MONETARY POLICY: WOBBLING & FUMBLING 11122006

The Central Bank (CBN) Governor, Prof. Soludo, on Monday, 4/12/06 unveiled a new brand name for an otherwise failed product at a meeting with banks’ CEOs and selected financial journalists in Ibadan.  In addition to snippets of reports in the print and electronic media, one gathered that Professor soludo believed that his decision to bring down by fiat the CBN’s control lending rate to commercial banks to 10% from 14% as an epoch event which aligns Nigerian’s monetary policy with what obtains in successful and developed countries all over the world!   

It is worrisome that it took so long to recognize that the erstwhile 14% CBN control rate (known up till Monday as the Minimum Rediscount Rate - MRR) was reckless and counter productive to the economic welfare of Nigerians!  If the banks were forced to borrow funds from the CBN and pay an interest rate of 14%, it was not surprising that commercial banks’ lending rates to customers were often in excess of 20%: rates which do not encourage real sector investment!  But, rates remained so high because the government itself willingly borrows from the same banks and pays up to 17% for the risk-free bonds which it sells in the money market?  The CBN Governor confirmed on Monday, that the control rate of the central banks of developed countries was the key instrument in determining the direction and vibrancy of macroeconomic activity in those countries, but the CBN guru preferred not to remind the audience that the control rates (known as the federal reserve rate in USA and Bank of England rate in the UK) in these countries hardly ever exceeds 5%!  Check the Bank of Japan’s control rate of less than 1%!  

The disparity in cost of borrowing notwithstanding, our government, tongue in check, wonders why imported consumables are much cheaper and more competitive than the local equivalents, the additional deprivation of decrepit infrastructure and insecurity notwithstanding!  Haba!  However,  in deference to sound marketing principles, our monetary aficionados, not to be left wanting, have rebranded the same old product with modest cosmetic packaging as the strategy of choice, and the erstwhile MRR was on Monday  renamed the MPR or “Monetary Policy Rate”.   

Nigerians may be befuddled by the change of name, and they may also not know the difference between the new and the old products if the actual liquid content of the product remains distasteful! in other words, if inflation and inappropriate exchange valuation of the naira continue to deal deadly blows on both the sparse and bloated incomes of the poor and the rich respectively, the change in the nomenclature of the CBN control rate would become really meaningless and a waste of time!  However, the CBN insists that “the ultimate goal of the new framework is to achieve a stable value of the domestic currency through stability in short term interest rates around an ‘operating target’, the interest rate, which will be determined and operated by the CBN”  D.Independent, 5/12/06, pg 2.   The preceding is a classic declaration of the basic functions of central banks all over the world, but why have we just discovered these universal truths belatedly in the conduct of our monetary and economic policy?  

Ordinarily, the fact that our monetary authorities have at last seen the tunnel (not yet the light!) should be a thing of joy, but the reality and impact of reduced MRR (sorry) MPR on a money market that is awash with over N250bn monthly allocations to the three tiers of government leave one with a rather uneasy feeling that we are being led to the slaughter slab!   Let me explain: you see, by the nature of banking, if a bank has a deposit of N1, it can usually lend N1 to each of say five people; in other words, the bank has created additional N4 in this example.  So, if N250bn is paid as allocations into the bank accounts of the three tiers of government, this immediately means that the banks can extend credit to the tune of N1.25trillion to their customers.  The fear of such huge funds floating around in the system without collateral production would sooner than later lead to rising inflation, as all these monies chase the limited amount of goods available.  

In other to restrain the banks from such unbridled credit expansion to customers, the CBN borrows back some of the funds it earlier deposited with the banks by selling treasury bills and government stocks called bonds; for these, the CBN pays the banks interest rates ranging from 12% for treasury bills (short term loans) to 17% for bonds (longer term loans).  The CBN is prepared to pay such high costs for these risk-free government borrowings which attract interest rates of less than 5% in developed countries, in order to discourage borrowing for further consumption locally.  Worse still, in our case, the monies so borrowed at such high cost is not put into infrastructure or human capital development; it is simply closeted or sterilized, while we proceed to borrow some more inspite of idle local and external reserves to pay pensions, contractors, etc!  Indeed, the sum of N270bn will to be paid by Nigerians to the banks in 2007 for the favour of lending back to government these funds.

It is in acknowledgement of this fear of excess cash or liquidity in the system that the CBN has become paranoid on the issue of spending more of our reserves to ameliorate the abject poverty of our people.  Instead of committing ‘suicide’, by changing more of our external dollar reserves into naira and lodging same into the bank account of the three tiers of government, it is less embarrassing to give the fat cats in the Paris Club some of these ‘burdensome’ reserves and also give an unsolicited, uncollateralized and time-unlimited  loan of $7bn to a group of Nigerian banks at a cost certainly not exceeding 4% per annum, while our people suffer infrastructural deprivations in all facets of life and are advised to look out for foreign investors to redress the imbalance!  

The same fear of excess cash in the system predicated Prof. Soludo’s explanation to the National Assembly recently that the Nigerian economy had reached the limits of its absorptive capacity and would ‘explode’ if more of our reserves were spent!  Well, there is no indication that our good Professor has found the solution to the perennial albatross of excess cash in the system, and with our current increasing reserve endowment, it would be virtually impossible to prevent additional injection of our buoyant reserves into the domestic economy; so, how does Soludo hope to stop unbridled credit expansion when bigger naira sums hit the banks from revenue allocations in the coming months?  That will be the million dollar question!  The authorities like ostriches have buried their heads in the sand and refuse to see that the only way out of our economic predicament is to pay the dollar component of distributable revenue with registered dollar certificates, as this is the only realistic antidote to the cancer of excess liquidity and our failing economy.