CBN act and oppressive failure of monetary strategy -By Henry Boyo

The public’s usual refrain to rising prices is that “manufacturers/suppliers/farmers have increased prices of their respective goods and services;” the supplier is evidently the villain in public consciousness; it would indeed require the patience of Job to convince most Nigerians that such a condemnation was misplaced and it may even be more difficult to also put the blame for high cost of funds at the doorstep of the Central Bank of Nigeria. Consequently, it would be unbelievable to even suggest that the CBN is in fact the “devil in our economic workshop”.

Evidently, money is the binding glue that also predicates all economic activity; it is also true that without the instrument of money as a means of exchange and a store of value, modern economies would fail. It would be chaotic if everyone could simply create or introduce their own acceptable versions of money as this would ultimately lead to millions of different “brands” of money, with indeterminate purchasing power. Apart from the ensuing market confusion, the unregulated and compulsive creation of individual money “brands” would set so much purchasing power arbitrarily against few goods and services. Inevitably, the prices of all goods and services will spiral.

It is expedient therefore for every government to approve and mandate a single supply source for a nation’s currency. Consequently, the CBN, constitutionally, performs the role of the sole custodian and supplier of all naira. Nonetheless, if the CBN exhibits reckless “abandon” in its creation and supply of the naira, the impact of the resultant price rise would not be any different from, if money supply gushed out from myriad sources. The CBN Act therefore ensures considerable measure of independence and shields the apex bank from political interference and any pressure to excessively print more and more naira. The CBN’s mandate for appropriately managing money supply for inclusive economic growth is defined as the maintenance of price stability, which basically includes keeping a lid on the general price level, by modulating money supply in step, with productivity, while also ensuring that businesses can borrow at cost levels that would sustain industrial and economic growth with increasing employment opportunities.

Instructively, whenever, the CBN pumps too much naira into the system, both inflation and cost of funds are adversely affected, as increasing naira supply will not only drive the general price level but may also encourage easy access to loans and increasing consumer demand which could further fuel inflation. In such an event, the CBN regularly resorts to jerking up the rate at which commercial banks obtain loans from the apex bank whenever there is the need to shore up their cash positions from time to time. Thus, if the CBN’s monetary policy rate is 13 per cent as it currently is, the banks may be compelled to lend to their customers at the industrially unfriendly rate of over 20 per cent! It is revealing that while the CBN’s MPR is oppressively high at 13 per cent, the policy rate in successful economies is usually below three per cent!

Thus, foreign loans are generally cheaper than the rates offered by our money deposit banks and it is also clear that goods produced with cost of loans below seven per cent will always be more competitive than those local productions which are funded with over 20 per cent interest rates under severe infrastructural deprivations.

The CBN also has the constitutional mandate to maintain exchange rate stability; a currency with an exchange rate that is constantly on a steady decline, particularly in an economy that is heavily dependent on imported raw materials, will also increase domestic production costs and our goods may not successfully compete against cheaper imports. Instructively, therefore, the more liberal the official supply of the naira, the weaker ultimately will be the exchange rate as more naira chase the CBN’s limited dollar auctions in the money market. As a result, ravaging inflation, high cost of funds and a continuously weaker naira are all symptoms of the CBN’s excess naira creation and supply!

So, in the light of the above, why then does the CBN continue to induce excess naira supply in the economy? The unfortunate reality is that the apex bank impulsively instigates the oppressive consequences of a “surplus naira syndrome” every month when it substitutes fresh naira supplies for distributable dollar revenue. Farcically, the CBN proceeds immediately thereafter to remove/reduce part of the excess naira supply by borrowing back from commercial banks hundreds of billions of naira every month with over 10 per cent rate of interest to actively propel banks to lend at much higher rates to customers so as to contain inflation by discouraging borrowing and spending.

Incredibly, funds borrowed by government at such high cost will not be applied to remediate our health, educational, power inadequacies or indeed for any other positive social benefit, as such expenditure would only reintroduce more funds into an already naira suffocated economy to rapidly drive a beleaguered train of inflation, higher cost of funds and a weaker naira.

Incidentally, the CBN and the Monetary Committee see the mandate for price stability as simply maintenance of stability at any level, even if such levels, as in our current predicament, mean stability of disenabling high inflation rates, around eight per cent, disruptive cost of funds at over 20 per cent, and the naira exchange rate which for over 20 years has never responded positively to our increasing foreign reserves in spite of extended import covers!

Sadly, the CBN which is evidently the villainous agency which regularly poisons the money market with excess naira supply has got away with this obvious rape of our economy for so many years without any sanction. Indeed, the tenure of the CBN Governors has nothing to do with success in maintaining industrially and economically stable rates of inflation, e.g. One to three per cent as in focused and successful economies or indeed in bringing down cost of funds to industrially friendly levels such as five to seven per cent across the board (not selective bailouts which only exacerbate excess liquidity and the collateral of high inflation and interest rates with an embattled naira in tow)!

Consequently, in order to ensure best practice standards in monetary strategy, it is absolutely necessary that our expectation for international best standards must be enshrined in the CBN Act, so that any CBN Governor and Monetary Policy Committee incapable of bring inflation below three per cent, or fails to keep monetary policy rate at not more than two per cent above the International standard of the London Inter Bank Offer Rate (LIBOR – usually between one and three per cent) should resign from office, if such best practice standards cannot be re-established within three to six months. The Governors of Central Banks in successful economies would not be condoned if inflation and cost of funds are at such atrocious oppressive levels. This provision would force every CBN Governor to make sound monetary decisions to evolve practical strategies, such as for example, the containment of excess naira supply with the allocation of distributable dollar revenue with dollar certificates rather than the direct substitution with naira and the resultant scourge of naira surplus on our people. The adoption of such a strategy will readily galvanise inclusive economic growth and rapidly remove increasingly more Nigerians from below the poverty benchmark of $2/day.