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Sanusi’s Monetary Policy Salvos

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By Les Leba
Sanusi, Lamido Sanusi, the new Central Bank helmsman has since his appointment made it clear that he was dissatisfied with the laissez fair approach of the apex bank’s supervision and regulation of the monetary market. Sanusi had similarly decried the commercial lending rate of 22% plus, as being inimical to investment, industrial consolidation and expansion and also frowned at the poor culture of transparency in the banking sector.

It was expected that the above issues would consequently feature very early in the menu of intervention designed to remedy the failings of monetary policy. Not surprisingly, the major decisions at the 64th Monetary Policy Committee in Abuja last Tuesday, 6/7/09 revolved around the apparent liquidity squeeze in interbank lending; the reduction of the Central Bank monetary policy rate and the unyielding problem of liberalisation of the foreign exchange market.

We will briefly evaluate the possibility of achieving the desired objectives with the nature of the policy instruments adopted by the CBN.

Lately, banks have had to pay close to 20% when they borrow funds between themselves to augment their cash positions to meet their obligation to their customers. The fact that banks did not approach the CBN to access funds then at the prevailing cheaper monetary policy rate of about 8% is most certainly a reflection of their adverse net balances with the apex bank.

Furthermore, it has been speculated that the adoption of a common year end for all banks has put tremendous pressure on all banks to exercise utmost caution in making fresh advances and also expedite the recovery of existing loans so as to give a positive picture of each bank’s health status come the 31st December 2009!

The implication of the above scenario is that banks have become suspicious of the actual financial strength of their counterparts and are therefore reluctant to extend credit to one another. Such a liquidity squeeze in the interbank market translates into higher cost of lending, and loans to industry and commerce may in fact overshoot the cap of 22% interest which was imposed by the former CBN Governor and rightly considered to be anti-investment and generally unenforceable by Sanusi.

The new CBN helmsman has since jettisoned any form of limits on either deposit or lending rates and has chosen to moderate the prevailing cash squeeze and high interest rate by guaranteeing all interbank placements up till the end of the first quarter of 2010, and also reducing monetary policy rate (i.e. the rate CBN lends to the banks) to 6%!

Money market observers would generally agree that the CBN guarantee may indeed ease up the credit crunch in interbank lending, but some may also question the principle and the ulterior implication of the 100% guarantee. The glaring defect is that the guarantee may obscure the true health position of each bank as it would allow even seriously, ailing banks to postpone the evil day, while contaminating healthier banks rather than promptly biting the bullet and reducing the spread of their toxic net with the ultimate dislocation of the entire economy.

Some analysts would have recommended that the CBN guarantee would be limited by the cash reserves of these banks with the CBN and the value of government’s treasury bills and bonds they hold! These analysts warn that the CBN’s apparent caution to prevent the failure of a single sick bank may inadvertently lead to a collapse of the whole system!

The efficacy of the new CBN monetary policy rate (MPR) of 6% is also debatable. The evidence on ground is that interbank lending rates as well as deposits and commercial rates have in the past been impervious to movements in the MPR.

Thus, for example, until lately when MPR was 8%, deposit rates covertly hovered around 12% while lending cost was in excess of 20%. These rates have not changed very much in spite of the MPR hovering between 14% and 8% in the last five years!

In other words, the new 6% MPR may not reduce the cost of doing business and stimulate demand and employment as per Sanusi’s expectation!

In fact, if the CBN’s wish is to induce greater liquidity in the system, its actions outside its latest Monetary Policy Committee Meeting seem to be at variance with this objective. For example, most print media (D.Independent, 9/7/09 – pg A6) carried a CBN advert relating to the sale of a total of N45billion worth of treasury bills by Dutch auction on Thursday, 16/07/2009 for the apparent excuse of mopping up excess liquidity (read as removing perceived surplus cash) from the money market!

The question is, if cash squeeze is the raison deter of CBN’s guarantee of interbank placement and its reduction in MPR to 6%, why is the same CBN simultaneously embarking on further reduction of the scarce liquidity in the market, and paying interest on moneys which are borrowed and just stored idly away? Even the uninitiated will agree that something is fundamentally wrong in this CBN model!!

In the same vein, it would be interesting to see how much the CBN will pay as interest for its treasury bill issues. If the coupon rate is for example 7%, then it means that the banks can borrow at the MPR rate of 6% and technically lend back the same funds to CBN at 7%!

The situation becomes even more curious when you recognize that the same CBN who is borrowing from the banks at more than 6% is also the same one guaranteeing interbank placements without the control meter of each bank’s reserve and gilt edge holdings! This also raises questions as to the $7bn shared between 14 banks by CBN under hitherto undisclosed terms.

If it is revealed that the 14 banks pay less than the current 6% MPR for these soft loans, the CBN should explain why it is borrowing at a higher cost from the same lenders who pay less for the government funds placed liberally with them!
Sanusi had indicated that he would also fast track the process of liberalising the foreign exchange market.

To this end, the wholesale Dutch Auction foreign exchange market would be reestablished after its suspension last year by Soludo! In this reintroduced dispensation, banks can now buy forex ex CBN speculatively in advance for customers rather than the retail system where banks purchased forex only specifically on the instruction of bona fide end users.

Furthermore, all recipients of forex do not have to sell such funds only to the CBN, as they are now free to sell directly to the banks! This system has erroneously been described as a liberalised foreign exchange market in the last five years!

Indeed, in the same manner that we do not have a deregulated supply framework for fuel imports because NNPC continues to account for over 70% of market supplies, we also cannot say we have a liberalised foreign exchange market when the CBN continues to singularly account for about 80% of the total foreign exchange market.

The monopolistic stranglehold of NNPC is the same as that of the CBN in the forex market and the dislocations caused by these unfair trade systems are reflected in the high prices of fuel and the low value of the naira, in spite of our increased dollar earnings in recent years.

Whereas, a truly liberalised market by definition accommodates multiple sellers and buyers with possibly no single player accounting for, say, more than 10% of the total value of the market!

In this regard, CBN’s capture of our nation’s export dollar earnings and its unilateral substitution of naira for such dollars before sharing ultimately constitutes a market aberration and dislocates not only the effective operation of monetary policy, but also ensures we incur increasing debt for borrowing funds we don’t use, and pay higher petrol prices with a subsidy cost of about N1,000bn, according to government sources, and also ensures that our naira rate comes under pressure when we earn increasing dollar revenue and suffers even worse pressure when our export earnings decline!

It is also this market aberration that makes it necessary for the CBN to regularly auction our dollar earnings and sell relatively scarce forex to bureau de change, who have as major patrons, money launders and smugglers. The adoption of dollar certificates for payment of export dollar revenue will wipe out most of the above contradictions.
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