Dr Sarah Alade, until recently Deputy Governor (Economic Policy) of the Central Bank of Nigeria (CBN) speaks to TheEconomy exclusive on her 23 and half years of service in the apex bank, the challenges of managing Nigeria’s monetary policy and the recent positive trend in the foreign exchange market where the naira has appreciated against major currencies. Importantly, the former Acting Governor of the CBN pushes that  the independence of the Central Bank should always be respected. Excerpts:

Dr Sarah Alade
Dr Sarah Alade

The world over, politics is interfering with the independence of central banking. How can central bankers navigate the murky waters of politics while still maintaining their independence?

The independence of the Central Bank is necessary. The Bank needs the freedom and space to take a long view of what is best for the economy and take decisions accordingly. Central Banks have consistently moved towards policy independence to pursue policies free from political interference. Although no central bank can be entirely independent of government’s influence, it must be free to choose the instruments it needs to achieve its mandate. The Bank must also be free from fiscal dominance; that is a situation where fiscal considerations unduly dictate monetary policy.

In recent years, academics and policymakers have shown increasing interest in the independence of central banks with respect to the formulation of monetary policy. In the European Union, this interest was realized in the Maastricht Treaty, which gave the European Central Bank complete autonomy in conducting the monetary policy without political intrusion. Most empirical studies support central banks’ autonomy in the conduct of day-to-day monetary policy operations devoid of political pressure. This enables them to deliver better inflation outcomes, without compromising economic growth. The CBN Act of 2007 bestows independency on the Bank.

What advice do you have on the challenges of managing Nigeria’s monetary policy?

The monetary policy of the Central Bank of Nigeria in recent times has continued to focus on achieving price and financial stability for economic growth and development. The persistent inflation in the last one year is an issue of concern.  The inflationary pressure could be traced largely to structural factors, which included poor electricity supply, high cost of energy arising from scarcity of petroleum products, increase in the prices of imported food, raw materials and finished goods, seasonal factors, increase in electricity tariff,  insurgency and insecurity in the North East, as well as pipeline vandalism by the Niger Delta militants. However, some monetary factors included exchange rate depreciation, and budget deficits in the face of dwindling oil revenues.

Monetary policy management has been made difficult by the uncertain global environment, arising from political and economic developments around the world. There has been an intense attack on free trade, multilateralism and globalization and the situation has not been helped by a growing preference for nationalist interest. Key global trends such as Brexit, the rising wave of populist and anti-globalization sentiments anchored by emerging bilateralism, divergent monetary policy stance of the advanced central banks and disorderly commodity price movements will also affect monetary policy at home. These global developments coupled with domestic factors will make monetary policy management very difficult this year. Based on these, monetary policy management in Nigeria must be diligent and collaborative to achieve its objectives of price stability in the home front.

What has been responsible for the huge fall in the value of the naira in the parallel market since 2015?

The devaluation of the naira was as a result of the drop in the price of oil, Nigeria’s main foreign exchange earner. The collapse in global prices of oil, the product from which Nigeria derives the bulk of its revenue, has led to  reduction in external reserves and constrained the ability of the CBN to continually defend the Naira.  The ability of the Central Bank to sustain the exchange rate, and supply dollar to the market is anchored on the supply of dollar to the country. With reduced earnings and scarce foreign exchange, the naira has to be devalued.

How sustainable is the recent positive trend in the foreign exchange market where the naira has appreciated against major currencies?

The current reform that the Central Bank is undertaking to allow for transparency and price discovery will increase liquidity in the interbank market which will make the recent condition sustainable.

How can the naira exchange rate be better managed?

The objectives of exchange rate management in Nigeria are to ensure price stability; preserve the external reserves to defend the value of the Naira; diversify the economy through encouragement of non-oil exports; and narrow the premium between the official and parallel/BDC rates.

Following the deregulation of the foreign exchange market in 2016, the CBN released revised guidelines for the operation of the new interbank foreign exchange market. The FX Market would operate as a single market through the interbank while the forex (FX) rate would be determined by the forces of demand and supply.

It will bring about confidence in the FX market and encourage foreign direct investment; improve transparency in the market by removing allocation/utilization rules imposed on commercial banks. The best way to manage the exchange rate is to move towards a more market-determined interest rate, where price discovery, transparency and credibility are restored in the market. Price adjustment is important and so is the diversification of Nigeria’s revenue stream.

