CBN policies: Unsustainable and risky

Given its functions, a central bank is of immense relevance to the stability and sustainable growth of any economy. For the Central Bank of Nigeria (CBN), these functions include ensuring monetary and price stability, issuing of legal tender currency in Nigeria, maintaining external reserves to safeguard the international value of the legal tender currency, promotion of a sound financial system in Nigeria, act as the banker and provide economic and financial advice to the federal government. While there is no doubt that these are very important functions and that their effective implementation should result in financial stability and sustainable growth of the economy, the doubt is in the way some of the functions and policies have been implemented which if not checked might cause more risks and crisis to the economy.

With a focus on foreign exchange management, the current regular injection of forex into the market is particularly worrisome. Why it might be described as a successful strategy, it is highly flawed, unsustainable and to the best of my knowledge lacks critical empirical cost-benefits analysis to justify the policy. It was somehow used some years ago and did not achieve anything. From February to date, CBN has injected over $5billion dollars to enhance the value of Naira. While it might sound good and important in the short term, the question is what is CBN’s plan and what is it trying to achieve in the medium and long term. What is the purpose of the regular intervention? Is it just to enhance the value of Naira and that is it. Other important questions that will help in justifying the purpose of the injections include- to what extent has our national productivity improved since the injections, has it resulted in increased diversification of the economy and export of goods and services. Has it helped to reduce inflation or prices of goods and services?  Moreover, as the injection is dependent on foreign reserve which is hovering at about $30billion, the sustainability of the injections is also highly questionable given the determination of our foreign reserves by both internal and external factors which CBN has little or no control of. Related to the forex injections is the ban on 41 items which nobody is sure if the ban will be reviewed or if has become permanent.

To create a sustainable growth of the economy, both the CBN and the federal government should in their policies, actions and inactions clearly signify and show that they are interested in a stable and sustainable economy and not on uncertainty and risks. It is the only way that the private sector can effectively contribute and partner the government to develop and grow the economy. In my engagements with the private sector, their most significant challenge or risk is the uncertainty and unpredictability of government regulations and policies with many CEOs and senior managers describing our business environment as volatile, uncertain, complex and ambiguous (VUCA). If we already have a VUCA environment, the responsibility of the government  and key regulatory agencies such as the CBN should be mainly to find solutions and not to exacerbate the volatility, uncertainty, complexity and ambiguity of our economy and business environment.  With the way CBN is going in its actions, inactions and contradictions, it seems that it is exacerbating our VUCA and precarious economy.

I assume that the CBN should be aware and conversant with the concept of ‘Forward Guidance’. It is a concept used by Central Banks to create stability and confidence in the economy through a clear and upward communication of its strategies and policies especially to the private sector. Through it, Central Bank states their targets for key variables such as inflation, credit to the private sector, exchange and interest rate, capital adequacy ratios, unemployment for a certain period like 1, 3, 5 years with a commitment to robustly pursue the achievement of the targets possibly in collaboration with other policy makers for fiscal and supply side policies. Expectedly, the achievement of such targets forms part of the performance appraisal of the Central Bank. It is a concept that is highly advocated due to its stability creating feature. With policy announcements on what the rates of key variables will most likely be in 1, 3 and 5 years, the private sector can then effectively plan and contribute to the economy. As it is widely used by other central banks, the surprise is why CBN does not use it and prefers adhoc and contradictory policies.

In all the key variables such as inflation, credit to the private sector, lending interest rate, financial inclusion, non-performing loans, there is none that the CBN can be said to be doing well. Even with over 120 years of existence, the banking sector can only boast of about 30million bank accounts in a country of over 180 million people. With interest rates at above 20%, only about 7% of adults and 5% of firms have loans with the banks even as access to credit remains a major challenge to over 80% of SMEs. From 2008-2012, the average credit provided by the banking sector to the economy as a percentage of the GDP was about 24.62%. With such poor performance, it is difficult to say that the CBN is living up to its responsibilities.

In the UK where we adopt most our financial sector policies from, there are about 150 million bank accounts (savings, deposits and current) and about 95% of adults have at least one bank account in a population of about 64 million people. With about 64,000 ATM machines with no withdrawal charge in over 98% of them, the financial sector employs about 1million people. While the lending interest rate in the UK over these years has been about 0.5%, the average credit provided by the banking sector to the economy as a percentage of the GDP from 2008 to 2012 was about 214.32%. With over 10,500 bank branches, there is no charge for interbank transfers, cheque books, Debit Cards etc.

With regards to the banned 41 items, the CBN need to clearly state whether the items have been banned permanently or when they will be unbanned and if higher tariffs will be applied to discourage importation and as a result encourage local production. The absence of a very clear clarification creates a double or multiple jeopardy for the economy. First is that investors interested in starting a local production of any of the items will be hesitant to start due the fear of a possible reversal of the ban. Second is that in the absence of a local production of the items, importers will always innovate ways to smuggle the goods into the country at higher prices and loss of revenue to the government.

In line with my article ‘The Untapped Solution to our Economic Crisis Part 1 & 2’ published by Guardian newspaper on 13th & 14th April, 2016, let me reiterate that addressing the foreign exchange challenge will not be achieved by the current unsustainable injection of forex into the market. Effectively and sustainably addressing the challenge will require strategic thinking, determination and good leadership on the part of CBN and related authorities. I will suggest three. First is the need to fundamentally rethink and change the way our foreign exchange earnings is managed and shared in order to create a market determined exchange rate. Second is the effective utilization of over 15million Nigerians in Diaspora to annually generate over $30billion that can be used support our import demands. This is different from the ongoing Diaspora Bond. Third is through what can be achieved through direct intervention of the CBN or even through Corporate Social Responsibility. As a fundamental challenge to the export of our agricultural products is the absence of a packaging centre of international standard, it is a project that will really enhance the diversification and export potential of our economy.

Combining the above three suggestions with detailed policies to achieve effective ‘forward guidance’ should lead to a better foreign exchange management, financial inclusion, inflation management, lower lending rates and expectedly a more accountable CBN. When added to robust fiscal and supply-side policies, a stable and sustainable Nigerian economy will emerge.

 

Franklin Nnaemeka Ngwu