Cardoso gets to grips with the Nigerian economy

On 15 September, with Nigeria still rocking from the news that the once seemingly omnipotent central bank governor, Godwin Emefiele had been sacked, President Tinubu named Olayemi Cardoso, a long-time friend, as his nominee to take the helm at the central bank.

Emefiele, whose reign of nine years at the head of the central bank was the second-longest after Alhaji Abdulkadir Ahmed’s tenure of 11 years (1982-93), was perhaps the most powerful figure overseeing Nigeria’s economy, as well as sometimes an influence on its political direction.

He was first appointed in 2014 during the Presidency of Goodluck Jonathan and continued in office under the leadership of Muhammadu Buhari (2015-23).

Despite his outsize personality, he is most likely to be remembered for leading Nigeria into two recessions and record inflation and national debt of over $150bn.

An ill-judged attempt to contest for the Presidency during the last election, as well as the mounting economic crisis facing the country, seems to have earned him a place in Tinubu’s bad books. He cut a forlorn figure after the swearing-in and was suspended in June. Folashodun Shonubi, deputy under Emefiele, became acting governor, immediately lifting the highly unpopular ban on foreign exchange trading, which caused the naira to fall by 40% against the dollar, before giving way to Olayemi Cardoso.

Cardoso, the 66-year-old banker and former chairman of CitiBank Nigeria, was the commissioner in charge of Budget and Planning when Tinubu was the governor of Lagos between 1999 and 2007.

Tinubu also fired all of Emefiele’s deputies and gave Cardoso a clean slate to “implement critical reforms at the central bank of Nigeria, which will enhance the confidence of Nigerians and international partners in the restructuring of the Nigerian economy toward sustainable growth.”

This was, at least, a sign that reforms long demanded by the World Bank and the International Monetary Fund, over which the Buhari government had repeatedly stalled, will now be put in place.

With Finance Minister Wale Edun –who was also in charge of finance during Tinubu’s time as Lagos governor – the President effectively has the two people in charge of fiscal and monetary policy within his kitchen cabinet. This will not only give him tighter control over the economy but will also ensure better policy cohesion than under Buhari, when the two positions represented rival power centres.

By carrying the can for the massive loss of value by the national currency, Shonubi has cleared the way for Cardoso to proceed in a less encumbered way. This will enable the new central bank governor to focus immediately on price moderation, exchange-rate management and emerging threats to the financial system.

The inflation rate was at 25.8% in August, the highest in two decades, while the naira continues to lose ground against major currencies, with a 20% arbitrage opening up between the official and parallel markets, indicating the scope of problems faced by the monetary authorities.

Bank capital adequacy concerns

It will be a major challenge for Cardoso to bring the inflation rate anywhere close to the central bank’s target range of 6-9% from the high of 25.8%. With the country’s foreign reserves severely depleted under Buhari and oil exports still well below official OPEC levels, Nigeria lacks the foreign-currency backing to sustain any push for a stronger naira.

Inevitably, Cardoso will have to confront the dangers to the financial system posed by the combined effect of devaluation and inflation on asset quality in the banking system.

There are expectations by some analysts that the regulator may have to increase the minimum capital requirement for banks in the country. The current minimum of N25bn was set some eighteen years ago.

Fitch, the rating agency, raised concerns in June about the likely erosion of the capital of banks due to the impact of devaluation and inflation.

It went on to affirm the top lenders as having a stable outlook on account of their strength. These included Zenith Bank, Access Bank, United Bank for Africa, Guaranty Trust Bank, First Bank and Stanbic IBTC.

First City Monument Bank, Coronation Merchant Bank and Ecobank were placed on ‘rate watch negative’ by Fitch on the basis of their higher risk of falling short of stipulated capital adequacy requirements.

Smaller regional and second-tier banks appear more at risk even though overall health would depend on the quality of each bank’s portfolio.

For banks that have long-term dollar investments, the devaluation would translate into gains initially but could become a burden if they become non-performing loans later, according to Bismarck Rewane, economist and CEO of Financial Derivatives Company, a Lagos business advisory.

Banks should avoid the temptation of booking initial translation gains as profit and going ahead to pay them out as dividends, bearing in mind the losses that are bound to come, the central bank advised banks in a recent circular.

Most of the top banks have so far restricted themselves by paying only 20-25% of their profits as dividends to conserve capital.

In the first half of the year, First Bank wrote off N98bn in foreign exchange losses due to devaluation but still posted strong results that saw a fivefold increase in earnings per share.

Most of the big banks are expected to absorb such losses as well as First Bank did – though they’re likely to see a general shrinking of capital reserves for the second half of the year.

Others have started preemptive moves to raise more capital. Among them are Fidelity Bank, First Bank and Wema Bank, either through a rights offer or in combination with a public offer.

As the banks respond to the unfolding dynamics, some analysts see the industry shaping up for another round of consolidation in which the bigger, stronger banks may take over the smaller, weaker ones.

Part of the challenge for Cardoso’s team will be to look at the process of creating new capital benchmarks to ensure that the banks remain healthy.

“We expect that the field will narrow after a possible increase in minimum capital requirements,” says Rewane.

With the clearing out of the central bank stables, there is a sense that the economy is slowly but surely coming under control and that policies are likely to be much more medium-term, at least, instead of the constant fire-fighting that characterised the last administration.