“What we have seen is that instead of banks channelling what we call excess liquidity in the system into the productive or certain targeted sectors of the economy, what they are doing is either placing these monies in treasury bills or even investing them at the CBN Windows”

The preceding excerpt is from the CBN Governor, Godwin Emefiele’s comments, when he spoke to journalists shortly after the latest meeting of the Monetary Policy Committee (MPC) in Abuja recently. Emefiele, frantically expressed the Committee’s consternation that inspite of the resounding reality of the acute needs of the real sector for moderately priced funds, the banks were inexplicably, sitting comfortably over N300bn, idle, excess funds; the MPC’s concern was further heightened by the reality that with an imminent injection of an additional sum of N866bn into the system when AMCON’s debts are redeemed in October, the surplus Naira could exceed N1000bn; worse still, inspite of this bountiful Excess Naira supply, the banks, according to Emefiele, still do not show any apparent inclination to support the real sector and instigate industrial expansion and job creation.

Consequently, it would be fair to ask, if banks do not freely lend to the real sector, then to whom do they lend to make such comparatively bountiful profits which are largely unattainable in preferred subsectors which have better capacity to induce inclusive economic growth; for example, recent media reports suggest that while 12 Nigerian banks posted 6 months after tax profits which are about 15 percent of gross revenue, industrial giants such as PZ and Guinness posted 12 months after tax profits that are barely 8 percent of their gross revenue!

So how come banks are so profitable, even when they ignore “the ample opportunities for productive and profitable lending to the real sector of the economy” as rightly also observed by the CBN Governor?

Indeed, according to Emefiele, “given the apathy to lending to the real sector, banks may become more inclined with the imminent cash injection of N866bn in October to lend their surplus cash, ironically, to a captive Central Bank”, despite the Governor’s sharp criticism of the product of such borrowing. Now the critical question, obviously is, why banks prefer to lend to the CBN instead of the real sector? In reality, the answer is quite simple and straightforward, no rational investor ignores a risk free investment that unfailingly yields over 10 percent rate of return, in favour of a more risk prone investment with lower rate of return. Actually, the higher profitability in investing in Government’s Treasury bill sales is probably the major factor responsible for banks’ apathy to lending to the real sector. 

One would normally expect the imminent injection of N866bn of fresh funds in October to further increase the level of cash surplus in the system and spur bank lending to the real sector; regrettably, this will not happen as we will actually witness more aggressive sale of Treasury bills by the CBN to mop up the increased excess cash in the hands of the banks instead.

We may be pardoned for asking why the same CBN which decries bank’s apathy to lending to the real sector, inexplicably turns out to be the real villain that prevents access to the surplus cash by the productive sector. Ironically, CBN would consider its aggressive borrowing strategy as altruistic as its intention is to reduce the amount of surplus funds and restrain inflation (i.e. too much money chasing fewer goods and services); in truth, uncontrolled inflation is a silent plague that decimates an economy and its citizens over time.

Furthermore, the over N1000bn surplus Naira that will become available after the imminent redemption of AMCON debts will also pitch so much more Naira against rationed dollar supplies in the forex market and this imbalance will according to Emefiele also “increase the pressure on the Naira Exchange rate.” In other words, price stability, which is the core mandate of the CBN will become severely threatened when the economy is ‘cursed’ with so much excess liquidity.

Evidently, even though predictably, CBN’s strategies to control the extent of surplus cash in the system have so far all failed to achieve this objective. For example, even though the CBN recognises that its high monetary policy (control) rate translates into high cost of funds charged by banks for loans to the real sector, the Apex Bank still appears incapable of bringing down its policy rate below 12 percent, despite the adverse consequences of the prohibitive cost of funds to inclusive economic growth.
Furthermore, even when it is clear that CBN’s strategy of increasing the mandatory cash reserve requirement (CRR) of banks has also become largely ineffective in modulating the extent of surplus cash, the Monetary Policy Committee nonetheless, has retained the Cash Reserve requirement (CRR) at 75 percent for public sector deposits, while the requirement for private sector deposits remained at 15 percent. In reality, the folly of simply increasing the CRR of public sector deposits appears lost on the MPC; evidently, raising the CRR for Public Sector deposits will only be meaningful for containing excess liquidity and prevent liberal consumption, if Ministries and government’s Agencies never spend their monthly revenue allocations; the inevitable reality is that these allocations will automatically migrate to become private sector deposits, once staff salaries and contractor’s bills are settled by MDAs.

Clearly, the CBN cannot be sincerely committed to liquidating the scourge of excess liquidity when it seems to shy away from addressing the root cause of eternally surplus, and idle cash in the system.

Undoubtedly, excess liquidity is caused by the monthly substitution of Naira allocations for dollar derived revenue by the CBN; indeed, a little objectivity will confirm that the adoption of dollar certificates as the instrument of choice for paying dollar derived revenue will immediately extinguish the decades long unnecessary burden of excess liquidity and the attendant  profligacy of placing government deposits at zero percent and forever mopping up same at double digit interest rates; furthermore, apart from the possibility of appropriately restoring cash equilibrium and caging inflation with this strategy, the Naira will practically defend itself and become stronger in the forex market without much interference from the CBN. The CBN is aware of this solution which is also amplified in the monetary policy thrust statement of the Vision 20:2020 blue print.   

In any event, we must wonder why, inspite of its adverse consequences to economic growth, the CBN would continue to pay double digit interest rates in order to sterilise surplus funds in the banks; it really should not require any persuasion for the CBN to adopt the current best practice of the European Central Bank which charges the domestic money deposit banks a token fee of 0.1 percent to warehouse surplus funds rather than pay any interest to the banks; unless of course, the CBN has committed to serving the needs of our oppressive oligarchs rather than the protection of the welfare of over 70 percent of Nigerians who earn less than $2 a day!