By Leba Leba

In the preamble to justify the hike in monetary policy rate to 8% and the increase in cash reserve ratio to 4%, CBN’s Monetary Policy Committee (MPC), in its communiqué No. 76 of May 24, noted that:

“Notwithstanding the recent monetary policy tightening measures implemented since January 2011, the committee observed that inflation rate remained at double digit level .…”

The policy making body of the apex bank is simply saying that its attempt to halt continuous rise in prices (of goods, rents and services) this year has failed!  It is, of course, unusual to observe such candour in self-evaluation by government parastatals; so it was not a surprise that the CBN Committee, in line with tradition, was also quick to shift blame for not taming inflation to “the apparent role of structural factors and supply bottlenecks in the elevated inflationary pressures in Nigeria.”

Again, what CBN is saying here is that factors outside its control (presumably, epileptic power, high fuel and transport costs, and distortions in the supply chain of foods and consumer goods both locally produced & imports) are to be blamed for the inability to tame inflation below 10%.

CBN also blames the surge of prices on increased spending by government and recent increases in public sector wages and the prospect of “possible removal of subsidy on petroleum products; … and further liquidity injection due to AMCON activity.”

Well, it seems CBN has pointed fingers at everything and everybody but itself in its identification of the major instigators of inflation.

Yes, it is true that excessive government spending could trigger inflation, but increased government spending is generally recommended for jumpstarting a depressed economy, as cash injections would create consumer demand by putting more money in more hands.

Entrepreneurs will rise to the challenge of meeting increased consumer demand by retooling and creating more employment opportunities; the resultant multiplier effect goes a long way to stimulate the economy.

It is not clear how the MPC expects industrial revival and increasing employment, with less and less government spending.

It is also evident that recent increases in public sector wages remain largely unimplemented.  Indeed, even if all federal agencies have adopted N18,000 minimum wage, beneficiaries of this ‘largesse’ form a small proportion of total national labour force!

So the inflationary risk of adoption of a nationwide minimum wage can only remain a potential and not a real or major threat!

Again, petroleum subsidy removal, which the MPC also blames for unstoppable inflationary spiral is yet a potential threat as the subsidy still remains firmly in place!

Finally, we must wonder at CBN’s identification of AMCON operations as fuel for inflation. Certainly, in the run-up to the establishment of AMCON, the threat of inflation was never mentioned as a possible downside to this contrived magnet for toxic debts.

Nigerians will recall that the refrain was that “AMCON will soak up bad debts which restrained banks’ lending to the real sector.

The banks were expected, thereafter, to be more cash laden, but certainly, the resultant liquidity was never identified as a major factor that would keep inflation uncomfortably above 10%!

It seems as if CBN created a bigger problem of an inflationary spiral, while trying to find solution to the simple challenge of credit to the real sector!

We recall that AMCOM is a child of CBN, but it seems its activities have now become a threat to our economy!

The above analysis is an indication that the MPC may, indeed, be a wee bit confused!  Indeed, CBN’s observation on the distribution of available market credit is also commendably honest, but its diagnosis of the problem is obviously skewed.

The Committee readily admits that in spite of all its reforms and financial engineering to promote credit expansion by banks, “aggregate credit continued to decline!”

A cynic might observe here that this is just as well, , as, success of CBN’s drive for bank credit expansion would only have complicated an already saturated market liquidity position and further compounded the threat of inflation!!

In spite of the decline of aggregate credit, the MPC further admits that the distribution of available credit has not promoted economic growth either as, “the huge growth in credit to government against the backdrop of continuing decline in private sector credit clearly indicates that government borrowing is crowding out private sector credit.”

The MPC is finally on the same page with the position expressed in several articles in this column (see www.lesleba.com) that even when CBN indicated that banks’ credit was expanding in the last eight years, it was always clear that government was, in fact, the prime customer of money deposit banks!  Is this a surprise?  Certainly Not!

The banks are in the business of lending money, and the easier and riskless the loan, the better for banks, and if banks could earn interest above 10% for such loans, so much the better still, it makes no difference whether the loans go to government or the real sector!

A perfect partnership can be said to exist for banks when a customer who is willing to borrow at above 10% happens to also be the same customer who places huge deposits with the same bank at no cost whatsoever!

Some readers may not believe that such ‘paradise’ exists for Nigerian banks, but they are wrong! This is the reality of the current relationship between government and banks!!

