Central Bank and the Economy

Central Bank and the Economy

Les Leba

Regular readers of this column over the years would most certainly have been exposed to a different perspective on the operation of the Nigerian economy. However, even if such adherents of the column accept the rationale of our proposals, and indeed, find them plausible; they may rightly wonder why the government and its responsible agents for monetary policy have turned deaf ears to what ordinarily makes a lot of sense with its huge potential for positively turning round the ravaged fortunes of our economy and our people. Indeed, converts to our arguments and our proposed framework for revamping our economy may have their confidence tested by the simple question of why the organised private sector, the intelligentsia in our ivory towers and indeed the host of business media houses and economic correspondents have refused to comment or even evaluate our proposals against the current framework which continues to deepen the poverty of our people, even in times of increasing national revenue!

It is always refreshing and reassuring, therefore, to read or listen to any presentation or analysis that bears any resemblance to our position on the appropriate framework for our economy. My faith in the validity of our recommendation for paying the dollar component of federal revenue to beneficiaries in form of dollar certificates is consequently further invigorated.

In the light of the foregoing, it is my pleasure to bolster the confidence of adherents of our position in this column by publishing the full text of “Central Bank and the Economy”, the editorial of 16/7/2009 of the Guardian Newspapers. The Guardian’s position on various aspects of monetary policy, ranging from the effectiveness of our Central Bank’s Monetary Policy Rate (MPR); the Retail and Wholesale Dutch Auction of foreign exchange (RDAS and WDAS); CBN’s monopoly of the forex market, and the unusual practice of CBN’s sale of federally owned dollar revenue to Bureau de change, are all in accord with the content of several articles in this column in the past five years. Even if the content of the Guardian editorial is a bit technical for the non-economist, the lay reader can still follow the drift of the analysis of our economy in the editorial under reference. Please read on:

“RIGHT from the conclusion of the bank consolidation exercise and more frequently since the financial meltdown in industrialised countries, the Central Bank has calmed the financial sector with assurances that no bank would be allowed to fail. However, in less than one month in the saddle, CBN Governor Sanusi Lamido Sanusi chose the foreign print media quite inappropriately to make premature assessment ahead of the outcome of the ongoing full audit of the banking sector in an apparent move to sell a pet action plan that would lay all existing banks open to foreign poaching as the solution to perceived problems of the sector.

“The interview evoked interpretations that produced overly self-protective reaction in a banking sector that was already exercising unusual caution owing to the adoption of a common financial year-end. It was primarily to ward off the increasing paralysis of inter-bank operations which could precipitate untoward result in the sector that prompted the Monetary Policy Committee (MPC) of the apex bank to convene a damage-control session and announce the CBN's plan to temporarily guarantee inter-bank and pension placements in the system as concrete expression that no bank would go under.

“Otherwise, in spite of the poor state of the economy, the new apex bank management had set itself a leisurely schedule to "work on diagnosis, resolution and disclosure policy in the banking system" by next March. The MPC therefore merely re-introduced policy measures that had failed in the past to make any positive impact on the economy.

“Before reviewing some recycled measures, it is necessary to caution the apex bank to eschew unilateral action on non-technical aspects of any proffered solutions to any problems that the ongoing audit might unearth. For example, notwithstanding Sanusi's expressed personal position, owing to the critical nature of the banking sector to any economy, there may be need to first send a bill on the Nigerian/foreign ownership structure of banks to the National Assembly for an Act that will clearly define the national interest on the issue.

“As regards the purported reduction in the monetary policy rate (MPR), the effective CBN lending rate to commercial banks, which up till December 2006 was known as minimum rediscount rate, became, first, the standing lending facility rate that marked the ceiling of the interest rate corridor and then transformed into the stand-alone MPR after the interest rate corridor was scrapped. With the latest re-introduction of the median MPR in the corridor of interest rates, fixing the MPR-in-corridor at six per cent leaves the effective standing lending facility rate at eight per cent, the same level as the previous stand-alone MPR.

“Thus apart from the confused changes in name, there was no reduction in the real CBN lending rate. In any case, bank-lending rates to the investing public have not shown any systematic pattern of response to any set CBN rate. Since the apex bank will not guarantee bank loans to the public, it is unlikely that the recycled policy will bring down commercial lending rates significantly.

“The MPC also announced purported complete liberalisation of the inter-bank foreign exchange market with wholesale replacing retail Dutch auction system as a means of improving supplies of foreign exchange in the economy. That would be at least the fifth time RDAS would be employed and discarded among the numerous failed foreign exchange market systems that have been experimented since the early 1970s. It is a misnomer for the CBN to claim the existence of a liberalised foreign exchange market where the apex bank exercises monopoly control over official foreign exchange that accounts for about 95 per cent of total foreign exchange and where foreign exchange is auctioned.

“While the MPC communiqué is silent on bureaux de change (BDCs), it is remarkable that the apex bank governor gave them special treatment at the media briefing: a circular has been rushed out to formalise the arrangement. In 2007, for instance, the CBN sold US$6.84 billion via the BDCs, which represented some 73 per cent of the $9.33 billion sold at WDAS through the banks. Yet the BDCs, which make negligible contribution to the country's foreign exchange earnings, are officially known to be facilitators of capital flight, smuggling and treasury looting, undesirable activities that destroy the economy. It is reprehensible for the apex bank governor to avidly encourage activities that undermine the CBN's core objectives and statutory responsibilities.

“Finally, the oft-repeated MPC concern that the objectives of economic growth, inflation control and financial stability require low lending rates is an implicit recognition of the need for low fiscal deficits, a condition that is specifically underscored in the CBN Act as well as in the Fiscal Responsibility Act. Even the Appropriation Act sets a limit to the fiscal deficit that should be incurred in a given year.

“Sadly, the CBN cannot refute that as at May the three tiers of government had technically incurred on an annual basis a combined fiscal deficit of at least 10 per cent of GDP or nearly three times over the safe limit set for the Federal Government. That came about as the beneficiaries of the Federation Account expended or lodged in the banks toxic CBN advances (which may be likened to the toxic margin loans) that were substituted for Federation Account dollar proceeds. The MPC was confronted by evidence of the high fiscal deficit in its review of developments in the economy.

“Yet, by technically and appropriately monetising the said dollar proceeds, the three tiers of government could obtain from the system non-destabilising actual naira revenue amounts that would equal the quantum of toxic CBN advances while the Federal Government could still up its expenditure using advances or borrowings within the approved safe deficit limit. This is the way to ensuring stable and conducive conditions that will engender all-round vibrant economic activity.

“It is axiomatic that where the bulk of government revenue is derived from export proceeds, only mismanagement of the export earnings will inhibit economic advancement. The mismanagement of the public sector export proceeds, which has left a legacy of economic failure over the past three decades, must stop now.”