With inflation at almost 10 percent and cost of funds at over 22% to the real sector and a sliding naira rate, clearly the CBN’s liquidity forecasting and programming have failed as monetary strategy to induce price stability
It would come as a huge surprise to Nigerians if anyone suggested that surplus money constitutes the greatest impediment to the creation of more jobs to enhance the quality of economic and social welfare of our people.
Nonetheless, the constitutional custodian of money supply, i.e. CBN, would readily admit that the incurable presence of surplus money supply is actually the major challenge to best practice inflation rate below 2% and cost of funds below 5%, to successfully drive our economy.
Expectedly, persistent excess money supply is also responsible for the unending slide in Naira exchange rate, even when our National coffers are fortuitously endowed with best ever accumulated dollar reserves. In this regard, in a press briefing on the outcome of the Monetary Policy Committee(MPC) meeting of 16/6/2005, former CBN Governor, Prof Charles Soludo, noted as follows:
“The major source of huge liquidity injection has been “the monetization (read as the substitution of Naira for dollar denominated revenue) of 2004 Excess crude earnings amounting to over N160bn and this has contributed to the liquidity surge”; Soludo therefore warned that….”the (adverse) consequences of excess liquidity stare us in the face”.
Regrettably, CBN has however, failed, so far, to reduce the extent of liquidity and restrain inflation and Naira depreciation with its usual strategy of borrowing and warehousing some of the market’s surplus liquidity as idle funds, despite the attendant cost that is inconsistent with risk free sovereign debts, incurred by a resource and reserves rich country like Nigeria. Clearly, even though this trade in government securities remains the most profitable investment for Nigerian banks, it also discourages facilitation of low cost credit to the real sector.
Curiously, while the real sector struggles to survive, the banks continue to declare bountiful profits which are primarily derived from loans to government; current indications are that while fiscal debts may require almost N900bn to service annually, the banks, primarily, will also earn over N600bn from the related high interest charges from buying government’s Treasury Bills.
It is pertinent, to interrogate why such loans cost the Treasury so much despite the alleged surfeit of money supply in the market. Undoubtedly, if CBN does not borrow trillions of Naira to store away as idle funds annually, the banks would have no choice than to eagerly seek out real sector investors for patronage with cheaper credit. Incidentally, after the MPC meeting in July 2013, Lamido Sanusi, the past CBN Governor also ‘remorsefully’ observed that:
“First of all, you have got liquidity surplus in the banking industry…. there is over N1.3Tn or so sitting in banks belonging to government agencies. Now basically, they (these funds) are at zero percent interest and the banks are lending about N2Tn to government and charging 13 to 14%; so why would I, as a bank, go and lend to anyone?” Similarly, Godwin Emefiele, the present CBN Governor, in another press briefing after another MPC meeting in November 2015, also disdainfully noted that:
“We have discovered that, instead of banks to deploy their liquidity to the real sector to create credit, (and) stimulate growth, what the banks do is to dump their money on CBN AND EARN 11% FOR DOING NOTHING”! Admittedly, the pertinent question, however, is whether or not it makes business sense for government to borrow at even 1% if such loans are ultimately simply kept idle from productive use? Indeed, Central banks in successful economies now, conversely, charge a token fee from banks to warehouse their excess funds.
Incidentally, before the recent introduction of the Treasury Single Account(TSA), the availability of idle government deposits in various banks ironically facilitated the farcical process of government borrowing back its own money from banks despite the oppressive cost. With the adoption of TSA, one would expect reduced market liquidity and subsequent reduction in unproductive government borrowings.
The reality, of course, is that any payment made by MDAs as recurrent or capital expenses to staff and contractors will ultimately migrate to private sector bank accounts and still invariably compound market liquidity.
The marginal impact of TSA on banks’ liquidity was also recently underscored by Nnandi Okonkwo, Chairman of the Bankers Committee; in his reaction to CBN’s earlier harmonisation of Cash Reserve Ratios for public and private sectors deposits with banks to 25%, in October 2015, Okonkwo happily declared that:
“CBN made Nigerian banks richer as it returned N740bn to sector, and in the process made liquidity available to the banking system”, consequently, Okonkwo concluded that “we can say that there is no alarm on account of moving TSA funds; and ‘I am (therefore) pleased to inform you that after the review and after compliance, industry liquidity remained strong”.
Sadly, however, there is still no assurance that the resultant liquidity surplus, reported by Okonkwo would reach the real sector, as the CBN re-entered the money market soon after the review, to once more borrow and store, as idle funds, hundreds of billions of presumed troublesome Naira surplus in the system.
Curiously, despite Okonkwo’s confidence on adequate market liquidity, the CBN, nonetheless, still set out, nonetheless, to create even more liquidity with further reduction of the harmonised CRR to 20% from the previous 25% rate that was adjudged by the Banker’s Committee Chairman as providing comfortable liquidity cover for the banking sector.
Nevertheless, the CBN may contend that the additional reduction in CRR, is designed to guarantee that banks will not be starved of liquidity, despite Okonkwo’s assurances of sufficient market liquidity; however, this strategy certainly became inexplicable, when, the CBN on 2nd December 2015, soon after reducing CRR to 20%, again forayed into the market to once more provide banks with the usual ‘awoof’ income by selling N129bn worth of Treasury bills, allegedly to mop up an obviously still compounded market liquidity surplus and restrain an inflationary spiral.
Evidently, the challenge of excess liquidity is also clearly recognised in the monetary policy thrust of vision 2020 which states as follows: “Dealing with the excess liquidity challenge requires innovative approaches… one potentially enduring solution, which would avoid the creation of new money and boost the naira value in the foreign exchange market, relates to the allocation of foreign exchange earned from oil to the three tiers of government rather than monetising it.. but this may be a recipe for capital flight. therefore, the central bank would need to develop capacity for LIQUIDITY FORECASTING AND PROGRAMMING.”
In retrospect, however, with inflation at almost 10 percent and cost of funds at over 22% to the real sector and a sliding naira rate, clearly the CBN’s liquidity forecasting and programming have failed as monetary strategy to induce price stability.
SAVE THE NAIRA! SAVE NIGERIANS.
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