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Utter Confusion in CBN Monetary Policy-by Les Leba

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he question on the lips of all concerned Nigerians lately is whether or not the abysmal decline in our economy can be arrested by the measures currently adopted by our Central Bank. My usual response to this question is that you cannot sow rice and hope

to reap cassava (a la Majek Fashek)! To be clear on this issue, we may identify the salutary features of an improving economy to be as follows: single digit/low interest rates to encourage industrial activity; increasing employment, increasing disposable income, stable price level, (inflation below 5%), lower petrol prices and a transparent and market determined exchange rate regime.

Meanwhile, the overt measures currently adopted by the CBN to turn around the economy and impact positively on the above objectives are as follows: almost N700bn has been printed, according to the CBN Governor, and released into the banking system to prevent failure in about eight commercial banks, whose patrons are depositors and shareholders, who may not exceed 1% of our estimated population of 140m. We acknowledge the argument, of course, that other patrons of otherwise stable banks would also be adversely affected if the CBN failed to prop up ailing banks! Nonetheless, we note the observation of Mr. Victor Itonyo, the President of the Association of Micro Finance Banks (Rivers State) that “statistical records based on a survey carried out by the CBN show that out of the over 140m people in this country, less than three percent of people have access to banking facilities!!” (Punch 7/10/09 – pg 20).

Now, so what this means is that the CBN plugged the debilitating leakages in the banking system with over N700bn just to protect the interest of less than five million Nigerians!! Good for them, you might say, but what about the rest 135m Nigerians? How would they benefit from this humongous CBN largesse? Well, presumably, they would also benefit if industries are alive again, and more jobs were created and income earners were paid adequate living wage, etc, etc as a result of recovery of these banks!

Regrettably, however, the N700bn 'protection fee' for 3% of Nigerians will not have any such salutary effect! We recall that $7bn (or over N1000bn) was given to 14 commercial banks by Soludo, after consolidation four years ago to enable them stimulate growth in the economy; the result of that cash injection is high lending rates, a reduced industrial landscape, increased unemployment, and a drop in our ratings to the bottom of the ladder of the world's poorest at a time when we earned more export revenue than ever before! So, there is nothing to suggest that the relatively 'paltry' N700bn now being injected in eight banks would have a different or positive impact. As if in realization of this fact, the government in its wisdom has lately also agreed to instruct the CBN to release $2bn (N300bn) from the escrow account of the illegally constituted excess crude account. It does not matter that our Constitution is yet to be amended to accommodate the State Governors' closet decision to endorse Obasanjo's creation of this illegal account; our rule of law advocate-in-chief obviously also prefers to conveniently ignore the criminality of this illegal account!

Anyhow, the net effect of the fallback on excess crude account is that the CBN may have to print more naira or at best inject additional N300bn into the bank accounts of the three tiers of government this month! Note that once more, the banks (with less than 3% Nigerians as patrons) are once again the prime beneficiaries of this largesse because the additional cash lodgments would enhance their ability to expand lending to their customers! But, the banks' good fortunes do not end there, because they are also the custodians of the usual monthly allocations from the federation account to the three tiers of government! These payments have averaged an additional N300bn monthly for the last four months! With all these funds in the hands of the banks, you would think that the real sector (including Manufacturers Association and members of Chambers of Commerce and Industries and other Small and Medium Industrialists) would shout hallelujah; but this will not be the case, because the real sector are not the only ones waiting to pounce on these huge funds!

Here is the twist in the tale; the reality is that the same government agencies which have liberally pumped over N2 trillion into the hands of the banks in the last four months, also realize that if the capacity of the banks to expand credit on the platform of this huge liquidity base is not curtailed, there would be too much money chasing a diminishing volume of goods and services in the system! Believe or not, the CBN has consequently already moved into the market to reduce the amount of cash in the system so as to prevent inflation or a rising price level that would diminish the purchasing power of all income earners, such that the N50,000 minimum wage currently demanded by Labour today would not buy less than the same value of goods that the same N50,000 would have bought in, say, January this year!

To save the day, the CBN has already embarked on a heavy borrowing binge from the same banks into whose hands it had earlier liberally pumped so much cash! The CBN has in the last two months sold over N200bn worth of treasury bills primarily to banks (which have become heavily cash laden as a result of CBN benevolence or misguided monetary policy, some would say)! The burden to the Nigerian economy for such unforced CBN debts may exceed the almost N300bn provided for payment of interest for such borrowings in the 2009 federal budget! Remember that the purpose of such CBN borrowing was to remove money from the system, so it would be anomalous for the borrowed funds to be reintroduced by the government into the banks to tackle those critical areas of infrastructural deficit that exist.

Indeed, the CBN itself has unabashedly admitted severally that these borrowed funds are simply sterilized, (read as kept as idle funds in CBN vaults and accounting records)! Some analysts have described such poisonous monetary framework as voodoo economic management! How can too much liquidity exist side by side with inadequate liquidity for infrastructural and industrial regeneration? Fellow Nigerians, this is a malady we have suffered in our economic management in the last three decades!

Indeed, this ugly framework is responsible for the continuous decline in the purchasing power of our local currency, the naira, over the years, as CBN's substitution of increasingly worthless naira for our export dollar revenue means that we become 'cursed' with increasing naira balances in the banks with any increase in the dollar revenue that we may earn. Thus, any fortuitous rise in crude oil prices, will inevitably translate into excess naira liquidity, which the CBN is then forced to remove from the system by borrowing back these funds at an average cost of 10%! Furthermore, the huge naira balances available with the banks also ensure that the comparatively modest sums of dollars brought by the CBN to its weekly foreign exchange auctions become automatically confronted with the huge naira cash and credit balances which are available with the banks to swallow each week's dollar auction. In this manner, the naira value would paradoxically always depreciate with increasing dollar revenue!!!

The most serious distortion this causes apart from the firing of an inflationary spiral is the inevitable rise in fuel prices domestically with the attendant dislocations to the general price level. So, instead of increasing crude oil prices generating increasing dollar export revenue and reserves and an expected rise in the value of the naira, the converse becomes our reality, such that even a former Chief Executive of Nigeria National Petroleum Company (NNPC) was reported to have prayed at a time of Labour's resistance to fuel price increase that crude oil prices should fall drastically so that domestic fuel prices will also fall, notwithstanding the huge revenue loss that would be suffered by the NNPC and the Nigerian economy at large!

So, the probability of economic recovery from the foregoing analysis remains very dim, so long as Sanusi's monetary policies tow this inherited path of perfidy! A word, they say, is enough for the wise.