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How CBN can reverse Nigeria’s underdevelopment

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[FILES] Godwin Emefiele PHOTO:Twitter/CBN

The Central Bank of Nigeria underdevelops the economy through heterodox monetary and fiscal procedures contrary to the express mandate and intendment of its enabling law, which aims to promote national economic wellbeing. Ignore the alibi of the COVID-19 pandemic.

Despite enjoying presumed independence which should find expression in upholding Sections 2(d) and 2(e) and 38 of its mandate by providing the government with sound economic and financial advice, successive CBN leaderships at the prodding initially of the erstwhile military-political leadership, have since the discard of the Bretton Woods system of fixed exchange rates in 1971 persistently run against several key provisions of the CBN Act

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To wit, one, Section 2(a) of the CBN Act enjoins the apex bank to ensure monetary and price stability. Towards that end, the Fiscal Responsibility Act and annual Appropriation Act contain binding provisions for achieving a sound and productive and self-reliant economy. They set conditions that FG should run annual balanced budgets or surplus budgets or (if need be) budget deficit of up to 3 per cent of GDP. The intendment or expectation from such budget outcomes is to evolve a stable macroeconomic environment in which the apex bank should routinely (i) maintain an annual inflation range of 0-3 per cent, (ii) float the naira rate within 0-3 per cent stability band, (iii) fix minimum rediscount rate range within 1-4 per cent (and not the heterodox double-digit monetary policy rate in a corridor), which in turn would give rise to 3-6 per cent lending rates that are positive in real terms and internationally competitive.

Such conducive conditions would allow the 46 GDP economic activity sectors to access cheap bank credit to steadily grow and expand an economy that would wax through flourishing forward and backward linkage enterprises. Sadly, against the above-intended results, evidence abounds that CBN’s heterodox measures underdevelop the economy: there has long existed over 70 per cent un-utilised banking sector lending capacity, no thanks to double-digit inflation, unstable exchange rates and uncompetitive interest rates that have ranged from 14.5 per cent to over 30 per cent since the mid-1980s. Recall that FMFBNP and CBN are wont to cite the high-interest rates arising from their joint action as justification for FG to contract foreign (multilateral, bilateral and international capital market) loans. Even in several sections including section 28 of the 2020 IMF Article IV Consultation report, CBN actually portrays Nigeria as unique by describing the glaringly unstable multi-segment naira exchange rates that vary by over 18 per cent as welcome and stable exchange rate system and that the prevailing double-digit inflation (up to November 2020) represent price stability. And by implication, the attendant contractionary monetary stance via high interest rates is propitious. But instructively, the European Central Bank has defined price stability as inflation close to, but below, 2 per cent, the definition which central banks of the leading industrial countries have adopted as the standard.

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Two, Section 2(b) of the CBN Act invests the apex bank with the sole authority to issue and protect and maintain the primacy of the legal tender naira currency in Nigeria. However, the erstwhile military-political leadership naively divested the naira of its primacy role by, to be charitable, ignorantly operating multiple currency system and taking steps that allowed the dollar to supersede the naira. The military leadership’s naivety simultaneously rendered Nigeria’s apex bank, Central Bank, against the Naira, the economic lifeblood. All that resulted when the military leadership, purportedly intent on preventing state government access to physical oil dollar proceeds, instigated CBN to (i) improperly withhold Federation Account dollar allocations, and (ii), in technical terms, fiat print naira funds at artificial exchange rates in their place for disbursement to the tiers of government for budgetary spending. Although the military bowed out of politics in 1999, the CBN has covetously stuck to the injurious practice in total neglect of Section 16 of the CBN Act thereby, as earlier indicated, forsaking its presumed independence and compromising over the years all its actions under Sections 2(d) and 2(e) and 38 of its enabling law

In plain truth, naira funds being shared and attributed to oil receipts by FAAC inclusive of the March 2021 disbursements represent improper proportionate apex bank deficit financing of the budgets of the tiers of government. Therefore, the recent denial of that fact by the National Economic Council, FMFBNP and CBN amount to feigned ignorance. As far back as 2001, then CBN Governor J.O. Sanusi removed any official doubts about FAAC disbursements when he stated what has remained the official mantra in a paper titled, “The Nigerian Economy: Growth, Productivity and the Role of Monetary Policy” that “monetisation of (read fiat printed naira funds for) foreign exchange receipts from crude oil exports resulted in inflationary pressures and severe macroeconomic imbalances.”

To be continued tomorrow.

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