To be or Not to be - Pragmatism or Status Quo in Appointing New CBN Governor

Monday, November 17, 2013 / By Project Research

Will Nigeria toe the line of other pragmatic governments by appointing a Central bank governor that is not only prepared for the current challenges facing Nigeria, but also adept at initiating pro-active policies? Ion this piece, a team of professionals with prior experience in central banking in Nigeria and globally assess the decision before Nigeria currently and offer their perspective.

Preamble
The dogma of the quiet past is inadequate to the stormy present. The 2008 ‘great recession’ brought with it unprecedented difficulty, especially for Central bankers, and nations now search far and wide for qualified candidates that can rise to the occasion of stirring comatose economies back to life, or of steadying the ship of ongoing fragile economic recoveries. Thus, appointing national Central bank governors across the globe has now become an increasingly high profile affair, with the importance of choosing a credible head of Central bank consequently taking on an entirely new meaning. Financial markets take note of such appointments, and vote with their money, while sovereign risk establishments also rate the credibility of such appointees in international markets; an ‘unknown’ governor only serves to generate more uncertainty in an already volatile system.

In choosing Mark Carney, an expatriate and an ‘outsider’, as the Bank of England (BoE) governor, the BoE departed from a 319year old history of always appointing fixtures of the British establishment as the head of the BoE. Paul Tucker, a deputy governor at the BoE was widely considered a shoo-in replacement for the outgoing Mervyn King at the expiration of his tenure. Despite Tucker’s long history at the BoE, and stature in the UK financial sector, he was overlooked for the man dubbed the ‘’outstanding Central banker of his generation’’. Mark Caney was credited with guiding Canada’s economy through the recent global crisis with little or no scratch.

When Carney himself stepped down early from the helm of affairs at the Bank of Canada, Tiff Macklem, a senior deputy governor since 2010, was widely expected to replace him. Lightning struck twice as another outsider, Stephen Poloz emerged the surprise pick. It also took two rejections from the preferred candidates of the Israeli Prime Minister for the Bank of Israel’s top position, for Karnit Flug, a deputy governor with 25 years experience at the Central bank to finally clinch the job. This is despite the recommendation of Flug by the highly rated outgoing Bank of Israel governor as a perfectly capable successor. Janet Yellen, another deputy, only emerged the Fed Chairman nominee after the preferred top candidate ruled himself out of contention.

Indeed, these are not isolated incidents but rather reflect a growing trend in the number of countries turning to ‘outsiders’ to lead their Central banks.

Choosing Central Bank Governors in the new Millennium

Looking at when some of the current Central bank heads were appointed, and their immediate employment history reveals a pattern. Chart 1 shows that since 2008, external figures have dominated Central bank appointments, except for 2011. The story so far this year, has further corroborated the trend. Of the 25 countries to name new governors so far in 2013, only three chose to reappoint the incumbent, seven promoted one of the deputies to the post and 15 chose to appoint someone from outside the Central bank – either from the International organisations, ministry of finance, or the private sector.

There are a number of prominent examples of Central bank governors coming from the ministry of finance. Most notable was in Hungary, where the finance minister Gyorgy Matolcsy was appointed governor in a move widely interpreted as the government capturing the Central bank. But a number of major emerging economies have also placed officials close to the finance ministry as heads of their Central banks. Former Indonesian finance minister, Agus Martowardojo was sworn in as governor of Bank of Indonesia in May, and Elvira Nabiullina, previously economic adviser to Russian president Vladimir Putin, was named head of the Bank of Russia earlier in the year.

More recently, Raghuram Rajan was appointed governor of the Reserve Bank of India after a year as chief economic adviser in the finance ministry. This year has already seen more external appointments to the position of governor than any since the height of the crisis in 2009. External appointees outnumber internal promotions to the top job by two to one. Including reappointments, chart 2 shows outsiders represent 60% of the total appointments so far this year compared with 50% in 2012 and 30% in 2011.

The trend in the immediate aftermath of the 2008 crisis was not surprising. It was near impossible to argue for continuity in most of the Central banks when the Central banks and economies of those countries had capitulated. Governments opted for fresh approach in the hope for quick economic turnaround. As the global crisis abated, internal appointments also increased. But five years down the line, with growth in advanced countries still half the pre-crisis period, and activity in emerging economies slowing, nations are again increasingly revisiting the external appointment dogma with the hope of succeeding where the others have failed.

The change in governor at the Bank of Japan earlier this year was a case in point. A new government had come to power, determined to succeed where its predecessors had failed for the last 20 years, and end deflation in the country. A radical change in course of monetary policy needed a new governor and one not associated with the failures up to then. The appointment of Haruhiko Kuroda, a former head of the Asian Development Bank, appears to be yielding the much needed fruit.

As instructive as the immediate employment history of many of the current Central bank governors, is their academic and professional credential. It is incontrovertible that countries now prefer and appoint Central bank governors with impeccable track record and untainted credibility. This is more so in the light of stakeholders becoming more skeptical about the Central banks, and indeed the governments’ ability to manage the economy. Above and beyond the tools and policies Central banks deploy in the face of crisis, a credible Central bank governor helps win some credibility for the government. A cursory look at the academic and professional credential of many of the recently appointed Central bank governors’ reveals a salient trend that suggests governments are increasingly digging deep to appoint the cream of the crop, and not just more of the same.

