The foundation of Governor Emefiele’s unorthodox monetary policy approach came from his academic and professional experience and training he got as a banker.
By Jona N. Ezikpe
President Muhammad Buhari recently, directed the Governor of Central Bank of Nigeria (CBN) Godwin Emefiele to continue with his job as the Governor of CBN, after he, Emefiele, must have been seen to have somehow shown interest in the All Progressives Congress (APC) primary. He predicated his decision on the good performance of Emefiele because he used the unorthodox monetary Policy approach which according to Buhari, has resulted in a better growth or performance of the economy.
The President though, did not provide specific data to justify the assertion according to newspaper reporting, but he believed that the traditional or orthodox approach to monetary policy has failed or could not have been able to get the economy from the doldrums. This statement by the President Buhari, prompted me to write this paper.
The dichotomy between orthodox and unorthodox monetary policies
One thing that is common with all the Central Banks of the various countries of the world is that they act as the lender of last resort.
The Central Bank is managed by its Board of Directors/Governors who formulate policies that affect its operations including monetary policy. Monetary Policy therefore will spell out the means by which money supply will affect economic activities. These means are known as tools of monetary policy implementation, or transmission mechanism. They include three broad tools or instruments known as:
Discount Rate
Reserve Requirement
Open market Operation
Discount Rate
The Discount Rate is the interest rate that the Central Bank charges member banks that borrow money from it to support their operations. In Nigeria, it is known as the Monetary Policy Rate (MPR). The amount a given bank borrowed could be used to extend more loans to its customers or invest in assets that will command a rate of Return (ROR) that is equal or higher than the Discount Rate. By altering the Discount Rate, the cost of credit to borrowers from banks will be affected. If the Discount Rate which is the barometer of all the other rates in the financial system goes up, interest rate that banks charge their customers for borrowing money or providing credit goes up also. The revise is the case when the Discount Rate goes down. The rise in Discount Rate means that interest rate will tend to rise thus making the cost of borrowing to increase which will in turn lead to a reduction in demand for credit and consequently a reduction in spending.
If the Discount Rate on the other hand goes down, the cost of credit or interest rate will go down thus inducing an increase in the demand for credit and subsequent increase in money supply or credit. The change in Discount Rate will lead to either acceleration or deacceleration of money supply depending on the target or objective of Monetary Policy in that particular moment.
Reserve Requirement
Deposit Money Banks (DMBs) in Nigeria are required to keep a proportion/percentage of their deposits with the CBN. This reserve is kept in the CBN and cannot be utilized in the daily operations of the bank, but changes in the amount of Reserve left in the CBN, determines the direction of monetary policy. If the CBN wants to increase money supply, the Reserve Ratio will be reduced. The reverse is the case if the intention is to reduce the stock of money in circulation.
Open Market Operation (OMO)
Open Market Operation (OMO) involves the CBN buying and selling Federal Government Treasury Securities. When CBN buys Treasury bills, it will pay the sellers or holders of such Bills thereby increasing demand deposit balances in banks. Demand Deposit being a component of money stock whether it is M1, M2, M3 will increase the quantity of money. This decision by the CBN to buy T – Bills is considered as expansionary monetary policy. When the CBN sells T-Bills, buyers of such Bills will draw on their balances in Banks to pay CBN. This will lead to a reduction in the quantity of money available to the public. This is known as contractionary monetary policy as it reduces money stock. Other than buying and selling only Government Securities which in the first place, represents debt obligation in this case, of the Federal Government, CBN can buy and sell other types of securities. These other securities include corporate debts, sub-national debt instruments such as State and Local Government Bonds.
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These types of securities that are not the obligation of the Federal Government tend to be riskier and command a risk premium. Central Banks deal on these types of securities when the objective is to aggressively inject large volume of money in the economy especially if there are expectations that the economy could drift towards recession due to an exogenous shock like Covid-19.
