On the legality of CBN interventions

The Nigerian economy has been in bad shape for some time now. After the collapse in oil prices which started in 2014, the fast growth but non-inclusive growth years transformed into what now looks like a decade of more inclusive non-growth. More inclusive in the sense that most of the economy seems to be heading nowhere with job growth too low to meet new entrants in the labor force, resulting in ever rising unemployment and hunger, and probably rising poverty. The COVID-19 pandemic has exacerbated all these issues but Nigeria should at least be honest enough to accept that the vast majority of challenges were mature before then.

The underlying structural challenge has been present before this decade of crisis: the exposure of the Nigerian economy to crude oil. This exposure has been clear on two fronts, its impact on government revenue and its impact on foreign exchange inflows. The government has been mostly preoccupied with dealing with this exposure. On the fiscal side the strategy has been to keep spending and try to implement revenue reforms. Reforms which have so far not been very successful cue debt sustainability questions. The focus of this article is however on the monetary front which can be simplified as taking actions through direct interventions in the economy to reduce demand for foreign exchange inflows and the use administrative measures to manage that demand. I will argue that these interventions, regardless of their impact, are illegal. But first, two things are needed to understand my argument.

The first is to distinguish between value and money which are two very different things. If a farmer tills the soil and grows some maize and then harvests it, she or he has created some value. She can exchange that value for money if she wants to. The same logic applies to almost every economic activity, from producing tomato paste to haircuts to crude oil extraction and insurance services. Value, not money, is created. In this context the functioning of government is very simple. The government taxes some of your value created and in exchange delivers some public service like security, justice, or health care. In some of our traditional societies for instance, farmers or traders paid tribute, a tax on their creation of value through farming or trading, and in exchange got some form of protection and justice. The same was the case in the Kanem-Bornu with a tax on trade passing through the empire. Even the Zakat tax which was and still is practiced across large parts of Northern Nigeria is a tax on wealth in exchange for social protection for the poor. The common theme across all these is that only the recognized government or authority is allowed to collect and appropriate this tax. This process has little to do with money either but is really about value.

The same is true for more modern democracies like that of Nigeria. According to the Nigerian constitution only the government is allowed to collect taxes from the people and all taxes collected must be appropriated through a budget which is approved by the representatives of the people. No ifs or buts. Some specialized agencies are allowed to provide some services and accept payments but even for these agencies, any money raised beyond what is required to offer these services and any spending outside that must be appropriated and approved by the representatives of the people. It is why the government has to pass a finance bill before it can change any taxes it collects, and why TSA has been implemented to ensure that agencies remit any extra income for appropriation, and why the government has tried so hard to “block leakages”. Importantly, this process really has nothing to do with money, but is about value. The complication however is that in modern economies people do not barter anymore. It is grossly inefficient compared to using money. Money plays a fundamental role in modern economies and its use cannot be underestimated. This is true for governments who would rather collect taxes in cash than have to deal with a random farmer sending 100 tubers of yam to the FIRS. But this brings a complication in that relationship between the government and the people. The complication being the monetary authority which manages money, in Nigeria’s case the Central Bank of Nigeria aka CBN. This brings us to the second thing to understand, the inflation tax. We already know that value is different from money, but what happens if a central bank decides to double money supply by maybe spending the equivalent on loans for toothpick producers. On the one hand that is money, not value, going to toothpick producers. But in modern economies those toothpick producers can spend that money on all sorts of other things. The consequence is that the value attached to money in general reduces because there is more of it in circulation chasing the same actual value. This would be visible as prices going up all other things remaining constant, or inflation as we call it. If you think about it, what this means is that all the people who were holding money have essentially been taxed because the value of their money is lower than it was before the intervention, while those taxes have been spent on toothpick producers. Modern implementation of monetary policy is very complicated and all sorts of things, including supply shocks can lead to inflation. But that does not change the logic of central bank interventions being equivalent to extra budgetary non-appropriated spending from an inflation tax. Sometimes the central bank can attempt to manage this by shifting the tax liability to specific sectors such as it does with banks and CRR adjustments, or through OMO. It does not matter though. Given that money does not equal value, any money spent by the Central Bank outside of its normal monetary policy activities is essentially unappropriated spending financed by an inflation tax. According to the constitution this activity is illegal. The CBN Act gives the bank some license for development activities but this is very limited and of course does not supersede the constitution.

The executive ideally should be the first to investigate this illegality but they are direct benefactors Ala the budget financing activities of the CBN. The National Assembly, who should oversee all appropriation and fight against unappropriated spending, should also have noticed this but it is unclear why they have not. Regardless, the laws are already in place and it would be interesting to see if someone will test this in court. It goes without saying that the impacts of CBN interventions are not the question here, but the act of non-elected individuals taxing and spending without any legal backing. Indeed this activity did not start with the current CBN regime but if it continues unquestioned then it is only a matter of time before a more nefarious regime exploits that door.

Prod is a social commentator who cares about Nigeria’s affairs