Rational Perspectives

June 15, 2009

CBN Governor, Sanusi Will Need Courage!

By Less Leba
Several friends and acquaintances, both within and outside the media have contacted me lately for my reaction to the recent change of guard at our country’s Central Bank!   My callers were generally rather disappointed at my tepid response of ‘let’s wait and see.

I explained that my subdued response was the result of my observation of the performances of former CBN Governors, particularly in the last two decades, during which time Nigeria’s economy climbed down from the exalted position of an awakening African tiger to its current humble position among the world’s poorest nations in spite of the fortuitous increases in crude oil prices and the related vast export revenue earned within the same period!

The Central Bank Governors during that period came with impeccable credentials for the job; yet, they failed during their tenure to turn round the economy.

Generally, CBN Governors immediately before Soludo had solid backgrounds in banking without necessarily being core economic professionals, so the appointment of the erudite PhD degree holder in Economics raised  hopes that possibly a ‘Daniel has come to judge’!

Regrettably, Soludo’s tenure, in spite of its being blessed with abundant best ever federal revenue, actually witnessed the most challenging times for Nigeria’s critical mass as unemployment soared to over 50% of the population, with almost a total collapse of the real sector and spiraling inflation reducing the purchasing values of all income earners!

The appointment of Sanusi Lamido Sanusi may once again rekindle the hope that his antecedent as a core economist as well as a very successful practicing banker may be the right mix for the job of CBN Governor!

Some apologists of the immediate past Governor may maintain that the CBN Governor alone does not constitute the federal government and in this sense Soludo cannot be blamed for our present dismal economic paralysis!

However, people who hold these views forget that the prime role of a Central Bank Governor anywhere in the world is to evolve economic and monetary frameworks that would create an enabling environment that would stimulate and sustain economic growth!

Thus, the fact that we have a failed economy after five years of ‘Soludonomics’ is ample testimony that no matter what Soludo may have ‘achieved’ during his tenure, the failure of our economy at his point of exit is a demonstration of the disenabling economic and monetary framework, which he nurtured.

The relevant questions here are, what constitutes an enabling environment, and what should Sanusi, the new CBN Governor do to create an enabling environment that would jumpstart our economy and stimulate wealth creation and improvement of social welfare?

In answer to the first question, we may draw substance from the reaction of Central Banks in well managed economies to the recessional impact of the global financial crisis!

Even casual observers will recognize that the prime instrument of choice deployed against the economic downturn has been that of Monetary Policy Control Rate of each country’s Central Bank!

Thus, we have Japan’s Central Bank reaction with a rock bottom control rate of just over 0%, while the Bank of England and the Federal Reserve Bank of America have crashed their monetary policy control rates to below 2% from between 3 – 5% just over a year ago!

In addition, these banks have devised frameworks to flush the financial system with liquidity (i.e. cash).

In contrast, our own CBN maintains a monetary poly rate of almost 10% with the abiding consequence of commercial lending rates touching 22% plus other charges!

The truth is that industries and economies do not grow with such atrociously high interest rate levels.

Thus, while entrepreneurs and industrialists in Japan, the U.K. and U.S., for example, may be emboldened to venture into new business, or consolidate or expand current business with an enabling framework of low cost of borrowing,  Nigerian businesses may not survive in an environment with inadequate infrastructure and high interest rates!

Besides, our already handicapped businesses are forced to compete with the government for loanable funds when government auctions treasury bills and bonds in the market (read as government removes funds from the system, thus creating cash scarcity while focused Central Bankers elsewhere in the world are pumping funds into their financial system with low interest rates!)

Additionally, regrettably, the funds so borrowed from the market in our own case is generally plainly warehoused and not directed to any productive enterprise in spite of the high cost burden (N300bn in 2009 budget) to the economy.

From what we can glean from various interviews and media reports of Sanusi’s opinion on the economy, it is clear that the new Governor recognizes the significance of the appropriate management of the instruments of interest rate and exchange rate and the implication of ravaging inflation on an economy.

Sanusi had described the positioning of these indices as the management of ‘an unholy trinity’; in other words, one or the other of these indices would have to be sacrificed for the other two factors to have positive impact!

I recall this same lamentation as a weak defence from the former CBN Governor when the contradictory and debilitating results of his monetary management began to become apparent and poverty continued to deepen in the polity in spite of rapidly increasing federal revenue!

I would admonish Sanusi not to hide under this false cover of the predicament of ‘an unholy trinity’!

Indeed, Sanusi has already expressed that he may have to accommodate further naira depreciation so that the economy could enjoy lower interest rates and lower inflation!

However, from a well considered perspective, I believe this would be a grave mistake, and he may end up a greater failure than his predecessor in office!

If the truth be told about our economy, it is the exchange rate mechanism that drives the interest rate structure and inflation, and not the other way round!

The monopolistic stranglehold of the CBN on the nation’s foreign exchange revenue and its role as the sole supplier of naira into the market are the reasons for our economic woes!
Conversely, CBN’s monopoly of the forex market also ensures that a reduction of export revenue does not even translate into lower liquidity.

This is because lower dollar export revenue will induce further ‘strategic devaluation’ of the naira so as to maintain the nominal naira allocations to the three tiers of government; such huge naira allocations will once again trigger banks’ credit expansion and create excess liquidity and induce further mop up operations!  This appears to be a case of ‘heads I win, tails you lose’!

In addition to the needless increasing national debt burden, the CBN penchant to deter people/businesses from borrowing also implies a high CBN monetary policy rates which in turn trigger high lending rates in the financial system with a collateral reduction and contraction in the commercial and industrial landscape with adverse consequences for employment and security!

Thus, the CBN’s capture of our dollar revenue and its unilateral substitution of increasingly worthless naira into the economy are indeed responsible for the aberrant interest rate structure and the abiding inflation in the system as well as a weakening naira.

In other words, the more dollars we earn with CBN’s unilateral rate fixing (rather than a free market mechanism) the greater the threat of excess liquidity, which will then be followed by the incessant and dislocational mop up by the CBN with irresponsible and wasteful bond issues by the government at great and increasing cost to our nation, but, with nothing to show for such exuberant borrowings!

Now that Sanusi knows the truth, will he have the courage to pay allocations of dollar revenue with dollar certificates and dispel the ghost of the ‘unholy trinity’ so that our economy can rise again?