By Shola Ogunniyi

Last week, a fiery exchange took place between the Central Bank of Nigeria (CBN) and the Nigerian Economic Summit Group (NESG) on the general state of the nation or to put it in another way, the state of the Nigerian economy.  To begin with and before I opine another view to the raging spat between the two bodies, it is appropriate to state their mandate and have a look at the crux of their disagreement.  The CBN is the apex bank in Nigeria and its activities and existence are guided by the CBN Act (2007) and Bank and Other Financial Institution Act (1991 As Amended).  Its mandates are as follows: ensure monetary & price stability; issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in Nigeria and act as banker and provide economic and financial advice to the Federal Government.  The NESG, established in 1996 by the National Economic Summit (NES) which itself was founded in 1993,  is a private sector led think- tank and policy advocacy.  The vision of NESG vision is: “to become Africa’s leading private sector think-tank committed to the development of a modern globally competitive and inclusive Nigerian economy”, while its mission is to: “to promote and champion the reform of the Nigerian economy into an open, inclusive, sustainable and globally-competitive economy.”

The NESG released a press statement “ Matters of Urgent Attention”, which contains fifteen points that it believes require urgent attention  to  positively improve the state of the nation.  The NESG mentions Agriculture( especially the Anchor Borrowers Programme), Insecurity, the new Companies and Allied Matters Act ( CAMA), the dwindling fortunes of the oil industry with its implications for Nigeria’s public finance, the growing CBN development role heightened by the COVID-19 pandemic, the new BOFIA (2020) waiting for the president’s assent, the CBN management of interest rates and liquidity, growing debt and the resort to quantitative easing (QE) to finance large deficits, Federal Government’s infrastructure development, trade and border closure, deregulation of the petrol and electricity markets, rising poverty and unemployment and opening of eastern port. The NESG also pledges its readiness to work with the government in order to improve the fortunes of Nigerians and achieve the Nigeria of our dreams.  The release contains the acknowledgement of some progress made by the government; where it needs to improve upon to increase the societal welfare. Specifically, it also contains some acknowledgement of the economic environment the CBN is operating in at present, the CBN intervention, and the areas it believes the CBN activities could complicate matters for the overall economy. Out of the 15-point press release, about six items are specifically on the activities of CBN from policy point of view. And these were the issues that trigged the response from the CBN. 

The Central Bank of Nigeria, riled by the NESG write-up, responded with a five-page document that explains the policy  focus of its recent intervention against the background of the corona virus pandemic. The NESG press release statement, according to the CBN, was a diatribe and the apex bank forcefully rejected the contents of the press statement aimed at it. To be candid, the Central Bank of Nigeria had adopted some Unconventional Monetary Policy (UMP) tools in conjunction with its traditional ones even before the advent of COVID-19. The CBN adopted the heterodox policies mix from around 2016 following the fall of crude oil price in and other trade tensions between world super powers, which started in 2014. Its response to the fall in the oil receipts was the introduction of the UMP with a view to stabilizing the macroeconomy especially as Nigeria slipped into recession in the second quarter of 2016 and exited recession in the second quarter of 2017. The Naira exchange rate had been officially devalued twice during that period and now.  Accordingly, any assessment of the CBN in the carrying out of its legal mandate must include its remit of unconventional monetary policy. The unconventional/heterodox monetary policy involves using policy instruments such as quantitative easing (balance sheet expansion) or what some people call “printing money”, other Asset Purchase Programme (APP) especially buying of some risky financial assets to shore up their values,  increasing the development intervention in the real economy to achieve the output growth objectives in the macroeconomy among other novelties, which are not ordinarily contemplated in the traditional monetary policy tool box. Let us now examine the NESG points and the corresponding CBN response.

On Agriculture, the NESG wanted an overhaul of the CBN intervention in the Agriculture as the intended objectives have not been fully met. I believe this is a fair comment. Anchor Borrowers Programme (ABP), the flagship of the CBN intervention in Agricultural sector, was launched in November 2015. This was well before COVID-19, hence it is not out of place to question its relevance and contributions to the attainment of food security and sufficiency  in Nigeria and also to appraise it on the cost -benefit analysis basis. Hence, the CBN should see this not as an indictment of its intervention in the agricultural sector but as a call to evaluate the performance of its programme for the benefit of the Nigerian people. For security issues that the NESG raised, it is a fact that the incidence of growing insecurity has dealt a big blow to the Nigerian economy in recent times. So many people have been displaced with a result of growing internally displaced persons in the country.  The agriculture sector, which accounts for about 25% of the real GDP is affected by this troubling menace. Other economic activities in the affected regions are also curtailed. 

On the new CAMA, the point raised by the NESG is about acknowledgement of some encouraging provisions of the Act especially for the MSMEs while also calling on the government to pay attention to the concerns raised by some stakeholders on some of its provisions.  For the oil industry , the NESG recognized and applauded the Presidency’s work on the Petroleum Industry Bill ( PIB)  and called for its quick passage so that Nigeria can further optimize her benefits from this extremely vital sector, which though accounts for about 9% of the real GDP but brings in about 90% of foreign exchange earnings for Nigeria, and over 60% of the Federal Government Revenue and more than 80% of revenue for almost all the States and Local governments. Other key areas in this row are some provisions in revised BOFIA waiting for the president’s assent, Trade and Border closure /reopening, the CBN development role, Foreign Exchange Management and the CBN liquidity management. We will take a look at them in turn. 

