Sobowale On Business

May 27, 2024

Consequences of a vital promise broken


By Dele Sobowale

“To impose the usual anti-inflation medicine of higher interest rates and tighter money-supply will only kill the patient [Nigerian economy]…The better solution is to find ways to increase production and supply.” — RENEWED HOPE DOCUMENT, page 30.

BY the time your read this article, the Central Bank of Nigeria, CBN, would have increased interest rates for the fourth time since Yemi Cardoso was appointed governor. Ask Cardoso, and he will tell you that his monetary policies will save the economy in the long run. Unfortunately, millions of Nigerians would have passed on before the long run. Human beings don’t eat and live in the long run. They must eat today and every day. The CBN has no timeline for when Nigerians can expect regular food supply. That is one of the tragedies of the first year of the Tinubu government. This conflict of views was predicted long before  now. What is undeniable is the fact that the economy is now being killed by the federal authorities – fiscal and monetary policy makers alike.

In February, I got published an article titled ‘FG and CBN On collision course”. In that article, the FG and CBN were likened to two hands in which the left does not know what the right is doing; while working at cross purposes. The CBN had announced its approach to monetary policy which set it on a collision with the inevitable measures the fiscal policy managers must adopt. Tinubu, in the RENEWED HOPE document, was obviously opposed to interest rate increase. Right now, the CBN’s frequent interest rate increases will certainly send more manufacturers packing very soon; and ensure few new factories will start off until further notice. 

“Governments are best classified by considering who are the “somebodies” they are, in fact, endeavouring to satisfy.” — Alfred North Whitehead, 1861-1947.

One of the repercussions of the latest round of interest rate increases will be to further divide Nigerians into two groups – the gainers and the losers. Banks and other lenders invariably are the gainers; their earnings from loans will climb up; the FG, state governments and borrowers in the private sector, as well as the rest of Nigerians, facing higher prices, will lose. It has been said repeatedly that the best government is one which provides the greatest good to the greatest number of its citizens. Fighting inflation with steeper interest rates, which is conventional approach to solving the problem, is creating a nation in which ninety nine per cent of Nigerians are being sacrificed for the benefit of one per cent. Without realizing it, the CBN is making it clear beyond reasonable doubt that it is out to satisfy bankers. Whether or not that can continue remains to be seen. Paradoxically, the bankers might eventually join the losers.

High interest rates induce  bankruptcies

“History never repeats itself, man does.” — Barbara Tuchman, 1912-1989.

Human beings, through their political leaders, who are always self-centred, commit the same blunders which result in great tragedies. For instance, the world is lurching towards another World War, which like the first one might be caused by a small incident. The Nigerian economy currently favouring banks, like global conflicts, might eventually turn against the banks. Here is why.

Bank failures of 1997 resulted in the Failed Banks Decree of 1997. Before the banking crisis, which prompted the Abacha regime to enact that decree, several second generation banks, established when the Babangida administration liberalised banking, spent the previous two or three years declaring outlandish profits and dividends in a distressed economy. In late 1996, I published an article on this page to make two predictions. The first was to announce a banking crisis any time soon. The second was to list 19 banks, ignorantly regarded as sound, which would fold up. Top among them was Alpha Merchant Bank, headed by Jimi Lawal, who was the darling of the Nigerian Stock Exchange, NSE. History would record that 17 of the banks listed went down. The remaining two were rescued by Abacha on account of personal interest. The failure of banks in 1997 occurred because banks were recording fantastic profits when other companies were generating losses. It was unrealistic that the situation would continue indefinitely. It didn’t.

Fast forward. When Professor Soludo, Governor of Central Bank introduced the banking consolidation programme, which whittled down Nigerian banks from about 73 to 25 mega banks in 2006,    I was one of few dissenters. The objection was not to the idea, but, to the speed of implementation. We were convinced that the initiative would not work as envisaged because Nigerian banks were not adequately prepared to manage the geometric rise in assets. The minority, including me, had its say; Soludo had his way. In 2006 and 2007, the banks were again declaring huge profits. By 2008, virtually all the banks were in distress. By 2010, ten no longer existed; today, less than 10 still operate. Collectively, they left N6 trillion toxic loans which fellow Nigerians were forced to swallow; and which we still cannot vomit.

I can cite several other instances when the CBN Governor has brought Nigeria to ruin despite warnings on this page. But, why bother? Each and every time, the CBN has operated based on mistaken assumptions; and would not entertain dissenting views. Yet, the principles of economics remain the same from time immemorial. Even die-hard socialists have not published a textbook which refuted the fundamental issues of supply and demand – however modified by practice. For reasons hard to understand, managers of the Nigerian economy have simply refused to acknowledge  that our underlying problem is productivity – resulting in scarcities of everything from dollars to food to medicine.

Governments have been the worst culprits of borrowing to maintain entities which are not productive. At Federal and state levels, only a few Ministries, Departments and Agencies, MDAs, generate the revenue budgeted for them each year; some record as low as 20 per cent; or less than their payroll. Yet, the workers are fully paid each month for low productivity. Governments at every level currently constitute the biggest subsidy programme we have. And, given the rising debt accumulated everywhere, we are borrowing to support those who contribute next to nothing. A visit to any government ministry will convince the reader of the waste of our financial resources on the public sector.

One thing is certain. Another round of interest rates increase will enrich the banks and impoverish the rest of us, in the short term. But, because economic indices often behave like boomerangs, if pushed too far, what makes eminent sense in one era becomes a danger to even the winners in the long run. An example from advanced nations will help to illustrate the boomerang effect of measures carried too far. In Japan, some European countries, China, declining populations, resulting from low birth rates now pose dangers to retirement programmes and economic growth. Having two kids per family raised average family income. Then some families decided on having just one; and some individuals no longer marry. In the future, pension schemes might not be well-funded. Old people will again suffer – as they did before the Industrial Revolution. Nigerians will be in high demand globally – if well educated.

Meanwhile, we will all suffer the repercussions of high interest rates NOW.

*Follow me on Facebook @ J Israel Biola.