Will Cardoso Stand His Ground?

'Tosin Adeoti
12 min readApr 6, 2024

In 1964, by a narrow margin, British voters elected the first Labour government in 15 years. Its ministers followed up with a series of big spending plans to nationalize industries and expand social services. With investors and currency traders seeing the prospect of inflation over these plans, they quickly dumped the British pound. Investors fleeing is bad news, so the Bank of England decided to raise its discount rate to 7 percent from 5 percent, a huge jump.

For the uninitiated, the discount rate is the interest rate charged by a central bank on loans given to commercial banks and other financial institutions within its jurisdiction. It is essentially the rate at which commercial banks can borrow directly from the central bank in times of need.

Increasing the discount rate this way makes borrowing more expensive for banks and other financial institutions. By raising the cost of borrowing, the central bank aims to reduce the supply of money in the economy, which can help counteract inflationary pressures. This policy action can also attract foreign investors seeking higher returns on their investments, thereby supporting the currency.

Currency Conundrum: Johnson vs. Martin

Now, the Federal Reserve (as the central bank is called in the United States) had to do something so that dollars would not be drawn from the United States’ economy into Britain’s. Accordingly, it raised its own rate by one-half of 1 percentage point.

President Lyndon Johnson, who took over after John Kennedy was assassinated and then reelected, didn’t much mind. When he had the chance to speak with Fed chairman (what a central bank governor is called in the United States), he seemed to appreciate how William Martin used a news conference to calm any distress in the markets.

But in Martin’s eyes the situation was already turning, and in 1965 he began speaking publicly about his concerns. He was afraid the growing cost of the Vietnam War would force a devaluation of the dollar. He saw yet another budget deficit at a time when budget deficits were not in vogue. In late November, Martin signaled to the government that he would have to raise rates again. “Another one?”, Johnson was not pleased.

Now, why did this bother the president? A significant hike can slow down economic activity by making borrowing more expensive for businesses and consumers. It makes sense. If the banks are borrowing from the central bank at a higher rate, they necessarily need to transfer that to the businesses and consumers. If businesses borrow at a high rate, they transfer that to their products and services. And some of them may even close down if they cannot afford it. All these could lead to concerns about dampening economic growth, reducing job creation, and potentially causing a slowdown or recession in the economy.

Hence, Johnson was worried about the news passed to him from the Feds. As a result, they asked Martin to delay any action, at least until January 1967, when the administration’s budget estimates would be available. Martin would not listen; he had to do what he had to do. If nothing is done, inflation could raise and there might be a sharp depreciation of the currency which would still lead to the problems of job losses and economic slowdown. As he sees it, the temporary discomfort is the price to pay for a longterm economic growth. After stability is achieved, the rates can be cut down, the thinking at the Federal Reserve went.

On the morning of Friday, Dec. 3, the day of the Fed’s policy-making meeting, Martin again told the government of the imminent rate increase. Johnson asked Martin not to do it. Telling his Treasury Secretary, Henry Fowler, to relay his message, Johnson warned,

“It’s going to hurt my pride, and it’s going to hurt my leadership, and it’s going to hurt the best champion business has got in this country.” For Johnson, the rate hike was unacceptable. It was going to make him look bad.

Martin resisted the appeals. At the Board of Governors meeting that afternoon, he called for a vote to raise the discount rate a half-percentage point, to 4.5 percent. The vote was 4 to 3. Martin cast the deciding ballot.

President Johnson was enraged. Martin was summoned to explain why he had defied the president. Martin flew down to the Johnsons’ Ranch on Monday, Dec. 6. There, Johnson got Martin alone and did not mince words. According to different accounts, the 6-foot-4 Johnson pushed the shorter Martin up against a wall.

“You went ahead and did something that you knew I disapproved of, that can affect my entire term here,” Johnson said, as Martin recalled later in an oral history. “You took advantage of me and I’m not going to forget it…Martin, my boys are dying in Vietnam, and you won’t print the money I need,” he said.”

Martin stood his ground. He pointed out that he had given the president fair warning that a raise was coming. More broadly, he insisted that he and the president had different jobs to do, that the Federal Reserve Act gave the Fed responsibility over interest rates.

“I knew you disapproved of it, but I had to call the shot as I saw it,” he said.

Separation of Duties, Prejudices and Outcomes

That, in my book, is what it means to be a strong man. When we say the Central Bank is independent, it means it does its job without recourse to, among other things, the sentiments of political actors.

And the sentiments are real. At the Annual General Conference of the Nigerian Bar Association in 2018, the former governor of the Central Bank of Nigeria refuted President Obama’s claim that Africa do not need strong men but institutions. According to HRM Sanusi Lamido Sanusi, “We need not only strong institutions but also strong men because weak men destroy strong institutions.”

