Since the last global financial crisis, governments around the world have recognised the enormous power in the hands of those who make monetary policy. The fact that the economies of Canada and Israel were significantly shielded from the crisis and the US’ Ben Bernanke provided the lead for the world to deal with the financial turmoil have warranted a deeper consideration of who governs the central bank.
It is now clear that the performance of any economy depends largely on how the monetary policy power is exercised. Israel, for instance is reckoned to have installed the world’s smartest central banker. Stanley Fischer, a non-indigene governor of the Bank of Israel, was Zambian-born, U.S. educated, a former MIT professor, former chief economist at the World Bank, former deputy managing director at the International Monetary Fund and former vice chairman at Citigroup.
Fischer’s financial strategy is now a standing recommendation globally to the extent that even Washington has been asked to go to school in Tel Aviv in order to rev up its wavering economy. Canada’s central bank governor during the financial crisis has been called over to England to do for Europe what he has accomplished for the North American country. Even so our own Godwin Emefiele, who has been part of the building of Nigeria’s largest bank, takes over this week as Nigeria’s central banker.
The challenge facing the in-coming governor of the Central Bank is that policy actions and responses that effectively deal with economic difficulties of nations are no longer found in the rule book. Economies have become increasingly complex and effective monetary governance now lies in the realm of innovation.
A lot therefore depends on how central bankers are able to apply pragmatic approaches to dramatise the flow of money and credit through the virtually unlimited transmission mechanisms to attain desired monetary aggregates. This means that monetary policy has, out of necessity, become a tool for long-term economic management. The few countries that escaped the worst of the global financial crisis and its devastating aftermath implemented something close to a classic Keynesian spending policy, cutting spending before the meltdown, then easing monetary flow through the economy during the decline.
The new CBN goernor therefore needs to stretch out the monetary policy horizon to break free from the apparent short-term monetary policy confinement and give the economy a long-term productive breath. We need to engage monetary policy not just to curb excess liquidity but to direct the productive function, defend and grow jobs and adequately empower consumer markets. In this way, the bank could succeed in redirecting the flow of money from excessive consumption into production, which will present a fundamental appraoch to fighting inflation.
Monetary policy strain has been employed to address short-term imbalances in the financial markets while considerable monetary policy stimulus is needed to build productive capacity in the long-term. How to achieve a balance between these conflicting objectives will be a major task ahead of the new CBN governor.
Building long-term productive capacity will require that monetary policy wears a longer-term orientation. Monetary policy seeks to provide solutions to today’s financial markets difficulties but is lacking in the essential features required to build strength for future economic stability.
A change of focus is necessary to encourage domestic production and stem the drift from hardcore productive activity to quick turnaround businesses that minimise the use and cost of credit in a high interest rate and low credit delivery environment. People and businesses must be empowered to begin to act again at all levels of the economic frontline, which many years of monetary policy stringency have restricted considerably.
Another major challenge facing the CBN governor is the loose fiscal behaviour of the government. Fiscal policy and actions define the environment in which monetary policy is applied and therefore its effectiveness. All that the CBN has been doing so far is to use monetary policy alone to do the work that both fiscal and monetary tightening should have been doing together. This has been done with serious implications for domestic economic activity.
There is an urgent need for a departure from merely using monetary policy as a tool to soak off excess liquidity to a situation of actively engaging monetary policy as a productive stimulant in the economy. For the new CBN governor to make a difference in this direction, he needs to get the commitment of government to reduce excessive spending. Otherwise, the bank will remain the errand boy used to clean up the mess when the spending party is over.
Monetary policy has been rediscovered as an economic recovery stimulant since the last financial crisis. It isn’t however going to work in the environment of fiscal excesses. We seem to have approached the limits of the possibilities of using monetary policy alone to try to achieve a stable exchange rate. The CBN needs to explore possible ways of securing fiscal policy support in order to enhance the effectiveness of monetary policy in achieving exchange rate stability.
In recent times, further drawback has come from the depletion of fiscal buffers, which has made the job of the CBN even more difficult. The drop in the level of reserves has made the economy susceptible to oil price volatility. This means that in the event of revenue shocks coming from either crude oil output or price, CBN will be unable to defend the value of the local currency no matter the extent it decides to sterilise liquidity.
There is need to give greater attention to the internal economic risk we are facing than the fears of external shocks that appear to bear greater weight in monetary policy making. The main economic risks we face are economic recession, unemployment, business closures, declining output, falling aggregate consumption and so on. We need to achieve internal security at home to be able to address the external challenges.
Attaining medium- to long-term economic stability depends on how monetary policy is applied to create an environment that favours both local and foreign direct investments. These are the preferred type of investments, which have the capacity to increase the level of domestic output and employment.
For the new CBN governor to cause positive changes in the functioning of the economy, he needs to change the use of monetary policy in three ways. The first is to bring to an end the use of monetary policy to hinder domestic production and consumption along with the jobs they create for the purpose of stimulating non-job creating portfolio investments.
Secondly, it needs to free monetary policy from its present confinement as a passive tool for addressing fiscal excesses and reset it as an active instrument for stimulating domestic economic activity. Thirdly, it needs to end the restriction of monetary policy as a defensive tool against external developments and activate it as an instrument of changing the very external dependence to which it is merely reacting.
It is critically important as well that the governor of the central bank speaks confidence into the system in his public statements. Regulatory assurances, spoken or implied do work in calming financial markets and represent a major instrument of managing financial crisis the world over. Regulators usually instill confidence in the system by working on the market’s psychology – to make people feel that all is well even though there may issues to deal with.
