Cardoso: Ulysses and the Sirens policy distractions

In life, they say those who feed and finance you can take the privilege of dictating what you should do. It is even more so for sovereign loans because the lenders expect good behaviour from those holding their money.

So, it is not surprising to hear the World Bank Country Director, Nigeria’s biggest external financier, raising concerns about the country’s policies and reforms. The World Bank Director cried out to the government to control inflation and stabilise its foreign exchange market in order to boost growth in the country. Of course, they did not complete the statement without acknowledging ineffective policies of currency reforms and the removal of a petrol subsidy. For clarity, this message is directed towards their domestic counterpart, the CBN Governor. And in all seriousness, they are right about it.

For reminder, the key objectives of the CBN are price stability, foreign exchange management, pursuing economic growth and employment, and issuing currency.

On the contrary, since Cardoso took over, the CBN has only been involved in sweet talk and political drama instead of pursuing objective policies. These include media reports that CBN staff are to declare their relationship with politically exposed persons and the transfer of senior officials to irrelevant offices that create more inefficiencies in the institution. These issues are nothing but a distraction, and the biggest lender has picked it up.

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These actions taken by the CBN under Governor Cardoso’s leadership can be likened to the tale of Ulysses and the Sirens in “The Odyssey.” The Sirens’ delightful but dangerous song is leading him to abandon the purpose of the institution. Similarly, the CBN is distracted by internal organisational manoeuvres and political compliance issues.

These actions, having their rationale, are diverting focus from the CBN’s core mandates – ensuring price stability, effectively managing foreign exchange, fostering economic growth and employment, and overseeing currency issuance. These distractions are similar to the seductive but dangerous allure of the Sirens’ song and risk leading Cardoso away from the essential tasks at hand.

When Cardoso took over, they were optimistic for him to implement Tinubu’s speculative reforms, which he mentioned in his inauguration speech. As the selected CBN Governor, supposedly independent, it is expected that he will implement those monetary policies that will bring economic growth and ensure price stability. It is expected that he is now fully settled, and work is expected of him.

The pressing need for Cardoso is to bring price stability by addressing excess liquidity, soaring inflation, and stimulating growth, as picked up by the World Bank. This goes against what Cardoso is doing—increasing the money supply. As a consequence, the headline inflation rate has hit a historic high of 28.2 per cent in November 2023 and is predicted to reach 30 per cent in December. The current rate is the highest inflate rate since July 2005, marking a significant rise and the fastest increase since the 2016 recession.

The interest rate rise to 18.75 per cent under the Acting Governor in July to address pressures is showing to be ineffective, as evidenced by the World Bank. Higher interest rates are meant to help curb inflation, as this will reduce the excess liquidity in the economy. The money supply of M2, the sum of currency outside banks and demand deposits, has increased by N2.05 trillion to N66.4 trillion in three months of Tinubu’s taking office, according to the CBN reports. This is mainly for Ways and Means. Therefore, reducing M2 should be Cardoso’s priority, but he needs to pay attention to the bigger chunk of the contributors, like Ways and Means, not the money in circulation.

The last worry for Cardoso is to stabilise Nigeria’s foreign exchange market. It is equally clear that this is a failed policy as the World Bank is clearly advocating for refinement. There are experiences from Denmark and Bulgaria where they have their currencies pegged to the Euro. Under this system, the central banks in these countries have relinquished control over their monetary policy to a large extent.

The money supply is directly tied to the foreign reserves, and their central bank commits to exchanging local currencies for euros at a fixed rate. The arrangement provides a high degree of exchange rate stability and can help in controlling inflation. But it also means that these countries cannot independently adjust their monetary policy to respond to domestic economic conditions—a condition the CBN seems to be comfortable with.

There are also successful experiences of India, China, Singapore, and other emerging countries on how to manage a floating exchange rate—the typical situation in Nigeria. However, implementing this choice of exchange rate regime, like other monetary policies, requires a commitment to rules and prudence.

But as we see it, and as the World Bank sees it, Cardoso is focused on other objectives than the economy. Objectively speaking, he needs to wear his hat of independence, resist these ‘siren calls’ and refocus on CBN’s fundamental objectives, which are more important for the country’s economic health and stability.