CBN, Banks and Govt Funds By Henry Boyo

“…First of all, you have got liquidity surplus in the banking industry; … there is over N1.3tr or so sitting in banks and belonging to government agencies.  Now, basically, they (these funds) are at zero per cent interest and the banks are lending about N2tn to the government and charging 13 to 14 per cent!  Now, that is a very good business model, isn’t it?  Give me your money for free and I lend it to you at 14 per cent; so, why would I go and lend to anyone?”

The above text, which may unexpectedly corroborate views regularly canvassed on this column, is actually from an address to journalists by none other than the Governor of the Central Bank of Nigeria, Lamido Sanusi, after the latest Monetary Policy Committee meeting in Abuja last week, as reported in Thisday of July 24, 2013.

The statement is in defence of the CBN’s attempt to contain harmful credit expansion with the introduction of a 50 per cent cash reserve requirement on all public funds domicilled in commercial banks nationwide!  Prior to this development, the prevailing requirement was 12 per cent for all deposits.

Evidently, larger cash deposits create liberal opportunities that banks leverage on, to expand credit and increase public and private sectors’ spending, which may inadvertently instigate an injurious rise in the price level of goods and services.

Consequently, the higher the mandatory limit of cash reserve of banks, the lower will be the cash available with banks for onward lending to customers.  In this manner, the spectre of too much money chasing too few goods will be relatively contained to forestall an inflationary spiral.  Thus, the latest requirement for higher cash reserves is really an admission that the erstwhile 12 per cent Cash Reserve Requirement had failed to contain the discomforting inflationary push.

However, some critics may regard the higher CRR by the CBN as inappropriate, since it would further reduce the already inadequate credit to a cash-beleaguered real sector.

This column has consistently drawn attention to the obviously reckless strategy of banks lending the so-called surplus funds at atrocious interest rate to the same CBN, which inexplicably instigated the excess cash in the system in the first place.

Thankfully, Sanusi has finally recognised that ,”If you want to discourage such perverse behaviour, part of it is to basically take away some of this money….”  The critical question, however, is how the CBN can satisfactorily monitor banks’ compliance with the new directive.  In the absence of strict compliance, surplus cash will still persist, and inflation will still remain untamed with disastrous consequences for the economy.

The CBN governor’s fear that even higher reserve requirement may not adequately cage inflation is probably also embedded in his warning that, “If spending continues, and we are concerned about the liquidity conditions, we foresee in the nearest future continued increase in the Cash Reserve Ratio across the board…”  In other words, the new measure does not translate to a decrease in the CBN’s already oppressive 12 per cent  benchmark rate and  consequently, interest rate to the real sector may remain prohibitive at well over 20 per cent!

However, what options other than further increases in Monetary Policy Rate, are available to control money supply?

We had consistently decried the foolhardiness of government  borrowing back its own cash deposits in the banks, at extortionist interest rates; (see for “Will you Borrow Back Your Own Money and Pay 17% Interest?  …Ask CBN!”, December 27, 2004 and “MPR Hike: Failure of CBN’s Monetary Framework”, August 1, 2011) we had advised that  it would certainly be more businesswise, for Ministries, Departments and Agencies to domicile their humongous monthly allocations with the CBN itself.  Obviously, it makes no sense, as Sanusi has rightly observed, to borrow back your own non-interest-yielding savings at a cost, even though a similar strategy also underpins Nigeria’s external borrowings!

If this advice had been adopted in 2005, the perennial issue of excess funds would have been eliminated with savings of hundreds of billions of naira foolishly expended on paying the high cost of borrowing funds that the CBN would ultimately leave idle.  Indeed, a move was made to domicile all government funds with the CBN under the former President Olusegun Obasanjo’s administration, but intense pressure from beneficiaries of the free cash tradition quickly killed the initiative.

Consequently, Sanusi’s new directory of 50 per cent CRR for government deposits, is clearly an uneasy half-way measure, and critics may wonder why the CBN governor cannot, in his characteristic style, take the bull by the horns, and demand that all government funds should be banked with the CBN, and save us further payment of interest on money we do not apply to any purpose! It is inexplicable that such blatant treasury looting did not attract the attention of the government’s economic advisers for so long.

Without a doubt, Sanusi’s intervention will lead to a significant contraction in the cash available, and it will become possible to better control inflation in the system.  Regrettably, however, if government still remains actively in competition with the real sector in the market for long term loans, the cost of funds may still not fall.

Ultimately, an enduring solution to the high cost of funds and unyielding inflation is to tackle the root cause of excess liquidity; i.e. first, recognise that surplus cash is the direct product of the CBN’s monthly substitution of naira allocations for dollar revenue, and second, ensure that beneficiaries of the federation pool receive dollar certificates for their share of monthly dollar denominated revenue.  Such an arrangement will immediately finally eliminate the perennial burden of excess liquidity and its train of adverse consequences.

In its place, a lower single digit interest rate will become available to the real sector, with a socially and industrially supportive inflation rate in tow!  The naira will become extremely stronger, and eliminate any remote possibility of subsidising fuel prices, thus achieving the erstwhile impossible task of benignly deregulating the downstream sector.  The resultant trillions of naira fuel subsidy savings can then be ploughed into social infrastructure and positive welfare programs.

Furthermore, purchasing power of all income earners will improve and stimulate increasing consumer demand, which industrialists and entrepreneurs would hasten to satisfy profitably, with the prevailing low interest rates and strong rate of the naira.

For now, I congratulate Sanusi for his fresh initiative, which is definitely a bold step in the right direction.  My abiding hope, however, is that shortly hereafter, the CBN governor will be on the same page with this column on this matter of substituting naira allocations for dollar revenue.

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