And he has experience to back it up. When Sanusi left the CBN in 2014, the CNBC Africa had on its website the article titled, “Sanusi to leave CBN as a strong institution”. A few years after, his succesor was taking orders from the president to print funds to be spent on elephant projects, most of them ending up being stolen. He blatantly flouted the rule that forbids the bank from advancing ways and means to the federal government an amount more than 5 percent of the previous year’s revenue.

There were those who expressed sceptism after the appointment of Olayemi Cardoso as the governor of the Central Bank of Nigeria. Indeed, what made him qualified for the position of the top banker in the country? His first degree was in Managerial and Administrative Studies. He had his master’s degree in public administration. As one of the founders of Citizens Bank, he is rightly fingered as one of those responsible for the failure of the bank. Indeed, during his senate screening, the former NLC president, Adams Oshiomole opposed his nomination saying, “people who have managed banks that have gone into liquidation, that cannot be used as positive in their favour… a doctor who parades the number of people who died under his care cannot forward that to me as a CV for me to appoint him as a surgeon general.”

Those were biting words.

Anyway, as we have seen with most ministerial screening in Nigeria, once the executive is adamant about your appointment, there is not much the legislative does about it. It was the immediate past Senate President who said that any request from Buhari (the president at the time) is good for the nation. And so, Olayemi Cardoso was confirmed as the governor of the central bank of Nigeria without the kind of kind of pedigree and reputation expected from someone who would take over the monetary management of the biggest economy in Africa.

So, when the naira started wobbling at the parallel market from N980 to a dollar on the day Reuters announced he became acting central bank governor on September 22, 2023 to N1900 barely 5 months later on February 21, 2024, many considered it a self-fulfilling prophecy; a square peg in a round hole has only one outcome. The situation that led to it were not farfetched. Just like his predecessor, Godwin Emefiele, who cut down trees under the guise of saving the naira, Cardoso also went after Bureau De Change (BDC) operators, raiding their offices and arresting operators in Abuja, Lagos and Kano. The continuation of the supposed clampdown on speculators was bizarre. Currency speculation is an outcome, not a root cause. The Lebanese pound and Venezuelan bolivar are darlings of speculators, but not the Swiss Franc or the Czech Koruna. Why? Because of the difference in monetary policies. Why is Cardoso appearing to continue the ruinous policies of his predecessor was a question many were asking.

But a month later, Cardoso appeared to have changed tact. Away from solely tightening credit and raising interest rates in a bid to reduce money supply growth and encourage savings, the CBN is now gunning for the foreign exchange rate as a way of curbing inflation. In its mind, the primary inflationary driver is the foreign exchange rate. And how do you make prices of goods and services come down? By increasing the supply. If you want the price of eggs to come down, allow many sellers in the market.

The CBN is seeing that the problem is one of FX supply inadequacy and not excessive domestic money supply. Indeed, my argument has always been that an expanding economy will naturally experience growth in money supply to support the expansion of real sector activities. So, if you want the inflation to come down, find a way to increase the amount of foreign exchange coming into the country. This could be listing public assets on the Nigerian Foreign Exchange (NGX), making it easy and conducive for foreign companies to get licenses in mining, manufacturing, and services, and creating assets in the capital market that would entice foreigners to bring in FX. A flush of FX would improve the external value of the naira and drag down the domestic inflation rate. But it’s crucial to approach these measures with thorough analytical scrutiny. Implementing a sustained and uncritically analyzed increase in policy rates could slow down economic growth, leading to a rise in unemployment and exacerbating the security situation. In other words, a balanced and well-calibrated approach is necessary to achieve both price stability and sustainable economic growth.

This is why what is being witnessed in the last weeks should raise hopes. In its second monetary policy committee (MPC) meeting under Cardoso, the CBN voted to maintain its hawkish stance on interest rates and restated its pursuit of restoring stability to the Nigerian economy by curbing inflation. The following were announced:

  • The Monetary Policy Rate (MPR) was increased by 4% to 22.75%
  • The asymmetric corridor was moved from +100/-300 to +100/-700 basis points
  • Cash Reserve Ratio (CRR) was increased by 12.5% to 45%
  • Liquidity Ratio was maintained at 30%

Let me explain this a bit:

The increase in the Monetary Policy Rate (MPR) means that borrowing from Nigerian banks will become more expensive, but the interest you earn on your savings will also go up. If the banks are borrowing from the CBN at 22.75%, it means they will lend to those who come to them for loans at a higher rate. So, the MPR is the benchmark rate in the economy.

The asymmetric corridor, which sets the terms between the Central Bank of Nigeria (CBN) and commercial banks, means that banks needing quick funds will borrow from the CBN at a higher rate, while banks with excess funds can lend to the CBN at a lower rate. For instance, if a bank needs money in a hurry, it will have to borrow money from the CBN at MPR plus 1%, which is equivalent to 23.75% (100 basis points means 1%.) And if any bank has surplus funds with it (what is called excess liquidity), it can lend to the CBN at MPR minus 7%, which is equivalent to 15.75%.

