$20BN IDLE DEPOSITS:BURDEN OR OPPORTUNITY?
BY HENRY BOYO
''As I'm talking to you, $20bn is in various domiciliary accounts of individuals. Naira is our currency, why are they keeping the foreign currency? From my experience in international finance, I have never seen a country where its nationals speculate on its currency" (Dr. Joseph Nnana, CBN Deputy Governor at a recent meeting with the Joint Appropriation Committee of the National Assembly).
According to Nnana, the huge idle dollar deposits in domiciliary accounts are allegedly “part of the reason why the naira has continued to slide against the dollar". Nevertheless, Nnana warned that CBN will not just “sit down and watch the consistent fall of the Naira"; consequently, "CBN will embark on aggressive liquidity mop up to make the Naira stronger''.
Incidentally, CBN's instrument of choice for 'defending' Naira may seem 'strangely' consistent with my ceaseless advocacy, for several years, to minimize surplus Naira. Perhaps this belated confirmation of the congruency of our separate observations, on the poisonous impact of persistent excess Naira supply, will dispel any misgiving about the true objective of this column. The question then, becomes why it took CBN, until reserves dwindled to recognize this common sense cause of Naira exchange rate depreciation. Still, it is better late than never; but the reality nonetheless, is that aggressive liquidity mop, will inevitably also increase CBN's indebtedness, as Trillions of Naira perceived to be in excess supply will be borrowed and kept sterile, with the hope of inducing an appropriate enabling environment, with features of low inflation and interest rates that would successfully jumpstart and promote economic growth.
Furthermore, in addition to the unusually high cost of funds borrowed, CBN's defense of the Naira, in this fashion, will invariably also crowd out the real sector from access to cheaper funds, which the economy urgently requires to instigate production and create jobs. Evidently, the liquidity mop up projected back in Nov 2015 to soak up about N1.5Tn excess Naira supply between January-March 2016, is sadly, already counterproductive as it has failed to yield the desired positive results, because inflation and cost of funds are still inappropriately oppressive, while the Naira exchange rate remains under siege; ironically, however, despite this economic faux pas, Commercial banks will make more easy money from CBN's renewed vigor to 'aggressively' defend the Naira!!
Incidentally, Nnana also, paradoxically condemns speculators for allegedly manipulating the market against the Naira, without personally recognizing that CBN's regular dollar auctions are inadvertently equally strong bets on the dollar, as the numerically highest Naira bids would normally dictate the eventual AUCTION price of the dollar; thus, any bid for example, that is much stronger (i.e. numerically lower) than CBN's list price of N197=$1, may not have any forex to buy.
Indeed, the CBN Deputy Governor's palpable frustration at the dilemma of excess liquidity may wrongly suggest that the persistent challenge of surplus Naira supply is instigated extraneously by some untamable alien powers. The reality, however, is that CBN, actually has sole responsibility for creating and managing money supply as near as possible to an optimal equilibrium that would induce inflation and interest rate levels, that can successfully drive inclusive growth. Unfortunately, the consistent counterproductive impact of CBN's regular mop ups of excess Naira supply, continues to challenge consumer demand and restrain investment, with the attendant loss of potential job opportunities, while also creating a serious impediment to successful economic diversification.
Ultimately, sooner than later, the CBN would inevitably accept that the destabilizing dilemma of excess Naira supply will be substantially minimized if Naira payments are not directly substituted for dollar denominated government allocations.
Curiously, the recent revelation of $20bn idle deposits in domiciliary accounts, may, sadly suggest that the odious culture of warehousing and sterilising trillions of Naira as idle deposits in CBN vaults and accounting records, despite the apparent acute shortage of investible funds, may have sadly manifested also in the private sector, with billions of idle non interest yielding dollar deposits, which are not applied to any socially productive purpose. Sadly despite these huge idle balances, both government and private businesses, still inexplicably decry the non availability of reasonably priced funds to sustain vibrant economic activities, so that they do not compulsively obtain loans with shylock interest rates which ultimately make domestic production costs very high.
It is certainly perplexing that we are considering cap-in- hand external borrowing of $4.5bn to fund the 2016 budget, when in reality, our Money Deposit Banks are probably already, strategically round tripping the idle domiciliary funds in their custody as foreign investment to reap bountiful profits from their high yield business mainstay of lending to government.
It is probably trite to suggest that, idle funds are actually anathema to the culture and success of banking practice. Predictably, all depositors may never descend on banks to empty their accounts on the same day, unless there are signs of imminent distress in the sector. However, with the traditional predatory instinct of Nigerian banks, our indisputably 'smart', financial engineers would not have ignored the bountiful opportunity to surreptitiously trade with their idle dollars deposits with absolutely no oversight control whatsoever from CBN.
Ironically, however, the Peoples' Treasury may ultimately, be required to unfortunately, once again, bailout these same banks and restore international credibility to the sector, whenever banks recklessly mismanage depositors' funds or financially over reach themselves. Thus, in view of the above distressful possibility, it would be inappropriate for CBN to stand by idle until 'Alarm blow' in banks before reacting to quench the fire, by as usual, impulsively drawing down our precious national resources, while the errant bank executives invariably celebrate their usual soft landing.
Consequently, it is imperative that CBN should formally recognise the obvious danger of leaving $20bn as idle deposits in commercial banks, without regulatory oversight; the apex bank must therefore galvanise this latent wealth to successfully grow the economy. Advisedly, the deposits should remain as balances in personal domiciliary accounts with respective banks, but CBN must become formal custodian of the dollars, just as it is with Naira, so as, to minimise the risk of financial recklessness and also avoid the likely possibility of default, by ambitious commercial banks operating without regulatory oversight on their bountiful forex balances.
Furthermore, in the same manner that CBN stipulates appropriate cash reserve ratios(CRR) to influence the amount of Naira liquidity available for lending, similarly, the CBN could also formally adopt a conservative CRR of about 50 percent to reduce the attendant risk and formally empower commercial banks to positively apply idle forex balances to work in the economy with supportive interest rates below 7 percent. Indeed, with such arrangement, and a monetary policy rate of, say 2 percent, the owners of domiciliary accounts may also earn between 2-3 percent on their savings rather than the Zero return they currently endure annually.
Nevertheless, without prejudice to Naira as legal tender, every holder of a domiciliary account must be allowed free access to their dollar deposits, in the same manner that owners of Naira deposits currently operate their accounts. However, forex denominated loans must be dedicated to critical industrial subsectors with potential to drive multifaceted opportunities in manufacturing, agriculture and solid minerals; furthermore, forex balances may also be applied to the provision of critical, and visible, life changing infrastructural projects which have expansive positive social impact. Indeed, government loans are considered to be relatively risk free, because our National assets serve as guarantee. Evidently, the erstwhile idle, burdensome dollar deposits, will probably be safer in CBN's custody than if they remain as uncoordinated idle balances in Commercial banks without appropriate regulatory oversight.
SAVE THE NAIRA,SAVE NIGERIANS!!