In the wake of the 2008 financial crises, the Central Bank created over N4000bn fresh Naira supply, inspite of its attendant inflationary threat, to rescue the Nigerian banking sector.
Evidently, however, the bountiful profit figures declared lately by several banks would be clear testimony that, business is presently good in the sub-sector, particularly when compared with the relatively modest profit figures and systemic challenges in other industrial and commercial sub-sectors.
Conversely, however, the picture is far from rosy for AMCON, the vehicle created by CBN to soak up the toxic debts in the banking sector; ultimately, future generations may still be suffocated and entrapped by AMCON’s debt burden. It is equally worrisome also that inspite of the National sacrifice made to rescue banks, the same banks have regrettably not reciprocated with liberal access to low interest loans to support the real sector and create jobs.
Nevertheless, the banks cannot be blamed for the high cost of funds, since their high lending rates are, indirectly, deliberately instigated by the relatively high rates banks have to pay when they also borrow from the CBN to cover their inevitable occasional cash shortfalls. In other words, if banks can borrow from CBN at minimal cost, bank lending rates will be symmetrically reduced to support the real sector and induce economic growth!
The question, therefore, is why CBN deliberately keeps its monetary policy control rates as high as 12% despite the adverse impact and impediment of such high rates to industrial growth, economic diversification, employment generation and social welfare. The answer quite simply is that CBN recognises the adverse impact of the huge Naira surplus that it creates in the money market, whenever it pays hundreds of billions of Naira as monthly allocations to the three tiers of government; thus, the bigger the allocations, the greater also is the scourge of excess Naira supply which if left uncontrolled will readily drive an inflation spiral and jeopardise stability of prices of goods, services and exchange rates.
Consequently, it behoves the CBN to restrain such inflationary spiral by reducing the excess liquidity caused by the huge Naira allocations by seeking to borrow back and internally warehouse some of the resultant Naira surplus as idle cash in its vaults and accounting records. In order to reduce the excess money supply, the CBN would impulsively offer to borrow and pay mouth-watering interest rates on its sale of government’s Treasury Bills so as to encourage banks to part with some of the excess cash in their custody. Ultimately, the banks do not need much persuasion as it is unusual to earn such handsome double digit returns offered by CBN for what are ordinarily sovereign risk free investments, which should normally attract lower single digit interest rates.
We need not therefore, wonder how banks continue to post bountiful profit figures, while the real sector conversely, sadly falters with rate of unemployment steadily climbing with gruesome social consequences, as the CBN consciously and strategically crowds out the real sector from the funds they require to expand production and increase job opportunities.
So in truth, we can deduce, therefore that our challenged industrial sector and prostrate anti-social economy is actually engineered by none other than the same CBN whose constitutional mandate is ironically to create an enabling economic environment.
In a recent article titled, “The Strategic Blunders of CBN’s Monetary Policy Committee”, we noted as follows: “Late in June 2014, the CBN borrowed over N134bn with treasury bills to reduce excess liquidity; similarly, the CBN again borrowed N70bn and another tranche of over N134bn between the 9th and 23rd of July, 2014. It needs emphasizing that the over N340bn loans incurred by the CBN within four weeks will not be deployed towards the remediation of our severe infrastructural deprivations nor indeed, can these funds be applied to remediate any deficit in the recurrent expenditure of government, because such spending would only re-introduce more cash into the system and increase the pressure and destabilizing consequences of already surplus cash in the money market!
Technically, therefore, the above mentioned N340bn loan would simply be warehoused as idle funds in the accounting records of CBN, notwithstanding that banks would still receive an average interest rate of about 10 percent on the funds borrowed by the Apex bank. In recognition of this reckless and destructive practice, former CBN Governor, Lamido Sanusi, last year, belatedly decried this inexplicable un-businesslike strategy and government’s apparent folly for placing its deposits at zero percent with banks only for government to return thereafter to borrow from the same banks and pay oppressively high interest rates.Nonetheless, the Economic Management Team remains unrepentant and impervious to this apparent fraud and appears determined to up the ante in its borrowings with Treasury bills, not minding the increasing national debt burden and the attendant economic and social dislocations caused.
Curiously, in addition to the N340bn borrowed between the 20th June and 23rd of July, 2014, the CBN once again sold an additional N195bn Treasury bills on the 6th August, to make a whooping N535bn to mop up surplus cash in less than six weeks ! At this rate of borrowing, the CBN may actually borrow over N3000bn that it does not need this year at double digit interest rates, notwithstanding that such loans and CBN’s high monetary policy rates also discourage banks’ lending to the productive sector and reduce the prospect of job creation.
The foregoing is clear testimony that CBN’s attempt to also control its self-induced systemic cash surplus by increasing the mandatory cash reserve ratio for commercial banks to 15 percent for private sector and 75 percent for public sector deposits has failed abysmally. Indeed, the strategy was pre-destined for failure, because it ignored the reality that public sector deposits can only be sequestered if they are not spent by the relevant Ministries, Departments and Agencies; inevitably, public sector deposits migrate into private sector accounts once, they are disbursed, as salaries, allowances or payment of contractors’ invoices.
Conversely, the European Central Bank has successfully managed the challenge of excess liquidity at negative cost by directing that European banks would henceforth pay the ECB a token interest rate of 0.1 percent on their surplus cash balances.
Instructively, if CBN adopts such a strategy, the days of easy profits for banks, would be over and banks would be forced to look to providing the real sector with ready access to cheap funds which will stimulate inclusive economic growth and job creation. Nonetheless, with his illustrious antecedent in commercial banking, Emefiele, the current CBN Governor may be unwilling to deprive his erstwhile constituency, the indulgent bounty and anti-social subsidy it has enjoyed for so long.
Clearly, however, the fundamental cause of the unusual ‘eternal’ burden of surplus cash, ironically existing simultaneously with high cost of funds, a credit starved real sector and deepening poverty still remains CBN’s substitution of Naira allocations for dollar derived revenue.
Without this odious payment system, the oppressive Treasury bill scam will cease and allow for more efficient resource allocation.
Save the Naira, Save Nigerians!!
By Henry Boyo