This easing of money supply when the CBN buys securities other than Treasury obligations is known as Quantitative Easing (QE). (A discussion on QE) can be found in any book on Monetary Economics or CBN website.
Orthodox Monetary Policy
Orthodox Monetary Policy like the Unorthodox Policy requires the use of all or any of the above tools of monetary policy to control the quantity of money going or leaving the economy through the financial system.
Orthodox means doing something the same way most of the time. By constantly repeating that method of doing something, in this case the supply of money to the economy, a pattern or tradition is established. It becomes an accepted norm or tradition on how to conduct such activity. Every Central Bank decides which of those monetary policy tools to use depending on the goal of the policy which is influenced by conditions in the economy. Orthodox Monetary Policy therefore means that given tools of monetary policy have been used consistently by a central bank.
Unorthodox Monetary Policy
Unorthodox means shifting or deviating from the traditional or usual methods of doing something. Unorthodox Monetary Policy approach means that a central banker has decided to do things slightly differently from the generally accepted norms, methods or principles.
When President Buhari said that Governor Emefiele adopted an unorthodox method of money supply control, he did not explain exactly what was really involved in Emeliefe’s monetary policy. Buhari did not tell us whether Emefiele went outside the three main tools of monetary policy in his management of the economy. Did he introduce new tools or was it a change in style and intensity in the use of those tools? These are answers that I shall attempt to provide when I examine the practice of monetary policy under Governor Emeliefe.
Emefiele’s Unorthodox Monetary Policies
This section will attempt to give an outsider perspective on how Emefiele has used the unorthodox monetary policy approach in managing the economy via the financial system. This is not an appraisal of success or failure of Emefiele on the job as a Governor of CBN. Rather, it is more of a response to the statement by President Buhari on the concept of Monetary Policy Unorthodoxy.
The challenge I have in this discourse is that Buhari did not define what he meant by unorthodox method, hence I will make a lot of inferences or assumptions to arrive at my conclusion on how Emeliefe has used the unorthodox monetary policy. Like every assumption, it could be wrong hence I would like to be corrected.
As discussed above, the three key generally accepted tools of monetary policy are the Discount Rate/MPR, Reserve Requirement and Open Market Operation (OMO). There are other tools such as Exchange Rate Policy, Moral Suasion etc.
I interpret Buhari’s statement to represent his assessment of Emeliefe’s performance on the job, which will imply his use of all the available tools in the management of the nation’s financial system. The additional tools may include the regulatory role of the CBN and as a lender of last resort.
The Monetary Management tool that a Central Banker uses, depends on the objective of that policy at that particular point in time. This objective or objectives is driven by the structure and dynamics of the variables in the underlying economy. A Central Banker will emphasize those things that are critical to the growth of the economy. Emefiele operates in an economic environment that is different from that of the developed economies of the United States of America (USA) and United Kingdom (UK), therefore, his choice of tools may differ. For example, in Nigeria, availability of credit as will be discussed later, tends to be more important in driving the economy than interest rate or the cost of credit.
Foreign exchange availability and rate also do impact significantly on the decisions of firms and households in Nigeria than in the developed economies. The large external sector of the Nigeria economy which is due to over dependence and preference for foreign made goods and with limited capacity for domestic production, makes foreign exchange a major determinant of economic growth/policy.
In the USA and UK, Central Bankers focus more on interest rate as credit is readily available for those that are willing to take and have met the necessary conditions. To these countries, availability of foreign exchange, say the Dollar in the case of USA, becomes less significant because Dollar is the World Reserve Currency. USA does not need to look for Dollars to buy foreign goods, like in Nigeria. Also, the USA economy is driven mostly by domestic consumption, with limited foreign sector. The applicable monetary policy tools will also differ even within countries in similar stages of economic development. The tools used by the Governor of CBN may differ from that of the Governor of say Ghana Central Bank even though the two countries are classified as developing countries.
