, it does not appear that interest rates will be lowered in the short term, due to “liquidity conditions in the economy as well as the potential fiscal expansion in the run-up to the 2015 general elections”.
Emefiele further noted that the CBN will continue to keep the exchange rate stable, and acknowledged that pursuing the twin goals of exchange rate stability and lower interest rates would be daunting.
The most worrying aspect of the new governor’s speech is perhaps the notable emphasis on development banking and direct intervention from the central bank. He noted that due to the worryingly high unemployment rate, the CBN “cannot afford to sit idly by and concentrate only on price and monetary stability”.
In particular, the governor notes that the central bank would direct credit to “productive sectors of the economy”, acting as “a financial catalyst by targeting predetermined sectors that can create jobs on a mass scale and significantly reduce [the import bill]”.
The sectors that will benefit from these interventions have been identified as power, agriculture, micro, small and medium-sized enterprises, oil and gas, and health. Economists argue that it is not a central bank’s role to boost economic activity, and that the only contribution it could make is maintaining monetary and financial stability. Sadly, though, it seems the lessons of history must continuously be repeated.
The thrust of Emefiele’s speech appears to be a sharp turnaround from his predecessor Sanusi Lamido Sanusi. Whereas Sanusi would have been careful to emphasise that interest rates will remain high – both to keep inflation expectations anchored, and to support the naira – Emefiele has chosen to take the opposite route.
Even though the new governor is not looking to lower interest rates immediately, and even if the CBN plans to accomplish it by making structural reforms, the mere fact that he is mentioning lower interest rates has a direct and immediate impact on the market and on expectations.
This was clear in the movement in Treasury bill yields and the naira exchange rate following his speech. Emefiele clarified his comments the following day, emphasising that interest rates will only be lowered when conditions allowed, and that that will not be the case prior to the elections in February 2015.
The new governor also stressed that the CBN remains “very independent” and that there will not be any changes to the monetary policy decision making process.
Sanusi, meanwhile, has been named the new Emir of Kano. His nomination has not been uncontroversial. The previous Emir, Ado Abdullahi Bayero, ruled from 1963 to his death on June 6, aged 83. He was Sanusi’s grandfather’s brother.
Sanusi had always been in line to the throne, and the fact that he belonged to such a prominent Northern family has played a role in his successful career in banking and public administration.
However, the federal government would have preferred to see someone else succeed the late Emir after the political spat between Sanusi and President Goodluck Jonathan, which saw Sanusi suspended from his job as CBN governor in February 2014.
The final say in the nomination was that of Kano State Governor Rabiu Kwankwaso, formerly a member of the People’s Democratic Party (PDP), but one who defected to the opposition All Progressives Congress (APC) in November 2013.
Just before the choice was announced, a PDP spokesman posted a congratulatory message on Twitter to one of the late Emir’s sons; this, and the protests that broke out in Kano against Sanusi’s nomination, has led to allegations that the PDP is trying to incite trouble in the north.
The size of the protests and of crowds that gathered on June 10, to support an alleged plan by President Jonathan to reverse Mr Sanusi’s appointment, show that there is opposition to the APC in the North, and it is reasonable to think that the PDP is trying to capitalise on this. On Tuesday, however, the PDP formally congratulated the new Emir.
The previous Emir of Kano was not a particularly visible public figure, but in recent years at least, that may have been due to his advanced age. We expect that Sanusi will play a greater role in politics, which will be facilitated by the fact that he is already well known thanks to his tenure at the CBN, and that he will be a real thorn in President Jonathan’s side.
The drama around Sanusi’s nomination has provided a good illustration of two notable dynamics in Nigerian politics at the moment. Firstly, the extent of opposition to Sanusi in Kano shows that the PDP-APC split is far from being a simple north-south or Muslim-Christian division.
Secondly, and more worryingly, the attention paid to this matter while a large part of Nigeria is at war shows to what extent politicking ahead of 2015 election is distracting the political class from the real and urgent issues they should be paying attention to.