The Putrid mess also in CBN (2) -By Les Leba

Most of our people would recognize the role of commercial banks as custodians of our savings, but probably much less are in reality acquainted with the role of banks as lenders to individuals as well as corporations.

This is not surprising as possibly less than 10% of our estimated population of 150m are engaged as deposit customers with the banks while the percentage of those who have ever been locked in bank advances and loans for whatever purpose may not exceed 1% (or 1.5m Nigerians).

Thus, in spite of the ubiquitous presence of commercial banks in several towns and cities within the country, there is still a huge chasm between the banking sector and the majority of our people.

If only a very small proportion of Nigerians have a banking relationship, and/or recognize the roles of banks, then it may be safe to conclude that with the functional remoteness of Central Banks, possibly less than 0.1% (150,000 Nigerians) are truly conversant with the roles and objectives of a Central Bank.

Indeed, the unfettered media presence of the immediate past Governor brought the institution into public consciousness more than ever before, and consequently many more Nigerians, even when they had no direct interaction, became acquainted with the role of the apex bank as the 'Headmaster' of the banking sector.

However, the role of commercial bank regulation and supervision is generally seen as an end in itself and very few Nigerians recognize that the CBN's core mandate is in fact the maintenance of price stability in the economy.

Indeed, a brief published on the internet by the Legal Services Division of the apex bank describes the objects of the bank as contained in Section 2 of the CBN Act 2007 as follows: “The object of price stability has now been distinctly included in the core mandate of the bank. This is informed by the fact that the core function of every Central Bank is the maintenance of price stability. It should be noted that macroeconomic stability is essential for growth and development in any economy.

Macroeconomic stability is itself a function of price stability which is the ability of the Central Bank to moderate inflation, attain stable interest and exchange rates and create a conducive investment crimate for long term growth and development.

In order to achieve and maintain this objective, however, it is imperative to keep a close watch on government spending as persistently huge budget deficits tend to lead to volatility in prices which in turn negatively impacts the standard of living. The price stability objective will therefore enable the CBN to adopt the necessary measures, in collaboration with the fiscal authorities, to control the rate of inflation.”

The question that jumps at you from the above excerpt is how well has the CBN succeeded in the management of the critical index of price stability, seeing that the possibility of economic growth and development and social welfare are predicated on this factor, according to CBN admission?

The answer to the above question equally jumps at you, as increasingly more Nigerians look back in nostalgia at the good old days when a medium size loaf of bread cost 10kobo and primary, secondary and even university education in some states were free! Nigeria is now catalogued amongst the poorest nations in the world inexplicably at a time when we earned more foreign revenue than ever before!

The government readily admits that over 50% of our population are jobless, and that almost four million youths are thrown into the pool of Unemployed every year! The current minimum wage of N7,500 buys much less than the N250 paid in the 1980s, which may even command more value than the N50,000 currently demanded by the trade Unions.

Obviously, something is fundamentally wrong as these wide price and wage variations cannot be classified as consonant with the CBN prime objective of price stability in the economy and may, indeed, be regarded as prima facie evidence of the failure of CBN in bringing succor to our people with the implementation of its mandate.

The dysfunctional state of the banking sector before the advent of the present Governor is possibly conclusive evidence that the CBN not only knowingly failed woefully in its role of regulation and supervision of banks, but also missed the achievement of its prime objective of price stability in the economy by a very wide margin; this failure was in spite of the fortuitous 'excess' foreign revenue that should have primed us for success!

In the light of the foregoing, one must recognize the adept propaganda machinery of the CBN in the last five years, such that while we progressively descended into the pits of poverty as a nation, most Nigerians saw the evil machinations of the CBN from a benevolent perspective!

However, we may ask, how did the CBN get it so wrong with such a costly price to our wellbeing? The answer to this has been canvassed in this column in several articles over the last five years, and we have maintained unflinchingly that the failure of CBN's monetary policy framework and the consequent adverse impact on our fortunes as a nation is the gross mismanagement of money supply!

Macroeconomic stability, according to the CBN brief quoted above is defined “as a function of price stability, which is, the ability of a Central Bank to moderate inflation, attain stable interest and exchange rates and create a conducive investment climate for long term growth and development”.

Inflation impacts negatively on all income earners and consequently adversely affects our standard of living. In growth focused economies, inflation is regarded as intolerably high if it approaches 3%, and this may be contrasted with consistently double digit inflation in Nigeria over the last two decades! Lending rates for commerce and industry in progressive economies hardly exceeds 9%; check Japan 's less than 1% against the 25%+ for such loans in Nigeria .

Exchange rates in successful economies recognize the simple laws of demand and supply; in other words, a country's exchange rate would be stronger in the face of rapidly increasing foreign revenue, especially if its imports values remain largely unchanged or indeed fall. Contrast this with the naira experience which has suffered tremendous downward pressure in spite of quadrupling foreign income over the years!

A graphic example is the naira rate of N80=$1 in 1996 when our total foreign reserves of $4bn provided imports cover for just four months, as against our foreign reserves of over $60bn providing over 36 months imports cover in 2008, yet our naira fell to N140=$1 by the end of that year! Indeed, our current reserves of about $40bn still provides us with possibly 15 – 20 months imports cover, but the naira is still falling to nearly N152=$1 as at last week.