Foreign Exchange Policy Under Emefiele
Emefiele, since assumption of office, has tried various foreign exchange management strategies all in an attempt to achieve a stable Naira Exchange rate vis-à-vis other major convertible currencies like the Dollar and Euro.
At present, Emefiele practices what is called Multiple Exchange Rates Regime. This is different from the prescription of International Monetary Fund (IMF) and World Bank who recommend a single floating Naira Rate. IMF will prefer a limited intervention in the foreign exchange market and for the market forces to determine the exchange rate of the Nigeria based on the capacity of the nation to generate its own foreign exchange. We all know that the major source of foreign exchange earnings is the sale of crude oil in the international market. With OPEC Quota limit, volatility of crude oil prices in the international market, large foreign goods consumption appetite and unbridled level of corruption in the sell and accounting of proceeds from crude oil sales, the supply of foreign exchange to government is far below the demand. This tends, to put pressure on the Naira Exchange Rate and has resulted in constant depreciation of the Naira relative to the Dollar.
To stem a runaway exchange rate depreciation with its attendant effects on external relationships and domestic economic consequences, Emefiele has segmented the foreign exchange market based on the various needs of the users of foreign exchange.
We have the Federal Government segment with its own rate. The Export/Investor segment and invisible items/Bureau De-change segment. Each segment, has its own rate usually set by the Emelefiele Central Bank.
It is important to note that the prevailing rates in these segments of the foreign exchange market differ from the Federal Government rate which is lower than the other rates. These segmented markets come with their multiple exchange rates. The boundaries between the various segments are not rigid, hence opportunities for arbitrage exists in the Foreign Exchange Market. It is therefore easy to buy Dollars at the Government rate where it is low and sell in the invisible/Bureau De-change segment where rate is high and make above normal profit. This is what is known in the Nigerian Parlance as “Round Tripping.” Emefiele has been doing everything possible to crackdown on Round Tripping which is a veritable ground for Money laundry by not-too-distant past, suspending the operating licenses of Bureau De Change firms.
The success or failure of Emefiele’s Multiple Exchange Rates policy vis-à-vis the Single Floating Rate should be empirically tested and established. However, to President Buhari, Emefiele’s multiple exchange rates management strategy which I guess it is what he described as Unorthodox Policy is a big success and deserves accolade. The Orthodox Policy of Single Floating Rate of IMF on the other hand would have depreciated the Naira to a point that it could have severe political implications for the Buhari Administration as it would fuel inflation in the economy.
However, it probably would have resulted in more efficient allocation of foreign exchange. What the Multiple Exchange Rate regime has done, is to create Arbitrage opportunities and the emergence of non- productive wealth holders whose main entrepreneurial trait is the social linkages they have in government.
I have been trying to figure out the rational for allowing the federal government to buy foreign exchange at rate lower than what the private sector can buy. We all know that government is the largest sector in the economy and it has the biggest capacity to pay given its ability to print money (currency). Other than currying favour of government officials, the plausible reason for government to pay lower for foreign exchange, could be based on the different functions of the economic units.
Government is supposed to provide public goods whose benefits could be difficult to privatize or internalize while private sector goods are easy to internalize. When government provides infrastructure such as roads, that road is used by everybody who deserves to use it, but when an individual builds a house or buys a car for himself, he alone can use the facility. Thus, for government to meet its obligations to the governed, it has to provide such a service at a price that the citizens can afford. For that reason, government should buy the same product at lower price than the private sector. How this theory works in Nigeria is totally different. We can see that government has not been providing social goods at prices better than the private sector due to corruption.
Monetary policy under Emefiele
President Buhari used the term “Unorthodox” to describe the overall on the job performance of Emefiele of which Monetary Policy is an integral part. That implies that Emefiele’s unorthodox monetary policy is welcome and probably achieved better result in providing the desired credit to the economy than IMF/World Bank prescriptions.
