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The Putrid Messalso in CBN! (2)

By Les Leba
The Governor of the Central Bank of Nigeria, Lamido Sanusi continues to leave no one in doubt that CBN reforms and sanitization of the banking sector is ongoing.  Late in January 2010, the CBN once again unsheathed its sword to truncate the erstwhile unlimited tenure of Chief Executive Officers of banks to a maximum tenor of 10 years! 

It is not clear what determined the 10 years tenor, but what is clear is that this directive is in tandem with the ‘holier than thou attitude’ brazenly flaunted by the current CBN Governor since his appointment last year.

However, serious analysts have begun to wonder if we are not again gullibly being led to the slaughter slab on the wings of public deceit and ignorance!  The CBN Governor has carried on as if the CBN he inherited was the Pope’s Inner Sanctum with angelic officials.

Indeed, editorials in Nigerian dailies rightly recognize that the incidence of rampant margin loans, reckless share price manipulations and heavily cooked trading results, which precipitated the banking crisis, could not have happened if the regulatory authorities were effective and uncompromised!

Furthermore, the way things are, simple minded Nigerians might be tempted to think that all will soon be well once the banks have been taught a lesson! But the truth which Sanusi knows very well is that the core mandate of the CBN is “price stability’ in the economy!

CBN’s template for success in this area is yet to be revealed as high inflation, commercial lending rates and a ‘struggling’ naira continue to plague economic growth and employment.  In our attempt to correctly skew our perspective on the economy, the piece “The Putrid Mess also In CBN (1 – 3)” was published in September last year!

The text of part 2 of that article is reproduced below in an attempt to ensure we keep our eyes on the ball of true economic recovery and price stability rather than the thriller of ‘spurious’ bank reforms, which are conceived and supervised by the same cast who presided over the sector’s failure in the last five years!

By the way, what about a limited one_term tenor of not more than 5 – 6 years for CBN Governor?  The mind boggles as to what depths the economy would have fallen if Sanusi’s predecessor who kept assuring us that all was not only well but perfect, was allowed to remain for 10 years!

Following is the text of “The Putrid Mess Also in CBN (2)”.  Food for thought, you may say!
“Most of our people would recognize the role of commercial banks as custodians of our savings, but probably much less are in reality acquainted with the role of banks as lenders to individuals as well as corporations.

This is not surprising as possibly less than 10% of our estimated population of 150m are engaged as deposit customers with the banks while the percentage of those who have ever been locked in bank advances and loans for whatever purpose may not exceed 1% (or 1.5m Nigerians).  Thus, in spite of the ubiquitous presence of commercial banks in several towns and cities within the country, there is still a huge chasm between the banking sector and the majority of our people.

“If only a very small proportion of Nigerians have a banking relationship, and/or recognize the roles of banks, then it may be safe to conclude that with the functional remoteness of Central Banks, possibly less than 0.1% (150,000 Nigerians) are truly conversant with the roles and objectives of a Central Bank.

Indeed, the unfettered media presence of the immediate past Governor brought the institution into public consciousness more than ever before, and consequently many more Nigerians, even when they had no direct interaction, became acquainted with the role of the apex bank as the ‘Headmaster’ of the banking sector.

“However, the role of commercial bank regulation and supervision is generally seen as an end in itself and very few Nigerians recognize that the CBN’s core mandate is in fact the maintenance of price stability in the economy.

“Indeed, a brief published on the internet by the Legal Services Division of the apex bank describes the objects of the bank as contained in Section 2 of the CBN Act 2007 as follows: XX “The object of price stability has now been distinctly included in the core mandate of the bank.

This is informed by the fact that the core function of every Central Bank is the maintenance of price stability.  It should be noted that macroeconomic stability is essential for growth and development in any economy.   Macroeconomic stability is itself a function of price stability which is the ability of the Central Bank to moderate inflation, attain stable interest and exchange rates and create a conducive investment crimate for long term growth and development.

In order to achieve and maintain this objective, however, it is imperative to keep a close watch on government spending as persistently huge budget deficits tend to lead to volatility in prices which in turn negatively impacts the standard of living.

The price stability objective will therefore enable the CBN to adopt the necessary measures, in collaboration with the fiscal authorities, to control the rate of inflation.”

“The question that jumps at you from the above excerpt is how well has the CBN succeeded in the management of the critical index of price stability, seeing that the possibility of economic growth and development and social welfare are predicated on this factor, according to CBN admission?

