Financial markets and even citizens sit up and take notice when a central bank governor is challenged.
In Kenya the governor, Njuguna Ndung’u,returned to his office last week after securing a High Court ruling that he could not be arrested on corruption charges pending the hearing of his petition in mid-March. The charges centred on the award of a contract to provide security software to the central bank. Ndung’u is close to the end of his second term. There is no suggestion at this point that the Kenyan government seeks to suspend the governor although the director of public prosecutions has called for a case to be brought against him. We assume that it may think again once the petition has been heard.
The trigger for these opening remarks about the publicity which surrounds every central bank is, of course, the suspension of the CBN governor, Lamido Sanusi, on Thursday on the instructions of the president. Not being lawyers or lawmakers, we will not comment on the legality of the suspension. However, we have some views on a central bank’s independence, on its communications strategy and on any conclusions that can be drawn for frontier/ emerging markets.
Since Thursday we have seen several tributes to Nigeria’s independent and transparent monetary policy. We are happy to endorse them on the basis of the membership, openness and conduct of the monetary policy committee (MPC). We note the publication of members’ personal statements. The ECB and indeed most similar bodies do not share this information.
We also cite the use of the majority vote.Sanusi was the chair, and a highly persuasive one too, but the members formed their own opinions. In the meeting in January he was one of three who pushed for an increase in the cash reserve requirement for banks’ private-sector deposits from 12% to 15% but they lost the vote.
However, the independence of the MPC forms only part of the independence of the central bank. The definition of what is relevant to the bank’s core mandate (of achieving and maintaining price and exchange-rate stability) has to be the governor’s and the CBN’s to make. Otherwise markets take fright and voters ask questions.
At the start of his governorship Sanusi was operating in a near-vacuum. The president who appointed him was critically ill. Technocrats and reformers were thin on the ground. He led the formulation of policies to encourage bank lending and therefore growth, such as the CBN loan schemes for commercial agriculture and small-scale manufacturing.
Some might question the significance of these schemes in the context of the core mandate,narrowly defined, but they would not challenge their value.
Once AMCON was created and had carried out its initial remit, the CBN and MPC focus was shifted, almost exclusively, to the core mandate. If monetary policy and fiscal policy are not in harmony, then commentary from the party which is pulling its weight about the one which is not is warranted. It would be negligent not to take an interest in the supply and demand in the fx market.
If supply appears low or demand high, then the central bank should become involved.
A related topical question is whether the communication of monetary policy is more effective if it is delivered sotto voce or loudly, if not quite through a megaphone. Sanusi favoured the latter while most Nigerian policymakers advocate the former.
Clearly, if you deliver your message so loudly that you lose your position to influence policy, it is not effective. Equally, if you raise issues in a quiet voice behind closed doors, there is a risk that they will be ignored. The megaphone has its uses in different circumstances.
Minority shareholders in GSK Nigeria prevailed in their protests against a proposal by the parent company to increase its shareholding when the regulator intervened in July 2013 after articles appeared in the international financial media. We do not know if the Senate will ratify the president’s nomination for a new CBN governor but we are confident that the next incumbent will favour the sotto voce approach.
As for conclusions from Thursday’s developments for the frontier /emerging market universe, we repeat our opening remark that changes in senior positions at central banks make news. Markets tend to assume the worst, and have to be persuaded otherwise.
That monetary policy is in safe, independent hands is not enough. We see little value (other than the limited effort involved) in lumping together the suspension of Sanusi, the unrest in Ukraine and the devaluation of the tenge in Kazakhstan. They may all be frontier markets but the investor is able to distinguish between very different market and political dynamics. We are skeptical about the application of investor acronyms.
Yet, on the principle of if you can’t beat them then join them, we offer ANTs (Angola, Nigeria and Tunisia) for a grouping with strong external balance sheets and therefore greater resilience in the face of tapering than, say, Turkey,Brazil and South Africa.
GREGORY KRONSTEN