Emefiele like every other Central Banker probably used the three major tools/instruments of Monetary Policy namely; Discount Rate or Monetary Policy Rate (MPR), Reserve Requirement (RR) and Open Market Operation (OMO). What may differ could be the selection of a particular tool or combination of tools and the intensity to which a particular tool is deployed.
Discount Rate or Monetary Policy Rate (MPR)
This tool which is the interest rate CBN charges Deposit Money Banks (DMB) has not been an effective tool of implementing monetary Policy. The rate is the barometer on which other rates in the economy depend and more importantly, banks use it as base rate to determine the interest rates they charge their various classes of customers by adding a risk premium. Cost of credit or interest rate is very high in Nigeria. MPR hovers around 12 percent with asymmetric boundaries of 12 +_ with the upper limit higher than the lower limit. Changes in the MPR have not been very effective in altering the quantity of money stock or credit demanded in the economy. Households and businesses focus more on availability of funds or credit than the price of credit in making decisions in Nigeria.
Firms that are rate sensitive, are mostly the large conglomerates who have alternative sources of borrowing from external financial markets. The typical Idumota business enterprise cannot borrow from the off-shore financial institutions. Thus, the interest elasticity of demand for credit is very inelastic in Nigeria for most customers.
Reserve Requirement (RR)
Changes in RR have been a more potent instrument of monetary Policy than the use of MPR. RR as I said above, is the percentage of DMB’s deposits that is held in the CBN, which the bank is not allowed to use to run its business. However, because changes in RR immediately affect the ability of banks to extend credit, hence it has been relatively effective in controlling money stock.
Open Market Operation (OMO)
OMO has been the most effective method of providing the necessary credit to drive the economy. OMO as explained previously, is the buying and selling of Federal Government Treasury Securities by the CBN thereby either increasing or decreasing the supply of money to the economy. There is a variant of OMO called Quantitative Easing (QE).
CBN has used QE many times to alter the supply of money. QE is when the CBN buys securities other than Treasury Securities such as Mortgages/Subprime Mortgages, Subnational debts like state and local governments bonds/debt instruments and even corporate debts. This QE increases the volume of money, going into the economy relative to OMO because of the larger number of acceptable securities.
Other Monetary Policy tools used by Emefiele
Direct Sectorial Credit Provision
There are other tools to use by the central bank to provide the necessary liquidity to drive the economy. One of such tools, is Direct Credit Provision to a target sector. Emefiele has used this tool more extensively relative to any other CBN Governor. Many sectors of the economy ranging from Agriculture, Small and Medium Enterprises (SMEs), Power, Film or Intellectual Property, Aviation etc have received one type of intervention or the other.
Emefiele understands that credit availability is more important than the cost of credit in a developing economy such as Nigeria, hence he has structured credits to address the needs of those sectors. These credits are structured in such a way as to make it easy for borrowers to obtain. Interest rate on such loans for example, in the agricultural sector, is priced below the MPR. Loan tenor is extended up to seven years depending on the crop in question. And the collateral requirement is set at a minimum. These types of loans are described as “Soft Loans.”
In terms of magnitude or volume of credit extended to agricultural sector: rice, wheat, cotton farmers have received a large chunk. Majority of the recipients of the credits are domiciled in the Northern part of Nigeria.
Livestock farmers, of which President Buhari is one of them, have equally received huge sums of money from the CBN intervention programme. Buhari probably commended Emeliefe for a job well done because his farm and those in his part of the country must have received disproportionate share of credit allocated to that sector. The CBN plays important role in appraising and approving these credits through the Development Finance Department. The participating banks in the scheme, act mostly as agents or clearing house to CBN. They gather applications, appraise them and forward to the CBN for final approval. This direct provision of credit to the various sectors of the economy probably is what Buhari described as unorthodox approach.
IMF on the other hand, has recommended that credit be allocated by forces of demand and supply. Direct intervention in the provision of credit in developed economics of USA and UK is very rare and they are used mostly during time of emergency like Covid-19.
