Godwin Emefiele’s suspension as Nigeria's central bank governor -- and subsequent arrest -- is the latest in a string of changes designed to deal with Nigeria’s fiscal woes. But analysts at Capital Economics warn that some of the bad habits from the previous government may prove hard to undo.

“The suspension and potential removal of Godwin Emefiele as Nigeria’s central bank governor raises hopes that there will be a shift away from the current unorthodox and interventionist monetary and exchange rate policies. A large devaluation of the naira and sharp interest rate hikes now appear to be on the cards. But we’re not fully convinced yet that this represents a full U-turn from “Buharinomics”,” Jason Tuvey, deputy chief emerging markets economist at Capital Economics said in a note on June 12, referring to the economic policies of President Muhammadu Buhari.

Late on Friday (June 9), the secretary to Nigeria's Federal Government announced the suspension of Emefiele with immediate effect. According to the country’s secret police, the State Security Service, he was later taken into custody for “investigative reasons”.

The decision was made in light of the ongoing investigation into his office and the planned reforms in the financial sector. It is likely that a political power struggle is also underway, as Emefiele had initially put himself forward as the presidential candidate for the ruling All Progressives Congress before withdrawing from the race. Deputy Governor Folashodun Shonubi has assumed his responsibilities in the meantime.

Investors are likely to welcome Emefiele's suspension and potential removal from the CBN due to his oversight of unconventional and flawed policies, particularly the mismanagement of the naira, according to Tuvey.

“While the currency has fallen by a cumulative 65% against the dollar during Mr. Emefiele’s tenure (he was appointed in 2014), this has occurred through a series of step devaluations and the naira has generally remained overvalued. The official exchange rate currently stands at around 460/$, whereas it is currently trading at around 740/$ on the parallel market,” Tuvey said.

Short of dollars, Nigeria has introduced a complicated system to limit access to foreign exchange. Under Emefiele's leadership, the CBN has implemented an exchange rate system with multiple rates and restrictions on imported products. To preserve foreign exchange (FX) reserves, the central bank has limited the amount of FX provided to commercial banks.

Additionally, in an attempt to curb the parallel market, last year Emefiele blocked the central bank from supplying FX to bureau de change operators, resulting in inefficiencies and limited access to dollars for those without political connections.

Emefiele's tenure has also been marred by policies that stoked inflation. Monetary policy has remained accommodative, and the central bank has yielded to government pressure to finance large budget deficits through deficit monetization.

The upshot is headline inflation reached a 17-year high of 22.2% year-on-year in April, well above the central bank's target range of 6-9%. Furthermore, the botched demonetization efforts overseen by Emefiele disrupted economic activity and contributed to a sharp slowdown in the non-oil sector at the beginning of this year.

It appears that an overhaul of the monetary and exchange rate policies is on the cards. Recently elected President Bola Tinubu said in his inauguration speech, “monetary policy needs a thorough housecleaning”.

The suspension of Emefiele follows other positive policy measures in recent weeks, such as the removal of fuel subsidies. These developments have been well-received by investors, leading to a decline in yields on Nigeria's 2025 Eurobond by 500bp since their peak shortly after the elections in February. However, caution remains warranted.

"It remains to be seen how far the naira is allowed to fall and whether the gap with the parallel market rate is closed. Even if the naira does reach something closer to fair value and President Tinubu fulfils his pledge of a unified exchange rate, investors will want to see that the naira is allowed to move more freely in line with market dynamics. The president’s desire in his election manifesto for a strong naira raises the threat that, following a devaluation, the CBN tightens its grip again,” said Tuvey.

On the monetary policy front, sharp interest rate hikes would signal a stronger commitment to combating inflation. The recent fuel subsidy cuts are expected to push the headline inflation rate to around 30% year-on-year in June. Raising interest rates would help mitigate second-round effects from fuel price increases and help anchor inflation expectations.

But instead of hiking rates to tackle inflation, President Tinubu has taken a leaf out of Turkish President Recep Tayyip Erdogan’s book and called for interest rate cuts setting some alarm bells ringing.

"Meanwhile, it’s not clear that fiscal policy is moving in a more sustainable direction. Admittedly, the removal of fuel subsidies, which last year amounted to more than 2% of GDP, creates a big fiscal saving. But it looks most likely that the resources will spent rather than saved after the president pledged that the funds will be channelled into “public infrastructure, education, health care and jobs”,” says Tuvey.

In lieu of adequate fiscal policies to deal with Nigeria’s problems, Capital Economics predicts that the debt-to-GDP ratio will continue to rise as the government borrows its way out of its hole. That may come with fiscal repression as the government attempts to keep borrowing costs down.

“All told, even though President Tinubu appears to be moving more quickly on a number of key policies than we had originally anticipated, there are still a lot of unanswered questions. Elements of “Buharinomics” may still prove to be alive and kicking,” said Tuvey.