Buhari vs A Clueless MPC

More Nigerians will probably consider widespread insecurity, unstable power supply and our faltering economy as the three most critical challenges for which would have to urgently find sustainable solutions to. Nonetheless, some critics may trace the root of insecurity to increasing desperation from unemployment and “forced” idleness on a rising proportion of our youth population.

There is probably a consensus, however, that the prevailing suffocating unemployment rate would be minimised if the economy was “bubbling” with industrial and commercial activities. There is, probably, also a consensus, that steady power supply would trigger a burst of economic activities that would readily mop up idle youths from our streets to reduce the threat of insecurity.

It is however less obvious that despite the best intentions of government in the privatisation of the subsector, power supply may never become stable if enabling regulatory monetary indices also elude our economy. For example, the inability to access cheap funds has been identified as a major constraint to the capacity of companies to effectively provide stable power supply. Evidently, only few businesses with such medium to long term gestations can survive if they are funded with the prevailing interest rate of over 20 per cent.

Furthermore, a weaker exchange rates will continue to spur electricity tariff (just like petrol price) to make complete deregulation of the power sector also unpopular. The preceding suggests that insecurity will diminish, and power supply will become steady, only when an enabling economic environment is in place. Universally, the relative ratios of inflation and cost of funds usually signal the growth trajectory of every modern economy. For example, as best practice, inflation will generally remain below two per cent in more successful economies, so that consumer demand will be sustained to power-increasing industrial activity.

Similarly, wherever the inflation rate is closer to 10 per cent as in our case, poverty deepens, as incomes lose about 50 per cent of purchasing power every five years with adverse consequences for consumer demand and ultimately for national productivity and employment.

Clearly, the objective of management in successful economies would be sustainable lower cost of funds below seven per cent to encourage borrowing and spending in order to sustain consumer demand and also make cheap funds available to the real sector to produce and create more jobs, which in turn support further consumer demand in a cycle of productive economic activity and inclusive growth.

Clearly, the above scenario sharply contrasts with the management of our domestic economy, where the critical monetary indices which drive growth are in reverse gear. Thus, it would be calculated mischief for anyone to suggest industrial regeneration or economic diversification or indeed to express serious expectation for rapid job creation when inflation is almost 10 per cent while cost of funds exceeds 20 per cent.

Clearly, as witnessed from our national experience, abundant natural resources will not automatically translate to sustainable economic growth without the universal drivers defined above to galvanise resources to produce increasing social wealth which will in turn engender enhanced security, if distribution is more equitable. The question therefore, is, who has the responsibility for entrenching those strategies that will bring about the desired enabling environment?

Well, in addition to its responsibility for banking regulation and supervision, the Central Bank of Nigeria has a constitutional mandate to establish minimal inflation and low cost of funds. The also has the responsibility to manage the naira exchange in the best interest of the economy.

Indeed, the autonomy of the apex bank was enshrined in the 2007 CBN Act to protect the CBN in performing its crucial mandate. Furthermore, the CBN Governor also heads a Monetary Policy Committee which comprises eminent professionals who receive bountiful allowances to convene on a bi-monthly basis to dictate the direction of the monetary strategies in line with perceived needs of the economy.

Sadly, the strategies endorsed by the in recent years have failed to create the enabling environment for economic rebirth, while the impact of several of the Committee’s decisions has become counterproductive.

Clearly, the inexplicable systemic burden of surplus cash has become the albatross of the MPC and made it impossible for the CBN to restrain inflation below three per cent or keep cost of funds below 10 per cent. Consequently, Nigeria’s economy has remained grounded with disturbing social consequences for several years.

Regrettably, the eminent professionals in Nigeria’s Monetary Policy Committee seem impervious to the socially oppressive impact of their decisions on millions of helpless Nigerians. For example, the MPC’s high monetary policy rate of 13 per cent will guarantee banks a free income of over N600bn, in return for lending back, primarily, government deposits, to both the CBN and the three tiers of government in 2015! This bounty would be supplemented by over N30bn that banks would also earn for warehousing close to N100tn of their excess funds with the CBN (“CBN hides banks’ interest earnings on standing deposit facility” page 28, Vanguard, May 18, 2015).

Furthermore, the usually juicy returns from forex transactions will also embellish bank profits this year. Conversely, however, in more successful economies, banks would normally pay a fee of up to one per cent rather than earn interest for placing their surplus funds with their respective Central Banks. It is inexplicable that so much idle surplus funds exist in Nigeria’s economy while the real sector remains severely deprived, and the CBN remains eager to keep the funds sterile by selling Treasury Bills which pay interest rates of between 12 and 15 per cent for the surplus cash it borrows.

In the manner of a futile trial and error exercise, the regulator’s mandatory cash reserves for banks were differentiated, with the ratio for government deposits rising in steps within 18 months from 20 to 75 per cent only to become harmonised again with private sector deposits, at a consolidated ratio of 31 per cent at the MPCs’ May 2015 meeting. Sadly, however, systemic liquidity surplus remains unabated!

Indeed, media reports suggest that with the harmonised 31 per cent cash reserve ratio, the MPC may have unwittingly released additional liquidity of over N470bn into an already cash saturated market (“Banks gain N470bn liquidity from CRR harmonisation” page 26, Vanguard, May 25, 2015). Indeed, in immediate response to the ensuing liquidity surfeit, the CBN compulsively embarked on another borrowing spree to reduce the debilitating cash surplus in custody of banks with over N200bn Treasury Bills sold at mouth watering rates which were ironically above 12 per cent for risk-free sovereign debts, which normally attract less than two per cent interest rate in better managed economies.

Furthermore, the CBN and the MPC will not deny that systemic surplus cash is also responsible for the weaker naira exchange rates which trigger rising fuel prices to make deregulation of the sub-sector impossible.

Curiously, however, rather than address the root cause of unceasing naira surplus that clearly induces a weaker currency, the MPC’s rather irresponsible strategy is to endorse a system that formally allocates official revenue to both banks and the Bureaux de Change, at the CBN’s unilaterally determined exchange rate, while the real sector’s genuine forex requirements take several biddings to consolidate.

Inexplicably, despite the steady depletion of the CBN’s dollar reserves, every Nigerian tourist can still access up to $50,000 on their naira convertible ATM cards. Incredibly, the permitted access was $150,000 per person until earlier this year.

Thus, if the MPC’s shenanigans escape immediate attention, ’s tenure in office will not be radically different from the locust years of the recent past.

Written by Henry Boyo

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