The head of Nigeria’s highest monetary authority is fast becoming the country’s most powerful man. If only his policies were more serious
At a time when free markets are supposed to be the global economy’s dominant ideology, it’s ironic to see one single institution wield so much power over its fate. Any whisper by Fed chief Janet Yellen suggesting that the US may soon raise interest rates causes tantrums on world stock exchanges, capital flights in emerging markets and forecasts to be revised everywhere. Central bankers across other Western economies are second in command: the ECB’s Mario Draghi is the EU’s chief economic firefighter while Masaaki Shirakawa is spearheading efforts to pull Japan out of its deflation hole.
Their counterparts in emerging markets, often seen as beholden to their governments or broader market forces, rarely enjoy the same powers. But there are exceptions: witness the recent rise of Godwin Emefiele, the governor of Nigeria’s central bank.
Granted, the man does not have the same ambit as its Westerns peers. But as far as his country’s economic policy is concerned, his influence currently reigns supreme. Mainly this is because it goes largely unchallenged: Muhammudu Buhari, who raised much hope when he became Nigeria’s first opposition candidate to win the presidency last May, has since failed to articulate any form of economic vision. Four month after gaining power, he still hasn’t appointed an economy minister (or any member of the cabinet, for that matter).
Yet someone needs to be in charge. Nigeria’s economy, overly reliant on oil, has been sagging since prices of the black stuff collapsed. It has also suffered from the recent bout of risk aversion towards emerging markets triggered by the threat of a US rate rise and the Chinese slowdown. Its currency has taken a pounding: the naira has weakened a fifth against the dollar since July. Economists reckon it is still 10 to 20 percent overvalued, as demonstrated by the interbank lending rate and the dollar’s price on the black market.
Filling a void, Mr Emefiele is trying to take the country out of the quagmire. Or is he? Instead of letting the naira find its new equilibrium, as a number of other African economies have done, the governor has imposed capital controls. Many think his fight to support the currency is doomed – and more importantly, that it could have serious consequences for the broader economy.
First because Nigerian foreign reserves could soon drop below $30 billion, the critical level needed to cover four months of import. Second because controls are coercing demand to adjust to available foreign exchange supply, forcing the economy to contract. In that respect the plan may be working: Nigeria’s annualised second-quarter GDP growth slowed to 2.35 percent compared with 6.54 percent a year ago.
That has not been lost to market observers. From the end of this month, JP Morgan will be phasing Nigeria out of its emerging market government bond index, which is likely to cause significant capital outflows and tarnish the government’s economic credibility. The bank cited a lack of liquidity in the foreign exchange market as the chief reason behind the move. It also questioned the central bank’s independence.
Mr Buhari must now take back the reins. There’s much he could do to help the country diversify, starting with putting money – and catalysing investments – towards relieving infrastructure bottlenecks. Nigeria generates only one-tenth the amount of power produced in South Africa, a country three times less populous (and incidentally, also crippled by electricity blackouts). Most importantly, Mr Buhari must replace the divide-the-spoils culture that permeates Nigeria’s political system by making decision-makers accountable for their deeds. Devolving more power to the constituent parts of its federation would be one step in the right direction: it would create better incentives for economic activity, while bringing officials closer to the people they’re supposed to serve.
Mr Buhari shouldn’t expect much help from Mr Emefiele. Upon announcing modest measures to improve liquidity and growth, and despite widespread scepticism, the governor today said he would keep capital controls in place. It is becoming urgent for the president to speak out – and show that his attempts at reforming Nigeria’s creaking economy are no laughing matter.