CBN and the Ostrich

Last week, CBN’s Monetary Policy Committee agreed to keep the Monetary Policy Rate (MPR) at 12%, but decided to increase commercial banks’ Cash Reserve Ratio (CRR) from 8 – 12%. In the aftermath of this decision, CBN accused the Money Deposit Banks of not lending to the real sector. CBN governor, Lamido Sanusi decried the reality that “rather than lend to the real economy, the banks have continued to take advantage of the high yields of government securities to direct credit away from the core private sector.”

Not only that, CBN also belatedly recognized that the excessive liquidity of the banks had provided opportunity for speculative activities in the forex market. Sanusi finally concluded that the product of banks’ anti-economy activities is the reality of aggregate domestic credit declining by over 5% between June 2011 and June 2012.

Regular readers of this column may be forgiven if they imagined that Les Leba was actually the speechwriter for Sanusi’s presentation, because, the observations expressed by Sanusi are in full consonance with our advocacy in this column for almost a decade. To that extent, therefore, I feel vindicated that, finally, the authorities now recognise that this column has not deliberately set out to carelessly oppose the policies of the CBN without any just cause!!

Alternatively, while we have ceaselessly maintained that CBN has in its portfolio the antidote to the problems of bank lending to the real sector and fund diversion to speculative foreign exchange transactions, Sanusi, unfortunately, in his media address lamented that the apex bank was handicapped as it could not force the commercial banks to lend. Presumably, this could also mean that CBN, in spite of the usual braggadocio on its ability to supervise and control the banks may indeed have compromised that ability; that, of course, would be very tragic.

It is also curious that in spite of banks’ aversion to real sector lending, and their evident affinity for anti-social speculative forex activities over the years, CBN, nonetheless, continues to featherbed the money deposit banks at the expense of our economic and social welfare.

Indeed, we recall the humongous bailout sums, which the CBN made available to save the banks and encourage them to support the real sector. The additional public funds of over N2tn injected into the banks through AMCON has also done little or nothing to boost lending to the real sector nor has it restrained the banks from speculative forex trading.

Consequently, the ultimate impact of CBN’s and AMCON’s injections have been the instigation of an inflationary spiral, because these funds, which are literally cash creations by CBN, inevitably increase money supply and engender a cash surfeit in the system.

In other words, while the money deposit banks go home with a smile on their faces everyday, millions of ordinary Nigerians go home with a huge frown on their faces because of the economic deprivations ignominiously nurtured by CBN.

Not yet done, CBN, in apparent collusion with the banks, instituted the cashless policy in the expressed hope that the operational cost of running each bank would fall by at least a third. CBN had earlier noted that cash handling costs were responsible for over a third of the infrastructural and labour costs in bank operations; therefore, ‘cashless’ banking should reduce bank-operating costs accordingly, and thereby encourage banks to lend to the real sector.

Well, regrettably, once again, there is no indication that the banks are better primed or inclined to either lend to the real sector or to curb their appetite for speculative forex trading. Furthermore, CBN is evidently also in a dilemma concerning its core mandate for price stability in the economy, as core inflation rate (which includes price index of food items) is now on the inflammatory threshold of around 15%.

Indeed, Sanusi noted that”the committee recognized that a logical response (under the circumstances) would be an increase in the MPR, especially, considering the impact of sustained liquidity in the banking system on exchange rates. Consequently, rather than further fueling the rate of inflation with high MPR, the committee decided to increase the Cash Reserve Ratio from 8 – 12%”.

Undoubtedly, CBN appears totally confused; meanwhile, it stubbornly refuses to accept the truth that the poison in its monetary model is its monthly substitution of naira allocations for dollar-derived revenue. This, surely, instigates the eternal curse of excess liquidity and also drives high interest rates and fuel prices, and further provides an unending source of funds for speculative forex trading.

Until CBN accepts this reality, its shenanigans will be synonymous with the ostrich with its head stuck in the sand in the hope that it would become unnoticed; it would be a mark of gross insincerity for CBN to follow suit.



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