The underlying assumption in the orthodox approach to monetary policy is that market will do better in allocating resources in this case, financial resources because capital will move to where it has highest marginal productivity or efficiency. Some schools of thought, have argued that Emeliefe’s disproportionate allocation of credit to northern farmers including corporate bodies like Olam and Dangote who operate in the North, leads to sub-optimality. That the allocation creates an imbalance whereby, South East geopolitical zone tends to receive small amount of credit from the CBN even though, the marginal efficiency of capital is highest in that area. This school of thought further argued that Emeliefe who is ethnic Igbo probably gave more funds to the north in order not to be seen as favouring people of the same ethnic origin with him. Hence, they argue that Emefiele used this strategy to therefore secure his job and subsequent commendation and retention by Buhari.
To buttress their point, they gave example of when CBN announced the provision of N500 billion for palm tree farmers. Palm tree farms or plantations exist more in the East or South East geopolitical zone. Many of the palm tree growers expected the funds to be made available to them but that did not happen. The use of an unorthodox method in the allocation of credit has resulted in an imbalance whereby, credit is made available to regions that need it less. The same distortion that is found in the distribution of credit is similar to the imperfections found with multiple exchange rates. These distortions, make it difficult for one to buy into the statement by Buhari that unorthodox monetary management is superior to the IMF recommended approach.
It is important to note however, that the impact of monetary policy using direct credit allocation to the various sectors is easy to measure than the other tools such as the Discount Rate or Reserve Requirement whose impacts affect the whole economic system. In addition, the effects of these traditional tools are associated with transmission lags as against the direct or instantaneous impact of credit allocation.
Foundation of Emefiele’s Unorthodox Monetary Policy
The building blocks that help shape one’s personality or philosophy come mostly from parents, school, profession, church and social environment. As these blocks are placed on the human structure at various levels of development, the person’s values are formed. When he is opportune to enter a corporate organization as an employer, he brings those values to the work place. Most often, those values may not align with the corporate values and culture prevailing. Depending on the level of entry into the workforce, the individual may or may not drastically change the corporate norms on ground.
The Emefiele that I Knew at UNEC
I met Emefiele while he was a student in the Department of Banking and Finance of the University of Nigeria Enugu Campus (UNEC). I was teaching Corporate Finance and Investment Management at both the undergraduate and graduate levels. I supervised Emefiele’s Master’s Degree Thesis. In addition, he passed through my courses and demonstrated strong academic ability. The title of his Thesis was “An Estimable Private Investment Function in Nigeria.”
We both agreed that he should test this model because we wanted to know the major factors driving real investment spending in Nigeria for a given period.
Various variables were included in the model. The variable with the highest impact coefficient was money supply. Different definitions of money supply- M1, M2 and M3, were tested, the result still confirmed the dominance of money in private investment decisions in Nigeria relative to the impact of interest rate etc. I guess it was at this earlier stage in life that Emefiele understood the significant effect of money on investment and output.
Emefiele’s Commercial Banking Experience
This paper is not designed to discuss Emeliefe’s banking career before going to the CBN as a regulator of banks. Rather, I will discuss generally how his banking career must have added to his academic experience to help, form his unorthodox monetary policy approach. As a banker, Emefiele must have interacted with many corporate executives in the production sector of the economy.
He must have extended different types of loans to them and saw the response of those borrowers to either interest rate or availability of credit. At the bank, Emeliefe equally must have attended management courses overseas where probably, he would have further pursued or examined the results of similar studies on the key determinants of corporate investment expenditure in different climes. This professional experience Emeliefe acquired as a banker, would add to the building blocks. There are other factors that must have influenced his thinking other than the ones mentioned above.
When Emefiele was appointed to head the CBN, he was going there with a better understanding of the significant role money supply plays in changing aggregate output via investment spending. Some people had argued as reported in the Newspapers when he was made the CBN Governor that Emeliefe did not study Monetary Economics, hence was ill equipped or may not fully appreciate or understand the relationship between changes in money supply and changes in aggregate output (GDP) via investment spending. In my opinion this assertion may not be true given what I have stated above.
