Every public office comes with a high degree of responsibility. Not only do you decide the fate of the lives of residents in your country, but in some cases, you can also affect the lives of neighbouring countries and the global economy.
For example, Vladimir Putin’s obsession with the takeover of Ukraine has seen millions of people worldwide suffer from high energy and food prices, thus living poorer and less productive lives. But Putin is not the focus of today’s article.
The Kwarteng scenario
Today, we are focusing on some other public servants who ought to care about the negative consequences of their monetary policies but still go ahead with their implementation. A few months ago in the United Kingdom, the now-former Chancellor of the Exchequer, Kwasi Kwarteng, delivered a Ministerial Statement titled ‘The Growth Plan’. Widely referred to in the media as the mini-budget, the statement outlined a set of economic policies and tax cuts, including the following:
- Bringing forward the planned cut in the basic rate of income tax from 20% to 19%.
- The abolition of the 45% higher rate of income tax in England, Wales and Northern Ireland.
- Reversing a plan to increase corporation tax from 19% to 25%.
- Reversing the increase in National Insurance.
- The abolition of the proposed Health and Social Care Levy.
A few days after Kwarteng’s statement, the pound tanked, falling lower than the US dollar for the first time since 1985. The UK stock and bond markets lost about $500 billion in value and pensions almost got liquidated, except for the timely intervention of the Bank of England’s quantitative easing.
As part of the negative response that ensued, Kwasi Kwarteng was heavily criticised, with some pointing out that his policy favoured only the rich and made lives considerably difficult for the middle class and the poor. But he defended his decision, arguing that he was only interested in the medium and long-term goals of his ‘Growth Plan’ and not the reaction of the markets.
Unfortunately for him, this policy and his insistence on seeing it through ultimately contributed to his sacking and the untimely ‘demise’ of the administration he served under.
Let’s talk Emefiele’s naira redesign
Another man who does not care about the reaction of the markets is the Nigerian Central Bank Governor Godwin Emefiele. Last month, he announced an important policy to redesign, produce, release and circulate new N200, N500, and N1,000 banknotes.
To justify this decision, he alluded to statistics showing that over 85% of currency in circulation rests outside the vaults of commercial banks. This represents N2.73 trillion out of the N3.23 trillion currency in circulation across the country. Therefore, Emefiele’s objective is to reduce inflation by mopping up this excess cash in circulation.
The black market, where many Nigerians get foreign exchange, has reacted negatively to this policy as the naira has fallen to its lowest level yet. The currency is now unofficially the worst-performing currency in the world after Ghana’s cedi. We use the word ‘unofficially’ because the black market does not exist in the eyes of the CBN. Godwin Emefiele has said over time that anyone who needs foreign currency for legitimate reasons should access it from the banks and not patronise the black market.
Meanwhile, most banks have continued to decry the non-availability of forex. Even Godwin Emefiele himself has said the apex bank cannot solely manage the naira with its monetary policies as it does not print foreign currencies. He blamed the non-remittance by the NNPC and its subsidiaries for significantly limiting the availability of forex in foreign reserves.
This begs the question – if Emefiele knows that banks cannot supply forex to meet the needs of Nigerians, why does he carry on with a policy that would see the naira self-destruct in a way that mimics the famous LUNA cryptocurrency crash in May 2022? Has he examined the counterproductivity of this policy? The very inflation he is trying to reign in could get worse if the naira keeps losing value to the dollar because the economy is import-dependent.
The Kwasi-Kwarteng/Godwin Emefiele case study
Just like Kwasi Kwarteng, who had the approval of his principal, Liz Truss, Emefiele has the support of President Buhari, who has never openly disagreed with him. But from the looks of things, it appears not everyone in the presidency agreed with Emefiele’s recent move.
Globally, we often see Central Bankers and Presidents having differing opinions. And while the Central Banks have the prerogative to influence monetary policy, the government dictates fiscal policy. Therefore, both parties work together to achieve the country’s macroeconomic objectives.
Although the independence of the CBN is sacrosanct, it would have been more congruous if the Ministry of Finance did not find out about this new decree like every regular citizen. The Ministry of Finance might have had better ideas that could help to actualise the CBN’s objective without the negative impacts.
In the United Kingdom, Kwasi Kwarteng was also guilty of playing Lone Ranger as he revealed the mini-budget without economic forecasts from the Office of Budget Responsibility. The Office of Budget Responsibility’s committee had previously stated that any significant changes to taxation must be announced in a fiscal event alongside an OBR forecast. The forecasts are a vital indicator of the health of the nation’s finances and provide reassurance and confidence to international markets and investors.
The market’s negative outlook on Kwarteng’s Mini Budget cost him his job. Jeremy Hunt who replaced him reversed the majority of his policies.
In Nigeria, stakeholders are wondering if and when Godwin Emefiele would reverse this policy, as matters are exacerbating for Nigerians.
Additionally, banks would wonder how they would cope with the logistical nightmare of taking in over N2 trillion in 6 weeks.
The IMF has also expressed concerns as 45% of Nigerians do not have a bank account. So, we are looking at opening new accounts and taking in more deposits in a short amount of time. Financial inclusion might be the dividend but at what cost? This decree presents a possible operational nightmare and makes it the worst time to work in a bank. The global average of banks per person is 10 bank branches to 100,000 people. In Nigeria, there are 4.5 banks for 100,000 people.
Godwin Emefiele, who once flirted with the prospect of being the country’s President, might have his many traducers but he has had possibly the toughest and most arduous job in the world as he has been overwhelmed with 2 economic recessions, a once-in-a-lifetime pandemic, and a dip in foreign exchange earnings recently. But given the dire ripple effect from his new decree, questions are pointing to the principle of checks and balances as no one man should have all that power to inflict hardship on citizens and businesses.
Editing by Emmanuel Abara Benson