CBN and competitive financing of the economy
The CBN proposes to refund portions of the bank depositors’ funds lodged with the apex bank as cash reserve ratio (CRR) up to amounts lent by individual banks to finance projects in the agricultural and manufacturing sectors at the CBN’s prescribed interest rate of 9.0 per cent. According to the CBN Director of Banking Supervision Abdullahi Ahmad, the prospective loans would span seven years with two-year moratorium on the principal sum. The objective is to engender both job creating activities and reduction of interest rates as a means of improving and growing the economy. The director explained that apart from the above two initial sectors, any bank involved in financing any job creating activities in other sectors should apply for consideration for part refund of its CRR.
Without doubt, it is desirable to make available long-term and single digit credit to projects involved in the agricultural value chain. To utilise agricultural produce as raw materials in local industries is the foundation of true industralisation. However, for domestic output to be really competitive, the prescribed 9.0 per cent lending rate is unattractive and more so because proper management of the naira exchange rate would easily push down open market lending rates to the range of 4-7 per cent. Pertinently, the CBN Annual Report 2017 contains close to 30 apex bank’s so-called affordable financing packages (at least 11 of them relate to the agricultural sector and agro-allied industries) which were and are still being offered at CBN’s seeming magical 9.0 per cent interest rate. Some of the packaged funds were/are long-term and incorporate periods of moratium.
Recall that early in the current democratic dispensation, CBN rolled out an intervention fund for the agricultural sector at 7.0 per cent interest rate. All in all, various funds offered in the guise of apex bank performing “its developmental function with a focus on job creation, entrepreneurship development and financial inclusion, to promote inclusive growth” (as if the CBN’s duty is otherwise in the final analysis) failed to yield the desired results. Reasons? Through those funds, the apex bank mostly improperly set out to unsurp functions of the banks which the CBN is meant to regulate and supervise. Also the funds were unattractive because the 9.0 per cent interest rate was negative in real terms and uncompetitive.
The broached variable CRR tied to loans for projects which qualify as growth –enhancing activities, employment generating outfits and such like is the latest addition to an already long list of improper partitioning of CBN’s monetary policy measures. The proposed measure is uncalled-for because it fails to address the underlying economic problem as will be seen shortly. Monetary policy tools or measures such as interest rate and CRR should cut across the entire economy. All economic sectors are interdependent and jointly contribute to growth and generation of employment. While agricultural and manufacturing projects may deserve long-term loans, the projects are not islands unto themselves as they require inputs and services of forward and backward linkage enterprises which themselves need low cost credit to compete.
Moreover, in 2017, deposit money banks held total deposits of N19.4 trillion but credit granted to the private sector stood at N16.4 trillion. Against the set target liquidity ratio(LR) of 30 per cent, DMBs jointly posted average LR of 44.6 per cent, which implies that banks opted to keep loanable funds in risk-free and high interest-yielding FG debt instruments and other CBN offerings at the expense of financing private sector projects. Even then, the ratio of non-performing loans to industry total worsened to 14.8 per cent from 12.8 per cent in 2016 relative to the benchmark of 5.0 per cent. Reason?
The CBN explained in the Annual Report 2017 thus, “Monetary policy remained non-accommodative… To encourage foreign inflows to stabilize the exchange rate and enhance the flow of credit to the real economy, the MPR was maintained at 14.0 per cent throughout the year….Also the CRR and LR were retained at their respective rates of 22.5 and 30.0 per cent.” Note, firstly, that the excerpt gives insight into the feeble GDP growth over the years. Secondly, it is a mirage to expect to stabilize the exchange rate and tame inflation and increase credit to the real sector on a platter of foreign forex inflows. CBN began to chase that mirage beginning in the 1970s by steadily raising the then minimum rediscount rate from its low single digit level to the present double digit MPR level without achieving the desired results.
