By Dele Sobowale
“History does not repeat itself; man does.” Barbara Tuchmann, Historian, authority on 13th and 14th centuries in Europe.
My first articles on the Nigerian economy appeared in VANGUARD on Mondays in the 1980s, shortly before military President Ibarahim Badamasi Babangida, IBB, introduced the Structural Adjustment Programme, SAP. It was the most ambitious economic programme, ever, in our history. Even, till today, nothing has come close to the far-reaching impact of the economic policies.
The main thrust of SAP was to deregulate the economy and allow the private sector to take on those aspects of the economy which governments were running badly. Consequently, the Federal Government, which because of its investments in banking, airlines (Nigerian Airways), shipping (Nigerian National Shipping Line), Hotels (Federal Palace Hotels), Insurance (NICON etc) divested from those enterprises.
Foreign exchange rate, which was arbitrarily pegged by the Central Bank of Nigeria, CBN, was allowed to respond to market forces – although the country started with partial deregulation of the foreign exchange by adopting the Dutch option. That turned out to be a colossal mistake which undermined the objectives of the SAP.
However, of all the measures introduced by IBB from 1985 to 1993, none had such a dramatic impact as the instruction, given in 1989, to the Ministries, Departments and Agencies, MDAs, to withdraw all Federal Government and State Governments deposits in commercial and merchant banks and lodge them in the Central Bank. The reasons adduced for this order were clear enough. Three, however, will be sufficient for our purpose here.
First, it had long been established that most of the currency in circulation was outside the banking sector. Banks had grown to rely almost exclusively on deposits by governments and the Organized private sector and were contented to leave the over 70 per cent outside the system un-mobilized. The CBN wanted to change that in the hope that more money in the banking sector will drive interest rates down and promote investment.
Second, government deposits in the commercial banks attracted no interest while agencies of government still went about borrowing from the banks at high interest rates. It was thought that the new policy would at least save government the interest payments.
Third, it was discovered that some of public funds were deposited in private accounts for months, even years, earning interest for the owners, while governments went about borrowing. Government had no idea how much was in its accounts in the aggregate and decisions about borrowing could not be made with confidence. The new policy was designed to solve that problem as well.
On the face of it, one would have difficulties pointing to a flaw in government’s position. Unfortunately, economics is full of paradoxes. Measure taken by governments or individuals aimed at solving certain problems might solve them but create unintended consequences.
Thus, in the late 1980s, the withdrawal of government funds from banks immediately resulted in a liquidity crisis. Most banks could not find cash to pat depositors as and when due. Bank customers spent hours in banks trying to cash cheques. To mobilize deposits, banks increased interest rates. Finance companies sprang up offering higher interest rates to depositors than the commercial banks. Each finance house increased its rates in order to secure more deposits. As banks increased interest rates, they simultaneously hiked up lending rates. At one point lending rates topped 40% per annum.
Inflation reached about 30% per annum; prices of goods and services went through the roof; factory installed capacity was under-utilised; millions were retrenched and businesses folded up. UAC of Nigeria, the biggest business organization in Nigeria at the time, as well as others like PZ Industries and Leventis Group, merged some divisions, closed others and unemployment soared. In less than two years, the nation’s first banking crisis was upon us. Today, none of the finance houses, which sprang up is in business and most of the second generation banks have also gone under.
Incidentally, the order to withdraw government deposits from commercial banks and place them in the CBN occurred against the back ground of low crude oil prices which had tumbled from record highs in 1982 to less than US$10 per barrel. The country was earning less foreign exchange and the diversification of the Nigerian economy, which was one of the major goals of SAP, had not occurred significantly. Instead smuggling vitiated both the rice and sugar policies – aimed at making the nation self-sufficient in sugar and rice.
There was also the investment of large sums of scarce resources in the ill-fated “Wheat Programme” which was also supposed to result in wheat production in large quantities. Our continuing reliance on imported rice, wheat and sugar constitute the monuments to the battles we lost, when government deposits were suddenly withdrawn from commercial banks which were not prepared for the shock.
Will Treasury Single Account, TSA, work this time around? It is doubtful…