When Bola Tinubu was sworn in as Nigeria’s president on May 29, he said that the country’s monetary policy needed a “thorough housecleaning.” He also told the Central Bank of Nigeria (CBN) to work on making the country’s multiple exchange rate system more rational.
A few days later, Tinubu asked the CBN Governor Godwin Emefiele to hand over the reins to a deputy governor and issued an order to remove him from office.
The government said after the suspension that it was the first step in a plan to reform the financial sector and the latest step in an ongoing investigation of Emefiele’s office.
The former governor was taken into custody by the Department of State Security two 48 hours later, and a list of allegations had been filed against him.
According to economist Muda Yusuf, who heads a think tank in Lagos, “the removal of Emfiele, who had served nine years as governor, is unlikely to cause any destabilization in the state’s economic or financial policy.”
He continued, ” Instead, “there is a need for policy reform in our financial sector,” and Emefiele’s removal will pave the way for improvements, he argues, “it is positive.”
However, the more significant aspect of the move was its function as a prelude to the necessary monetary reform for the financial sector, businesses that conduct trade with Nigeria, and critics of development policy in one of the world’s most important oil exporters.
The Central Bank of Nigeria (CBN) requested banks to sell dollars to their customers at market-determined rates and announced that it was floating the naira exchange rate within days.
Two bankers, at least, confirmed the development but declined to be quoted. The news caused a 40% decline in the exchange rate.
“If anything, the president is likely to liberalize the exchange rate system as he is doing with fuel,” says Sebastian Spio-Garbrah, chief frontier markets analyst at Damina Advisors, an independent frontier markets research and consulting firm with offices in the UK, Canada, Switzerland, and Ghana as well as Nigeria.
“The parallel market rates gets business complicated, so Tinubu is going to push for a full liberalization.” Days earlier, Tinubu announced cuts in fuel subsidies in a bid to control spending.
For years, Nigeria has had an assortment of exchange rates, including the Investors and Exporters rate, today 463.8 to the dollar, and a parallel or black-market rate, most recently 755 to the dollar, which many regarded as the most relevant for investment decisions.
At his inauguration, Tinubu stated that unified rates would steer funds away from arbitrage and toward meaningful investments in industrial expansion-related plant and equipment.
The various rate system was seen by numerous examiners a weak of Emefiele’s initiative. The central bank argued that this did not amount to “multiple” rates but rather multiple access points to foreign exchange.
Additionally, other close observers warn that the transition to an unmanaged system will not be easy for Nigeria.
According to Spio-Garbrah,
“The problem with full liberalization is that when you look at history, countries that are oil exporters never had floating exchange rates, but managed exchange rates because oil is a more volatile commodity. So commodity exporters generally have more managed currencies. When you liberalize the currency market, the local currency always becomes weaker for a country that imports a lot.”
He warns that this could harm protected industries, but “not the financial market.”
However, Emefiele’s departure was inevitable given the government of Tinubu’s alternative strategy. Separately, the CBN’s controversial naira redesign at the end of last year caused him to garner the ire of Nigerians.
Millions of Nigerians were unable to access their bank accounts for days or weeks as a result of the exchange program’s severe distortion of economic activity.
“Emefiele’s position on foreign exchange and naira redesign is not the same with the new president, which means they are not on the same page,” says Yusuf. “You cannot reform a place without making changes. If the person who should drive the reform is not in support how do you drive it?”
Credit: Global Finance Magazine