Thus, CBN’s monetary policy framework is not only openly crowding out the real sector, and thereby constraining the economy, as noted by the MPC, the government itself is also the provider of the funds that it turns round to borrow back from the banks at rates above 10%!

The CBN Committee recognizes this bonanza, as it observes in its communiqué that banks “have become increasingly risk averse and have preferred to channel their funds into the relatively risk-free government sector.”   Can you imagine a constant rate of return of 10% plus on a risk free business?

A CBN apologist may concede that such rate of return is unusually high for a risk free investment, but may argue that it is incorrect to imply that government, itself, funded such loans.

Well, my response to this objection is to invite our readers to examine the cause of the unyielding plague of excess cash (liquidity) which inevitably triggers rising inflation.

A casual but regular acquaintance with media reports will reveal that the money market becomes flooded with cash when monthly naira allocations are paid to the three tiers of government. These allocations are invariably paid into the bank accounts of beneficiaries!

The hundreds of billions of Naira improve the cash position of banks and provide leverage for credit expansion that could be multiple times the actual cash deposit.

So it is not the cash deposit that is the cancer, but the huge leverage that the cash provides for bank credit expansion; such unhindered credit expansion would inevitably unleash or make available too much spending power in the system.

Consequently, the ‘Godfather’, a.k.a. CBN, now altruistically attempts to restrain the banks from lending to the limit permissible by their huge cash positions, by increasing its Monetary Policy rate (i.e. rate at which it lends to banks with cash shortages), so that the banks in turn are compelled to also increase cost of borrowing to their own customers, which include government!

For example, CBN’s current MPR of 8% will push cost of funds to well above 20% as the MPC communiqué under reference readily admits that retail lending rate was about 19.5% when MPR was 7.5% in April.

Although the objective of MPR hikes is to discourage spending by making borrowing more expensive, there is unfortunately the collateral damage to industries, whose products may become uncompetitive with higher cost of funds.

Ultimately, higher production costs would destabilize economic growth and engender increasing unemployment with attendant adverse impact on the economy.

Nonetheless, increasing cost of funds may not be sufficient to stop ‘excessive’ credit expansion; CBN additionally embarks on removing perceived excess cash in the system to stem an inflationary tide!

To this end, CBN would, itself, seek to borrow from the same banks to whom it earlier paid statutory allocations!!  In this manner, CBN and the Debt Management (read as Debt Creating) office borrow an average of about N200bn every month from the money deposit banks.

It is not unusual, for example, for CBN to pay allocations of over N400bn only to return soon after to borrow back half this sum in its attempt to reduce bank credit expansion and spending, and breach any threat of inflation!

Most of our nation’s rising domestic debt has been accumulated over the last eight years from such CBN market interventions and over N500bn has been earmarked for servicing such debts in the 2011 budget.

Never mind that these debts make no tangible contribution to our economic welfare, as they are simply sterilized by the monetary authorities.

The only beneficiaries in this charade are banks, who receive government deposits and also make billions from charging double-digit interest rates for its risk-free lending to same government!

It is not clear why our monetary authorities adopted this destructive framework for controlling excess liquidity and spending over the years.

A mandatory increase in cash reserve ratio of banks would similarly limit the extent to which banks can extend credit, and is cost-free.

In the same vein, the plague of excess liquidity and attendant inflation can also be controlled by banking government allocations with CBN, in place of the same money deposit banks that government borrows from.

Certainly, the most plausible industry and employment friendly antidote would be the payment of dollar-derived component of monthly allocations with the instrument of dollar certificates.

This process would banish the ghost of excess liquidity, engender possibly lower single digit inflation and interest rates, and stimulate industrial revival and expansion with salutary impact on employment; it would lower fuel prices and induce a stronger naira.

It would significantly also reduce our debt burden and service charge and save about N600bn currently paid for fuel subsidies.  These savings would become available for remediating our infrastructural deficits and promoting economic and social welfare.

This simple and inexpensive solution to CBN’s war on inflation has been in the public domain for over ten years, but it seems our MPC find the path of economic perversion easier to tread!

Since this article was first published on 6/6/2011, in an inadvertent testimony to abysmal  failure of its monetary policy, the CBN has further increased MPR to 8.75% in a futile attempt to reduce bank lending and cage inflation, not minding the adverse impact on industrial growth, employment and deepening poverty.

SAVE THE NAIRA, SAVE NIGERIANS!!