With a cash reserve ratio of 45%, banks are required to keep a portion of your deposits with the CBN, leaving less money available for lending. So, for every N100 you keep with the bank, the CBN takes N45, and the N55 is available to be used by the bank, including for loans. The CBN does this to take money away from circulation in the economy.

The liquidity ratio, unchanged at 30%, ensures banks keep enough liquid assets to meet customer withdrawals. This liquidity ratio is the amount of funds the banks must have in their balance sheet as a proportion of total deposits. These funds have to be liquid assets such as cash and treasury bills. The purpose of this fund is to ensure that banks can provide funds to meet up with customer demand for withdrawals whenever they need to.

So, think about it. You give N100 to the bank to keep for you. The bank will have to set aside N45 and hold N30 in liquid assets, leaving only N25 for lending. This scarcity of funds will definitely affect businesses and individuals who need capital; however, it will lead to higher interest rates for those putting money into the banks and the economy. This has its own way of attracting both local and foreign investors.

If foreign investors bring in funds, the craze for the dollar will reduce because the funds will be used to stabilize the exchange rate. Less money chasing goods and services should also reduce inflation. Inflation reduction does not mean the prices of goods will come down. It only means that prices will increase at a much slower rate. Inflation is not inherently bad. In fact, for the economy to grow, there has to be some inflation. An explanation of inflation is beyond the scope of this writeup, so just take it that way.

Now, there is something to think about: If inflation is 31.70%, why would foreign investors be excited by an interest rate of 22.75%? Ideally, the interest rates should be much higher than inflation because that’s how you get value for your money. But raising the interest rate drastically will shock the economy and bring it to its knees. Businesses could close up, unemployment, already high, could get out of hand, and anarchy could ensue. There have been many such cases in history. When Greece got in trouble (2010–2012) and it had to implemented austerity measures, including increases in interest rates, it sparked mass protests, strikes, and social unrest across the country, resulting in injuries and clashes with law enforcement. The situation was extremely tense, and the protests often turned violent, with clashes between demonstrators and police.

The CBN obviously doesn’t want that and is taking it easy even if some would still complain at the hikes. But so far, things have been relatively calm on the social front.

Now, what do we have for these measures just weeks into their implementation?

  • Nigeria’s external reserve rose by $993m to $34.11b
  • Foreign portfolio investments climbed by over $1b as total portfolio flows hit $2.3b thus far in 2024. The total for 2023 was $3.9b
  • Overseas remittances rose to $1.3b in February 2024, more than four times the $300m received in January 2024
  • Investments in fixed-income securities has risen as yield attracts investors and equities markets adjust
  • The exchange rate which was N1900 to a dollar is now about N1200

If these policies are followed and critically examined along the way, it is expected that foreign exchange will keep flowing and then the rates can adjust downwards. So far, the rate hikes and policy decisions have had a major impact on naira appreciation, but we have seen nothing yet on curbing inflationary pressures in the economy.

Monetary Policies Are Not Enough

Yet, as we have seen numerous times, monetary policies are often not enough to curb inflation. The fiscal policies, led by the Finance Ministry currently led by Wale Edun, would have to do its part.

Is the government spending on critical infrastructure to help individuals and businesses, thereby increasing their output and productivity? Is the government effectively generating revenue through taxes and through their actions encouraging individuals to pay their fair share? Is the government providing incentives and a conducive atmosphere for private investment? That’s not the job of the Central Bank. The naira is appreciating, but is the government enacting trade policies and government borrowing that can positively influence exchange rates? What about the persistent insecurity? What happened to the proposed civil service reforms? There is so much outside the control of the central bank that can derail their policies.

Even for the CBN, for how long does it expect to keep selling $10,000 to each Bureau De Change operators at a rate of N1,251 per U.S. dollar, and then instructing them to sell the dollars to eligible customers at a rate not exceeding 1.5 per cent above the purchase price. That comes to N1,269. This is not what it means to allow the markets to work. In his speech after his last MPC meeting, he reiterated his stance on not manipulating the markets and returning the CBN to its core mandate. “Some of the reforms being undertaken to stabilize the foreign exchange market include …promotion of a willing buyer willing seller market…” The price-setting for the BDCs goes against that reform.

For all the reforms being undertaken which include the unification of the foreign exchange market, removal of all limits on margins for IMTO remittances, introduction of a two-way hold system, transparency in the BDC segment of the market, decision to recapitalize the banks to improve resilience against potential risks, etc., what we can hope for are results in the short and medium term, for long-term results, the CBN need to change course as indicated by economic outputs, and the fiscal side needs to come to the party.

Anything short of this would have been a missed opportunity, and frankly, a waste of our time.