A Few Examples

The current BoE governor, Mark Carney, brings a tremendous amount of goodwill and credibility to a flailing Bank of England. Due to the reputation Carney generated by guiding the Bank of Canada, and the Canadian economy unscathed through the most trying period in recent history- Canada was the first G-7 nation to have both its GDP and employment recover to the pre-crisis levels, his appointment is hailed as a breath of fresh air to a BoE often accused of being behind the times. Prior to his appointment as the governor of the Bank of Canada in 2008, Carney was a senior deputy minister, and G7 deputy at the Canadian Department of Finance. He also served as deputy governor in the Bank of Canada before being seconded to the federal Department of Finance. Mark Carney was the chairman of the Bank of International Settlements’ committee on the global financial system between 2010 and 2012, and has been the chairman of the Basel based Financial Stability Board since 2011. He holds a Doctorate degree in Economics from the prestigious University of Oxford.

Raghuram Rajan took over as the governor of the Reserve Bank of India in September 2013, and with that, inherited higher and rising inflation levels, weak and falling currency, and a stumbling economy. Why is much expected from Rajan, and why has he been saddled with the responsibility of steadying the economy of India? For one, he was one of the few that rightly called the recent global crisis when it was easier to miss. His views which has become prescient in the light of the crisis, was at that time labeled misguided. The many problems of the Indian economy also require strong leadership and perhaps significant policy shifts that the new governor is well equipped to provide. Dr. Rajan brings with him experience not only from his previous role as the Chief Economist at the International Monetary Fund (IMF), but also his position as the Chief Economic Advisor to the Indian government which accords him an insight into the workings of the economy. He holds a PhD in Management from the reputable Massachusetts Institute of Technology (MIT).

The Fed Chairman designate, Janet Yellen is a Professor of Economics at the University of California’s business school and also the Vice Chair of the Board of Governors of the US Federal Reserve System. She was previously the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, and served as Chair of President Clinton’s Council of Economic Advisers. Yellen also previously taught at the London Business School and Harvard University. She was an Assistant Professor at Harvard University as far back as 1971, and an economist with the Federal Reserve Board of Governors between 1977 and 1978. She holds a Doctorate degree in Economics from the distinguished Yale University.

Karnit Flug was until her appointment as Bank of Israel’s governor, a deputy governor at the Central bank. She earned her Doctorate degree in Economics from the notable Columbia University. Prior to joining the Bank of Israel in 1988, she worked as an economist at the IMF. She also worked as a senior research economist at the Inter-American Development Bank while on leave from her Bank of Israel role. She returned to the Bank of Israel, and functioned in different capacities at the Bank’s research department before being appointed the Director of that department in 2001. She was appointed deputy governor at the bank in 2011.

The absence of primordial sentiments in the appointment of the above enumerated Central bank governors is evident from their track records- both academic and professional accomplishments. The profiles of these governors also suggest that governments are increasingly gravitating towards professional and globally acclaimed adept economists with strong research credential, great academic standing and name recognition among their peers. Across the world, professionalization of institutions, particularly Central banks, is now widely accepted and expected.

Lamido Sanusi’s term as the governor of the Central Bank of Nigeria (CBN) ends on June 2^nd, 2014, and he is widely expected not to take another term. The outgoing governor was appointed in June 2009, in the midst of a raging global crisis. He successfully guided the Central bank through the global crisis, and a home-grown financial crisis. He is widely credited with sanitizing and stabilizing the financial services industry in Nigeria. Responsible monetary policy has also kept inflation in check- currently at 5-year low, and exchange rate relatively stable. The CBN has thus performed credibly well in fulfilling its core mandate of preserving the value of the Naira- both domestically and internationally. However, in the light of global complexities, a view has gradually emerged that Central banks cannot obsessively focus on inflation targeting. Many Central bankers are quietly redefining their role to include inflation targeting, and sustaining financial stability to serve the wider economy. Emphasis is particularly being laid on economic growth and employment.

Close

Although the incoming CBN governor will most certainly inherit a stable macroeconomic environment, emerging risks suggest his tenure will be far from a smooth ride. The current global tailwind, which has supported the stable domestic macroeconomic environment, will most likely metamorphose into a headwind. Also, a confluence of emerging domestic risks will threaten the delicately balanced macroeconomic applecart. The fiscus is likely to remain loose in the midst of government revenue shortfall. Early indications of the upcoming 2015 general election also suggest we might be about to witness the most expensive and divisive election in the annals of Nigeria. Electioneering may also see reasonable management of the economy take a back seat. All these will further complicate the already complex tasks of the CBN governor.

Will Nigeria toe the line of other pragmatic governments by appointing a Central bank governor that is not only prepared for the current challenges facing Nigeria, but also adept at initiating pro-active policies? Will Nigeria appoint a professional and respectable economist with impeccable track record, or a relative ‘unknown’? As a nation, Nigeria has made more mistakes than any country is entitled to, continuing with the nineteenth century thinking in the appointment of a governor that will lead the Central bank in the 21^st century might prove a mistake too costly, and should be avoided at all cost.

You can also take part in the “The next CBN governor; whom the cap fit?” discourse. Send your contributions to [email protected].