“The answer to the above question equally jumps at you, as increasingly more Nigerians look back in nostalgia at the good old days when a medium size loaf of bread cost 10kobo and primary, secondary and even university education in some states were free!  Nigeria is now catalogued amongst the poorest nations in the world inexplicably at a time when we earned more foreign revenue than ever before!

The government readily admits that over 50% of our population are jobless, and that almost four million youths are thrown into the pool of Unemployed every year!  The current minimum wage of N7,500 buys much less than the N250 paid in the 1980s, which may even command more value than the N50,000 currently demanded by the trade Unions.

Obviously, something is fundamentally wrong as these wide price and wage variations cannot be classified as consonant with the CBN prime objective of price stability in the economy and may, indeed, be regarded as prima facie evidence of the failure of CBN in bringing succor to our people with the implementation of its mandate.

“The dysfunctional state of the banking sector before the advent of the present Governor is possibly conclusive evidence that the CBN not only knowingly failed woefully in its role of regulation and supervision of banks, but also missed the achievement of its prime objective of price stability in the economy by a very wide margin; this failure was in spite of the fortuitous ‘excess’ foreign revenue that should have primed us for success!

“In the light of the foregoing, one must recognize the adept propaganda machinery of the CBN in the last five years, such that while we progressively descended into the pits of poverty as a nation, most Nigerians saw the evil machinations of the CBN from a benevolent perspective!

“However, we may ask, how did the CBN get it so wrong with such a costly price to our wellbeing?  The answer to this has been canvassed in this column in several articles over the last five years, and we have maintained unflinchingly that the failure of CBN’s monetary policy framework and the consequent adverse impact on our fortunes as a nation is the gross mismanagement of money supply!

Macroeconomic stability, according to the CBN brief quoted above is defined  “as a function of price stability, which is, the ability of a Central Bank to moderate inflation, attain stable interest and exchange rates and create a conducive investment climate for long term growth and development”.XX

“Inflation impacts negatively on all income earners and consequently adversely affects our standard of living.  In growth focused economies, inflation is regarded as intolerably high if it approaches 3%, and this may be contrasted with consistently double digit inflation in Nigeria over the last two decades!  Lending rates for commerce and industry in progressive economies hardly exceeds 9%; check Japan’s less than 1% against the 25%+ for such loans in Nigeria.

Exchange rates in successful economies recognize the simple laws of demand and supply; in other words, a country’s exchange rate would be stronger in the face of rapidly increasing foreign revenue, especially if its imports values remain largely unchanged or indeed fall.  Contrast this with the naira experience which has suffered tremendous downward pressure in spite of quadrupling foreign income over the years!

A graphic example is the naira rate of N80=$1 in 1996 when our total foreign reserves of $4bn provided imports cover for just four months, as against our foreign reserves of over $60bn providing over 36 months imports cover in 2008, yet our naira fell to N140=$1 by the end of that year!  Indeed, our current reserves of about $40bn still provides us with possibly 15 – 20 months imports cover, but the naira is still falling to nearly N152=$1 as at last week!

“What you may ask is the impact of these anomalies to economic growth.  Well, to start with, serious economies recognize the role of interest rate as a driver of economic development.  They recognize that investors and entrepreneurs will refrain from initiating expansion or indeed an industrial concept if the cost of borrowing is prohibitive.

A loan taken at over 20% would almost double in three years, possibly even before the project for which the loan is taken is fully operational.  Reduced investment means fewer jobs, and fewer jobs mean less income, not only as tax revenue to government, but also a depletion of total disposable income in the economy.  This in turn creates an impediment for the survival of existing industries which depend on a larger base of disposable income.  With an interest rate level of over 20%, it is not surprising that we have over 50% of Nigerians unemployed and inevitably, we are now reaping the reward of increasing insecurity.

“The unfortunate inverse relationship between the naira and our foreign reserves is also responsible for the collapse of industries and depletion in the purchasing power of the naira.

Indeed, if our exchange rate mechanism recognizes the laws of demand and supply, fuel prices will fall, deregulation will become possible with all the attendant advantages and industrial raw materials will fall in prices and price stability will be maintained in the economy with increasing employment!

“Next week, we will discuss the underlying factor beneath the paradox in our economy.”

SAVE THE NAIRA, SAVE NIGERIANS!


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.