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Printing naira for bailout

A major aspect of the recent developments in the banking sector is the amount of funds; N 420 billion which the Central Bank had to inject into the affected banks in response to their reported chronic liquidity.

Naira sign
Naira sign

An immediate reaction came from shareholders who raised some concern about the implications of the funds injection for them as shareholders; that is there was the worry how this will all play out particular as there have  been various comments made regarding the manner the Central Bank would exit this investment and the other  was the controversy regarding why the Central Bank did not seek the appropriation of the National Assembly before committing such funds on this venture.

Incidentally both issues came up during the recent road show which the Central Bank coordinated to reassure third party stakeholders overseas that Nigerian banks, in spite of developments, are well able to keep to their obligations particularly arising from correspondent relationships which is a move well advised in the context of the downgrade of the Country’s risk rating by some Rating agencies overseas.

It was reported that during the town hall meeting in London that the Governor was asked how he sourced the bailout money and that he replied that the Central Bank printed money, which in Central Banking parlance is referred to as ‘Ways and Means’ finance. He explained that the Central Bank created an asset on its balance sheet, which is exactly what a loan is and not long after that some prominent commentators were in celebratory and jubilant mood that this is what they advocated during the immediate past dispensation at the Central Bank  as an appropriate response to the global financial crisis to mitigate its impact on the country.

Therefore this commentator is recommending that we flood the country with Naira and forget about all the hullaballoo regarding the crisis. You cannot but wonder when you hear such comments. It immediately reminded me of an experience I had during the second republic. I had accompanied  Alhaji Umaru Mutallab, who was then the Chief Executive Officer of United Bank for Africa Plc, as an employee of the Bank to attend the Senate hearing on the budget when this prominent officer of the Senate who is still very much around remarked  rhetorically that he could understand the problem with finding dollars but not Naira.

Fortunately I was able to keep myself from bursting out laughing. People who make such comments seem  not to appreciate the long time relationship between money supply and price inflation!  Coincidentally I am reminded that  the day in question was the day the NET building on Marina went up in flames.

There  is a required amount of money in circulation in an economy which is consistent with the objective of achieving targeted level of inflation with the attainment of commensurate level of employment. It is not often easy to estimate accurately what this level should be but Central Banks in the recent past have been quite adept at  controlling the currency in circulation to achieve smoother business cycles and minimise the incidents of recessions. Ben Bernanke the Chairman of Federal Reserve refers to this aspect of Central banking operations as  ‘ The Great Moderator’. The  other small matter is that some commentators actually took the Governor literally on his reply that the bank printed money quoting that an amount of one billion Naira was expended on the  printing of the notes. Waoh!  The Central Bank did not and would not do anything like that. It simply credited the accounts of the respective banks enabling them to draw their cheques.

On the matter regarding how the funds injected would be paid back there are a number of positions reported in the press. First the Governor of the Central Bank was reported  to have said that the money injected is of the nature of Tier 2  capital which the banks would keep until they stabilize and can pay back. At some point  in time five to seven years was mentioned as the tenor of this lending.

Then there was talk that the Central Bank would be glad to exit the investment as soon as its money is refunded, even if such refund would be made by a foreign interest, as there is nothing in the law that would debar foreign interests from owning shares in Nigerian banks. Of course existing shareholders have voiced their preference that such foreign interests are welcome to start up their own banks. Then as a fallout from the London road show the Central Bank had to deny that part of the agenda that informed the road show was to find foreign investors for the troubled banks.

On this issue what could be safely concluded is that the matter is still fluid. It will not be wise to foreclose any options right now. But the Central Bank has to be circumspect in the way and manner it exits this investment so that it does not inadvertently give credence to those who have claimed the existence of a hidden agenda. When the time for exit  comes it must be  handled transparently in consultation with the existing shareholders.

When I started hearing the word  ‘Appropriation’ in connection with the loan given to the banks I said to myself that all this is happening because the fund injection has been reported to be Tier 2 capital in which case if it’s an acquisition then an appropriation or concurrence would be required. But Tier 2 is subordinated capital which is available to be used in the business and carries a fixed coupon and which sometimes has a terminal date.

On this matter the Governor of the Central Bank was invited by the House Committee on Banking to explain why he did not seek appropriation from the National  Assembly before embarking on such a venture as the Constitution of the Land gives exclusive rights  to the National Assembly on such matters. I saw the hot exchange on television. There was so much anger and aggression on display. It must not be so!

There should be an overlap of interest in these matters. What I intend to do in the rest of this article is to take us on an excursion exploring the key duties and responsibilities of the Central bank at the end of which we should hopefully be in a position to reach a decision whether what has happened regarding the funds injection  is within the mandate and purview of the Central Bank. This is necessary particularly as there is already talk of revisiting the Central Bank Act if it really authorises the Central Bank to act so brazenly!
The primary responsibility of the Central Bank is the maintenance of price stability ( read low rates of inflation)  with the promotion of non inflationary growth and development of the national economy.

The Bank also has the responsibility for  the maintenance of the soundness and stability of the financial sector, acts as banker and adviser to the Federal Government and has responsibility for acting as a lender of last resort to the banks. The rate at which it lends to the banks when it discharges this obligation, which is the nominal anchor for interest rates in the economy was until recently referred to as the Minimum Rediscount Rate ( MRR ).

This designation was recently changed to  the Monetary Policy Rate. Therefore a major aspect of the function of the Central Bank is to provide liquidity for banks in times of need and crisis. The Bank also indirectly lends and borrows from the banking public as it conducts its Open Market Operations which it commenced on June 30, 1993 as it sells and redeems  securities to regulate the available liquidity in the economy.

But the most visible and obvious power of Central banks is its influence on the prevailing level of interest rates in the economy and this is based on the Bank’s ability to create as much fiat money as is required. The other major aspects of the Central Bank functions is the issue of legal tender currency in the country and the maintenance of the external reserves to safeguard the external value of the Naira. Therefore the functions of the Central Bank any where is replete with lending functions. It would not be designated as a Central Bank otherwise!


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