What in your opinion are the policy middle grounds needed to achieve the objective of lower inflation and economic growth?

For Nigeria, like most developing countries, policy has often times focused on the flexible exchange rate regime and financial integration, emphasizing monetary policy independence. However, as globalization, capital flows constraints and other adverse phenomena set in, it has become imperative to seek a convergence. The Organization for Economic Cooperation and Development (OECD) countries in 2008 recommended the imposition of some form of capital controls that at least restrain inflows of short-term funds, which the CBN has done. The CBN will also do well to stick to its statutory mandate of maintaining price stability for growth. This will go a long way in moderating inflation and stimulating growth in the long run.

The best way to ensure the desired economic growth and low inflation is economic diversification with a broadening of the revenue base. Reducing the import dependency will also help to curb the demand for dollar; thereby reducing general inflationary pressure.

What tools are being deployed by Nigeria’s economic managers to pull the country out of recession?

In 2016, the Nigerian economy officially entered into recession, recording two consecutive quarters of negative GDP growth rates of 0.36 per cent and 2.06 per cent in the first and second quarters, respectively.  For the full year of 2016, the real GDP contracted by 1.51 per cent. Achieving price stability has remained the priority objective of most central banks. However, given the high level of poverty and unemployment in most developing countries, it has become imperative for central banks to work hard at achieving price stability with growth.

A number of fiscal and monetary policy options have been deployed to end the recession and the efforts are yielding fruits as the recently released inflation figure shows that inflation is trending down after 15 months stretch of rising price level. The CBN is also working to increase supply of foreign exchange and boost liquidity in the interbank market to ease the scarcity of foreign exchange for the manufacture of goods and increase the level of production. On the part of the fiscal authority, efforts at broadening the revenue base and increasing the collection of taxes have been intensified and are yielding fruits.

To what extent can monetary policy help the country to exit recession?

Nigeria’s economic recession can be traced to a number of global and domestic factors. They include slump in commodity prices, general slowdown in economic activity in developing countries, over dependency on oil, lack of diversification of the revenue base, consumption-led growth, militancy in the Niger-Delta region, insurgency in the North East and unutilized excess liquidity in the banking system.

Taking these factors together, the effect on the Nigerian economy has been the significant decline in the country’s foreign reserves, depreciation of the Naira and substantial increase in consumer prices. To reverse the trend and put the economy back on a path to economic recovery, significant effort is needed on the part of the Federal Government, especially harmonization of its fiscal and monetary policies to boost aggregate demand and investor confidence. It is also expected that the fiscal authorities would provide direction and leadership while the monetary authorities would facilitate an enabling business environment conducive for growth. Nonetheless, the overriding mandate of the Bank continues to be price stability across the major price rates: inflation; loan interest; and foreign exchange. Stability in prices is essential for investment and consumption. Monetary policy can help through influencing short-term interest rate, but monetary policy alone is not enough to pull the country out of recession. Fiscal policy must come in and do its part to fully pull the economy out of  recession.

What are the challenges of Central Banking in Nigeria?

The challenges are many. Oil price volatility and the unstable global environment are major challenges for Central Banking in Nigeria as they are causing growth challenges and other spill-over effects for the local economy. Central Banking in Nigeria is faced with other enormous challenges such as the size of Nigeria’s informal sector. Globally, developing/emerging economies are characterized by a big informal sector which causes a lot of limitations to Monetary Policy implantation and coverage because a majority of the participants in the sector are not using formal financial services and so cannot be captured formally.

Poor financial literacy is another. It is only when the vast majority of the Nigerian population is financially literate that they can participate in the formal financial system; the reverse is the case.

Financial illiteracy results in poor financial inclusion. Non-financial inclusion becomes a threat to the survival of the Nigerian financial sector as most adults and young Nigerians are financially excluded from the formal financial sector. A high percentage of adult Nigerians don’t have bank accounts, and this in the long run becomes a big headache for central banking.

Nigeria needs to deepen its financial sector as a whole. Deepening the financial sector entails improving financial structures to ensure efficient delivery of financial services to the private sector.