How Emeliefe approached his job at the CBN would depend on his philosophy, the same way, Professor Chukwuma Soludo, whose background was in the academia, came to the CBN with predetermined values and vision for the CBN among which was the consolidation of banking industry by raising the minimum capital to ₦25 billion.
Other CBN Governors like Joseph Oladele Sanusi and Sanusi Lamido Sanusi approached their jobs at the CBN depending on their previous experiences. Joseph Sanusi came within the CBN as a career officer who rose through the ranks. His administration witnessed more regulation of banks especially cracking down on foreign exchange Round Tripping. A case in point, was the FCMB case involving its chairman Otunba Subomi Balogun.
Lamido Sanusi, before joining the CBN, worked in the Inspection Department of First Bank Nigeria Ltd. From that vantage position, he knew how healthy the banking industry was. On assumption of office as CBN Governor, he did Stress Test of banks and discovered that most of them were unhealthy.
Some banks like Oceanic Bank, according to reports, had metastasized financial Cancer that was at a terminal stage due to poor corporate governance practice. Sanusi had no option than to take over the bank and sell it to Eco bank. The MD/CEO Mrs. Cecilia Ibru was removed and put on trial.
Fallacy of Igbo Ethnic Identity denial by Emefiele
Some people may start to wonder how Emefiele’s ethnicity is relevant to his job as a CBN Governor. The reason as I said above is that, there is a school of thought that believed that Emefiele is biased towards the South-East geopolitical zone in his allocation of credit to the various sectors/regions in the country or economy, because he does not identify himself as a person of Igbo extraction.
It may be true that South-East Geopolitical zone may have gotten a disproportionate smaller share of CBN credit, but the reason may not depend on Emefiele denying his Igbo ethnic identity.
However, that does not mean that a lot of young men of Igbo extraction from the West of the Niger or old Mid-Western Region of Nigeria do not express this view of not being Igbos.
The much I know is that Emefiele has not denied his Igbo origin, and any statement that alleges that is false. But if there are imbalances in the allocation of credit by the CBN, Emefiele should try to address them because the South-East has the highest marginal productivity of capital due to their entrepreneurial prowess which is endowed on them by God. Other regions have their own comparative advantages.
Summary
You may recall that at the beginning of this paper, I stated that the primary motive of writing this paper was to examine the statement made by President Buhari to the effect that Unorthodox Monetary Policy as pursued by the CBN Governor Godwin Emefiele has performed better in driving the economy than the Traditional or Orthodox prescriptions of the IMF/World Bank Group.
I looked at Emefiele’s monetary management strategies using two key financial variables namely Foreign Exchange and Money Supply/Credit.
In both cases, Emefiele deviated from the market approach to resource allocation rather, took a discretionary approach whereby, CBN acting as the Central Banker, determines which sector of the economy gets what quantity of financial resources. This is probably what Buhari meant by unorthodox approach. But whether Emefiele’s unorthodox approach is superior to the market-based approach which IMF/World Bank and Professor Soludo former Governor of CBN would recommend, is difficult to say.
However, I will attempt to do a comparative analysis of the two methods and probably see the likely outcome of each approach.
Orthodox School Argument
The Orthodox school to monetary policy/management will argue that market forces of demand and supply will better allocate financial resources in the economy than any other controlled method. They tried to buttress their argument by demonstrating how the market will allocate foreign exchange optimally and remove the distortions that could be associated with non-market approach. They advocated the use of a single Floating Exchange Rate Policy in the allocation of foreign exchange in Nigeria.
They believed that under a floating rate regime, that exchange rate will adjust to changes in demand and supply. That the exchange rate would likely go up in the short run because of excess demand resulting from short fall in supply. That this rate adjustment would continue until the marginal cost of acquiring one unit of foreign exchange is equal to the marginal efficiency of capital. In business parlance, it means that the cost of acquiring one unit of foreign exchange will adjust up to the point where the benefit/utility associated with one unit of foreign exchange is equal. This is similar to a break- even point where price per unit is equal to cost per unit.
