OPINION: CBN and the Nigerian economy – Henry Boyo
Published:21 Jan, 2013
Last Monday, January 14, the Pastor Tunde Bakare-led ‘Save Nigeria Group’ marked the anniversary of the 2012 “Occupy Nigeria” fuel subsidy protest in Lagos with a public lecture titled “Nigeria’s Fiscal and Monetary Crisis: the Way Forward”. The occasion afforded the Central Bank of Nigeria the opportunity to publicly defend its failure to create an enabling environment for industries and businesses to bloom, in consonance with its core mandate for price stability. The major indicators of price stability, of course, relate to conducive low single-digit interest rates for bank loans and an even lower inflation rate.
I was privileged to be a guest speaker at the forum, where the CBN Directors of Research and Finance argued that it was virtually impossible to resolve what they described as the “unholy trinity” of low interest and inflation rates, and simultaneously also improve naira’s exchange rate.
Nonetheless, the apex bank commended its own performance on these indices when compared with other economies in West Africa. Why they chose to benchmark their performance against ducks, when indeed, they should be aspiring to be eagles, remains unclear.
However, the directors were hard pressed to identify any nation that successfully grew its economy with cost of funds to the real sector at over 20 per cent, and abiding inflation rate at over 12 per cent, while its domestic currency rate is constantly threatened by increasing export dollar revenue. In order to compensate for its failure to enthrone an enabling monetary strategy, the CBN reported its involvement in several projects such as the cash-lite policy and various selective bailout packages involving hundreds of billions of naira.
The source of these huge cash injections including the N1bn donation to a particular university remains a mystery. Regrettably, these rogue interventions have so far failed to revitalise beneficiary subsectors and stimulate economic growth and employment opportunities.
Interestingly, the CBN rejected responsibility for the nation’s poor infrastructural base, as well as blame for the inability to diversify production in our economy. The apex bank’s representatives were obviously in denial of the fact that massive infrastructural enhancement is impossible with double digit interest and inflation rates. For example, Bi-Courtney would most probably have since revamped the Lagos-Ibadan Expressway if cost of funds were as low as five per cent rather than 20 per cent or more. Also, the agricultural, power, aviation, textile, transport and other sectors would similarly be much stronger if operators in each sector also had access to much cheaper funds.
Indeed, Nigeria’s paltry annual capital budget of barely $9bn indicates that our hope for rapid infrastructural enhancement is better placed on private sector investments.
Nonetheless, the CBN boasted that only the uninformed would demand a stronger naira rate of exchange, as textbook economics suggests that a strong naira rate would make Nigerian products more expensive than imports! The fallacy of this argument was obviously ignored, as reckless depreciation of the naira from stronger than parity to about N160:$1 has obviously had a negative rather than a positive growth impact on exports and other sectors of the Nigerian economy. The CBN certainly misses the point that the demand for oil, our major export, does not depend on naira’s exchange rate!
Surprisingly, the CBN’s understanding of its core mandate of price stability seems related primarily to modulation of excessive high and low cycles in the levels of interest and inflation rates rather than the promotion of enabling rates as in industrialised and successful economies elsewhere! Besides, according to the CBN, the capital market remains a cheap source of funds for all investors, including Small and Medium Enterprises.
The CBN directors were obviously acquainted with my strident advocacy for an urgent review of Nigeria’s monetary strategy, but quickly described the thrust of our argument as “misleading, misguiding and miseducating”! Regrettably, however, they failed to demonstrate the logic beneath this questionable conclusion.
They also failed to justify why Nigeria’s economy has remained a victim of surplus cash for decades, or indeed, why the burden of excess liquidity exists side by side with the failure of the real sector to access adequate and cheap funds! Besides, there was no satisfactory explanation why the CBN combats inflation by borrowing back perceived excess cash in the economy from commercial banks at rates above 12 per cent, only to warehouse the loans as idle funds. It is inexplicable that any commodity would become more expensive whenever the market is awash with a surplus of that item, especially when the CBN also agrees that our high rates were the product of market demand and supply.
The CBN is obviously unrepentant for crowding out the real sector by borrowing at outrageous levels of interest rate while such risk-free sovereign borrowings in successful economies elsewhere generally attract lower single-digit interest rates; rates level, which the CBN insists are inapplicable in our state of development.
The directors did not even attempt to fault my observation that the CBN’s inability to achieve its core mandate of price stability is actually the product of its poor management of money supply! It is nonetheless, irrefutable that the ever-present burden of excess liquidity induces heavy government borrowings at high interest rates and also fuels inflation rate as the increasingly huge cash surplus in the system cannot be immediately matched by available goods and services. This systemic cash surplus is regularly pitched against relatively paltry dollar auctions by the CBN, and this ultimately also depreciates naira’s exchange rate!
Undoubtedly, the CBN’s alleged “unholy trinity” of interest, inflation and exchange rates have a common causative influence; i.e. the ever-present burden of excess liquidity.
Instructively, massive reduction or total elimination of excess liquidity will actually create a “holy trinity” of lower single-digit interest and inflation rates and also engender a stronger naira, all of which constitute the requisite profile for an enabling environment for growth and economic development with increasing employment opportunities.
In truth, the economic poison of excess liquidity is not administered by increased government spending, as often alleged, but by CBN’s capture of the nation’s dollar revenue and substitution with naira allocations to the three tiers of government.
The CBN’s claim that they are compelled by the constitution to substitute naira allocation for dollar revenue is certainly not substantiated by Section 162 of the constitution, which simply states that all monies must be paid into the federation account. The section really does not stop the three tiers of government from maintaining domiciliary accounts just like any other citizen.
We will discuss the CBN’s lion share of our reserves next week!
– Henry Boyo (email@example.com