Thirdly, the apex bank’s actual preoccupation is starkly different as Section 7.6 of the annual report shows. Whereas, for example, there is a single euro exchange rate covering some 20 countries, the leadership of the CBN has continuously flouted provisions of the CBN Act and the annual Appropriation Act which prescribe an economy-wide market-determined single naira exchange rate. Instead CBN has partitioned the country’s forex earnings into official and autonomous categories. There also exist partitioned multiple currency practices and multiple forex market segments such as the most recent Importers’ and Exporters’ (I&E) window where significant portions of the so-called CBN’s external reserves and autonomous forex are traded at CBN’s unilaterally fixed artificial and grossly devalued exchange rates in contempt of the Appropriation Act exchange rate (AAR). Yet, although the IMF Article IV consultation report of March 2018 indicates that 70 percent of forex transactions were channeled through the I&E in 2017 and despite the fact that the CBN Annual Report 2017 states that the average I&E exchange rate in that year was N366.58/US$1, the apex bank claimed at several points in the same report that the 2017 effective and/or average naira exchange rate was N305.79/$1 or the AAR.
All that artifice of “now it is this exchange rate and now it is that exchange rate” is an apparent but futile attempt to hide the glaring truth that the multiple exchange rate procedure serves as an avenue to not only shortchange the Federal Government of humongous non-oil tax revenue being drained away through middlemen or forex dealers but also deny Federal Government access to genuine external reserves and make the country to forfeit chunks of its forex earnings to interlopers. Additionally, the CBN leadership repeated in the annual report the fatuous notion of “external reserves by ownership at end-December 2017 showed that the share of the CBN, Federal Government and Federation stood at US$30.17 billion (or 76.7 per cent of the total), US$6.73 billion (or 17.1 per cent) and US$2.45 billion (or 6.2 per cent) respectively”.
To partition external reserves does not serve the national economy well. The so-called CBN’s external reserves arose from improper printing of naira amounts by fiat for allocation to the tiers of government in place of withheld Federation Account dollar allocations. External reserves should belong to the sovereign state represented by FG in which resides the exclusive monetary responsibility. CBN as an agency of the FG cannot and should not divest the FG of sovereignty and ownership of the national currency or external reserves which accrete in the course of management of the national currency. The claim by the CBN leadership is preposterous. The CBN should stop making the country a laughingstock in the discerning international fora.
Therefore, the CBN should end its decades–long willful wandering in the woods. The naira exchange rate is a given contained in the yearly Appropriation Act. Monetary and price stability arises from floating the naira within a stability band centered on the AAR in a single forex market (SFM) amid strict observance of the fiscal deficit ceiling of 3.0 per cent of GDP. That way, the economy’s forex-surplus state will surface. Also the low level inflation expectation associated with the fiscal deficit ceiling becomes readily realizable thereby permitting a return to the low single digit minimum rediscount rate (or corridorless MPR) of about 3.0 per cent. Given sympathetic downward adjustment of public debt instruments and appropriate levels of the cash reserve and liquidity ratios, the shackling and deepening underdevelopment of the economy by the apex bank would finally come to an end. The SFM would make banks to assume their proper role with competition among banks driving lending rates down to the range of 4-7 per cent across the board. That would signify the coming of the era of internationally competitive lending rates.
Thereupon gestation–linked tenor periods for bank loans contracted for specific activities would prove to be adequate incentive to real sector operators and entrepreneurs to invest. The financial sector credit to the various sectors of the economy would help generate employment and lubricate rapid development and growth. Banking sector credit to the economy as a proportion of GDP which declined on 2016 and 2017 would begin to rise rapidly from its unimpressive level of less than 20 per cent. That indicator now exceeds 100 per cent in Nigeria’s quondam peer economies of Malaysia and Singapore. For the U.S. and Japan, the indicator is higher than 200 per cent of GDP.
And so the CBN should abide by the provisions of its enabling law and faithfully implement its apportioned aspect in the yearly Appropriation Act and, without creating any further impediments, let the economy grow vigorously.
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