At this point, they argued that market participants would have formed homogeneous expectations of what the rate would be and what they would be willing to pay for each unit of foreign exchange given the marginal price of their output if they are to remain profitable and as a going concern. That the volume of foreign exchange demanded and supplied at that rate would be the best allocation of foreign exchange in the economy as resources would go to firms that would have the best use of them. That in the short run, that it could result in a substantial depreciation of the Naira due to the rising exchange rate, that in the long run, there will be full adjustment in the rate. The outcome would be to remove waste and corruption that would be associated with unorthodox approach.
The Orthodox School believes that similar analysis would be made in the allocation of credit. That interest rate should not be regulated with different rates applicable to different sectors of the economy. They argued that the type of foreign exchange arbitrage that obtained in the foreign exchange market would occur also in the financial market due to credit/lending arbitrage. That borrowers would obtain loans at a very lower rate say at the agricultural segment of the loan market and sell at a higher rate at say the commercial loans, import segments. The unorthodox approach as practiced by Emefiele therefore would lead to market distortions and corruption in the allocation of credit.
For example, changes in MPR are not very responsive to changes in demand for loanable funds. MPR as presently constituted, tends to be sticky downwards. This is due to the asymmetric bands of MPR as set by the Monetary Policy committee (MPC). The MPC determines the upper and lower limits of (MPR). The MPR is subsequently, adjusted by the asymmetric error rates to arrive at the band limits which tend to be skewed towards a positive direction due to the higher positive value of one of the asymmetric error rates. However, because availability of credit is more important in the credit market than MPR, interest elasticity of demand for money or loanable funds tends to be inelastic with little effect on money supply and the economy the orthodox school concluded.
Unorthodox School Argument
The Unorthodox School would argue that the introduction of a single floating rate will not serve the interest of a developing economy such as Nigeria because the markets are not well developed and there are many structural imperfections in the system such as poor infrastructure like power, communications especially in the financial markets. That single floating rate would result in a significant depreciation in the value of the Naira which will have serious political consequences. That the Central Bank Governor should pursue a policy of financial inclusion as the single floating rate will most likely disenfranchise or crowd out a lot of small users of foreign exchange who may not afford to pay for the high price. That under the single floating rate regime that it would likely result in concentration of financial resources in the hands of few. That the aim of the CBN should be to encourage greater participation of households and firms in the economic system thereby growing the private sector that would sustain the long-term growth and subsequently reduce the level of poverty in the country.
They further argued that given the current stage of development of Nigeria and the huge appetitive for foreign exchange, that the best method of making foreign exchange available to users is to directly allocate it to the various sectors of the economy. Hence, the CBN has to segment the various users and apply differential rates for each segment of the foreign exchange market and the resultant multiple foreign exchange rates. To the unorthodox school, the argument continued, that CBN will be able to supply foreign exchange to the critical production, or manufacturing sectors and equally make foreign exchange available to every user who may need it.
The unorthodox school agreed that the multiple exchange rates regime may result in corruption and distortion in the market, but they believed that it is the lesser of the evils in the system as the problem with the exchange rate is a supply problem which the CBN does not have absolute control. They went further to say that CBN acts as custodian to the Federal Government in warehousing the foreign exchange generated mainly from the sale of crude oil. That the CBN is trying to make the best out of “worst situation by using the multiple exchange rates to ensure that foreign exchange goes round. That until crude oil sales are fully accounted for and channeled into the public treasury the unorthodox method may remain the only viable alternative. That the current massive decline in the value of the Naira should not be blamed on the CBN Governor Emefiele rather those engaged in crude oil theft and diversion of proceeds of sale of crude oil theft should be blamed. They went further to say that it is ridiculous to hear people talk about oil theft when Nigeria can boast of having the biggest and best equipped Military in West Africa. The Nigerian Navy they argued, is capable of manning all the water ways through which the stolen oil is taken out. They said that oil theft is not carried out by common people or petty rogues, rather it is an organized syndicate of elites probably comprising those in government, private sector and security.