Then, there is the issue of monetary and fiscal policy coordination. Non- harmonization of monetary and fiscal policies is an issue of serious concern in the country because they complement each other. Monetary policy has a limit and whenever it reaches that limit, the only way out is for the fiscal authorities to intervene in the economy. So, in the absence of such coordination/harmonization between the two, a serious economic problem may arise.

The threat to CBN autonomy is also disturbing. Global best practice prescribes central banks’ independence to enhance policy coherence and sturdiness born out of freedom of vision and implementation space.

You have worked in several committees and agencies on the Nigerian economy over the years. Looking at where Nigeria is today, what is your take on the outlook of Nigeria in the near future?

The future of the Nigerian economy is very bright. The Economic Growth and Recovery Plan (ERRP) by the Federal Government with other complementary policies are set to propel the Nigerian economy out of the recession and move the economy forward. The broad government strategy of infrastructure development, structural reforms and investment in social safety nets are policies that will position the economy to a more inclusive and diversified growth.

As the first woman in Nigeria to be Acting Governor of the apex bank, how would you describe the experience?

It is a privilege and I am grateful for the opportunity.

Do you have any regrets?

I feel proud and grateful to God for the opportunity to serve at the CBN. However, I have one regret and that was when I was acting governor. It was the time that the CBN was being investigated. It never happened before that the activity of the CBN as an institution would be subjected to such investigation. It was bad publicity for an institution as important as Central Bank.

Are you saying that the operations of the CBN should not be looked into?

No. However, there should be less drama with issues bordering on the CBN. Central Banking anywhere in the world is a sensitive activity. For example, during the IMF/World Bank meetings where we met some investors, they asked us: ‘What is happening? We understand that there was financial mismanagement in the CBN’. I kept explaining and assuring and re-assuring investors that all was well. It was humiliating for the Board, the management and staff of the Bank. I think for me, that was a low point. The credibility of the institution was eroded. Moreso, during that period, we lost reserves because there was massive capital outflow.

Subjecting an institution as important as the CBN to such negative spotlight does not augur well for the economy. At the end of the day, it was not only the CBN that suffered for it, but also the economy. So, I want to advise that whatever we need to do, let us do it right. We should not subject the Bank to such a negative treatment again. During that period, I was reminded every morning that we had four governors — the suspended governor, the governor-in-waiting, the acting governor and the investigating governor. The investigator told us that there would be no new initiative, no payments, nothing. The only thing we could do was to carry on minimal activities to maintain the Bank. The CBN was paralyzed. We could not do anything. For me, it was a humiliating experience, but we did the best we could.

What advice do you have for the Governor and the management?

My advice is that they should continue to uphold the integrity of the Central Bank of Nigeria.

In spite of the relative inroads a handful of women have made in central banking across the world, many still see it as a man’s turf.  What is your take on this?

I do not agree that Central Banking is a man’s turf. There are many central banks in advanced and emerging markets that are headed by women. The Federal Reserve Bank is headed by a woman and many on the African continent have either been headed by women or currently headed by a woman such as South African Reserve Bank, Central Bank of Lesotho and Bank of Botswana.

What is your advice to young women who wish to make it to the top?

Work hard. There is no substitute for hard work. They also need to believe in themselves and have passion for what they do. When you love what you do, you are bound to excel because you will then put in your best. I also believe that for women, it is important to have a work/home balance. They will succeed by so doing. And women also need support at work and in the family. If the home is settled, then you will be able to perform very well at work.

How would you describe the years you spent at the Central Bank of Nigeria?

My 23 and half years in the Bank have been very intellectually stimulating and rewarding as well. I enjoyed my work at the Bank because it is what I love to do. It is also what I studied. With a research background from the university, the work I did at the Central Bank just provided me the opportunity to contribute to policy-making. So, I have enjoyed every bit of it, and it is an opportunity and a privilege that I am grateful for.

What legacies are you leaving behind at the apex bank?

I hope I am leaving a legacy of hard work, dedication and professionalism.

You have amassed an incredible wealth of experience. From your sojourn in the academia to your state government, and the numerous committees you have served in at the highest level of policy-making.  All these make you a priceless asset to any society anywhere in the world.  Where is your next likely port of call?

I have quite a number of things I am thinking of, but I think the first thing is to go on holiday. Definitely, I will continue to contribute to the development of the country in one way or the other.

In what capacity should we be looking forward to your contribution?

I will tell you at the right time.

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