With respect to unorthodox approach to money supply or credit management, the unorthodox school, argued that Nigeria is not ripe for the use of only traditional instruments of monetary policy in channeling financial resources into the economy. That there are a lot of impediments in the system that will prevent the market from efficiently allocating resources to the deserving economic units. These include weak institutions like the judiciary. Laws are made and carried in the books but sparingly executed or enforced. That a large number of the population are not well educated and skilled, thus cannot contribute meaningfully to productivity. That class of individuals tend to have low income and relatively low assets to meet the requirement of lenders. Hence, a large segment of the population would be disenfranchised from the credit market. That CBN should pursue policy of financial inclusion by devising means of reaching the under banked sections of the country. The unorthodox school went further to say that Nigerian banks are highly risks averse and do not have a lot of products in their credit mix such that consumers are limited as to how much credit they can obtain even when they are willing to borrow. Banks because of the short-term nature of their deposits may not want to lend long eg. mortgage loans, agricultural and manufacturing loans. They would rather like to remain in the short-end of the market by investing in Treasury instruments or in foreign exchange. The unorthodox school believed that the CBN has the responsibility to provide credit to those sectors/sections of the economy that the orthodox approach cannot effectively accommodate their credit needs by using all the financial institutions – DMBs, Development Banks, Micro-Finance Banks, Loan Associations to provide direct credit through on-lending arrangements. The unorthodox school argued that due to the poor infrastructure like poor power supply, bad roads, poor communication system, low banking density that the lag in the transmission of monetary policy will be too long such that it would take some months or even years for a given effect of monetary policy to reach those places without banking presence. That the result is that the society will continue to have a large population of rural poor dwellers. With the above reasons, the Unorthodox school believes that direct intervention by the CBN by providing credits to the various sectors is what is optimal for the Nigerian economy as the orthodox approach will crowd a lot of people out and result in an unbalanced growth.
Conclusion
I will conclude this paper by reviewing the extent to which the objectives stated at the beginning have been achieved.
I came to the conclusion that the foundation of Governor Emefiele’s unorthodox monetary policy approach came from his academic and professional experience and training he got as a banker. That Emefiele must have arrived at the CBN equipped to handle the assignment even though he did not study Monetary Economics, but he understood the relationship between money and economic activities and growth.
I believe that Emefiele did not deny his identity as person of Igbo extraction. Hence, any speculation in that regards is a fallacy. However, that does not mean that some young men west of the Niger River, are not doing so.
I further believe that Emefiele’s Igbo identity did not determine or influence his allocation of financial resources to the various sectors of the society. But, the disproportionate share of the South East Region in the distribution of credit should be rectified. Emefiele should therefore, provide more financial resources to regions with the highest efficiency of capital coupled with entrepreneurial abilities that have been demonstrated by their resourcefulness, productivity and innovation.
Whether President Buhari’s assertion that Governor Emefiele’s unorthodox monetary policy approach has achieved a better result in driving the economy than the orthodox approach is correct, has to be empirically established. Furthermore, one would like to know exactly what Buhari meant by unorthodox.
In the light of the current unofficial rate of the Naira via-a-vis the Dollar hovering around N730/$1, it would be difficult to know or say that the multiple exchange rates regime is superior to the single floating rate.
Moreso, when the floating rate has not been subjected to rigorous testing in the market place. I remembered at the beginning of Emefiele’s tenure, exchange rate was initially allowed to float but subsequently stopped.
Finally, I welcome comments on the issues discussed in this paper, I also take full responsibility of the views expressed in this paper.
Dr. Jona N. Ezikpe, former MD/CEO Manny Bank Plc