The NESG’s comment on the new BOFIA irked the CBN. The NESG wrote: “The Bill contains certain provisions which breach the provisions of the Nigerian Constitution, confers immunity on CBN officials and exempts actions by the CBN from judicial review. These are draconian, totalitarian and inimical to the development of a stable and transparently regulated financial sector. We respectfully request that the President should please withhold his assent until the Bill is properly reviewed, amended and is made fit for purpose.”  Ordinarily and on closer look at other legislations in the Nigerian Financial System, there are similar provisions that protect the Federal government, the respective bodies ( the CBN in this case) and its officers against adverse claims while carrying out their duties according to the enabling Acts. According to Section 52 (1 & 2 ) of the CBN Act (2007): (1) Neither the Federal Government nor the Bank nor any officer of that Government or Bank shall be subject to any action, claim or demand by or liability to any person in respect of anything done or omitted to be done in good faith in pursuance or in execution of, or in connection with the execution or intended execution of any power conferred upon that Government, the Bank or such officer, by this Act. (2) For the purpose of this section, the Minister or any officer duly acting on his behalf shall be deemed to be an officer of the Federal Government and the Governor, any Deputy Governor of the Bank or other employee shall be deemed to be an officer of the Bank”.  Therefore, except the provisions bordering on the protection against adverse claim in the new BOFIA (2020) Bill differ substantially from the similar provisions in other similar Acts; I believe the point raised by NESG is unnecessary and needless. 

The border closure/reopening and trade issues raised by the NESG is about regional trade opportunities, impact on employment  and security. On the other hand, the CBN’s view is about protecting the players in the local industries, agriculture (especially for the local rice farmers) and reduction of the economic sabotage allegedly inflicted on Nigeria by its neighbours. Again, both bodies have some valid points. The focus, in my view, is to assess the impact of the border closure on the societal welfare maximization. This should be the objective.  For sure, protection of local industry is desirable in order to ensure their continued growth and contribution to the real GDP. But there is a trade-off. The economic agents (producers) in the end tend to be well off while the consumers tend to be worse off as they pay more for the goods or services than would otherwise cost less. The point then is: is the society being compensated for the reduction of their utility optimal level by the relative better outcomes for the few people in the protected industries?  Protecting the local industries might be based on strategic consideration; again are all the industries protected strategic? Is Nigeria not losing some trade opportunities and revenue with the continued border closure? Can Nigeria continue to close its border to protect the local industries even if the productivity gains of these industries are weak or near-absence? Can Nigeria continue to protect the local industries even if the prices of those industries products are galloping away?  Can Nigeria continue to protect the industries whose products as a whole tend to be price inelastic and which tend to worsen the inflation and reduce the real wage of workers whose nominal earnings are basically static? The continued border closure certainly needs a clear rethinking and an urgent review.   

With respect to the growing development role of the CBN in recent times, I am of the opinion that it is hard to fault it in this regard. As I mentioned above, the CBN had been involved in financing development even before COVID-19; it is just that it has stepped up its activities.  It is only doing what other central banks in the world are doing. To be sure, it has recorded some successes. The coronavirus pandemic has made it difficult for it to slow down. Essentially,  it cannot overlook the output growth objectives as the global economy tanks. Once more, we need to ask:  at what cost to the potential GPD is what the CBN is doing? And when will the CBN slow down? When will it slow down especially as the shocks to the Nigerian economy is mainly from the fall in the oil receipts?  Ideally and this is supported in the economic literature, in order to stabilize the macroeconomic activities and equally pursue growth objectives in an economy, the monetary policy can affect both the nominal monetary magnitudes and the real economy especially in the short run because output can be raised. This is easy to glean from an economy that is closed or less open to the outside world.  However, the Nigeria economy is not closed and even though there is a negative output gap, the productive capacity to close the gap overtime is weak. I am sure the CBN is aware of this topic in the Nigeria economy. Just as it cannot solve it alone, its actions can complicate matters as my next point will show.

On the management of foreign exchange, there is a limit as to what the CBN can do to increase the inflow of foreign currency into Nigeria.  The CBN, as the body in charge of the monetary policy, can only work as long as the macroeconomy permits it. The effect and interaction of the workings of the real sector must be taken into consideration in its policy tweaking. Foreign currency inflows into Nigeria is a function of the stable macroeconomic variables, growth opportunities in key sectors, competitive export prices, stable polity and security, productive and knowledgeable capital base especially the human capital and the existence and adherence to the rule of law.  The introduction of the Import and Export ( I & E ) window has been a good move by the CBN. That said, the FX pricing in the market can be better managed than it is right now.  One, the huge gap between the official and parallel markets can be and is being exploited by the arbitragers. This differential is a free money for the few economic agents that have access at the official window. Therefore, the gap needs to be closed up. The absence of the price differentials can reduce the pressure on the naira value as there will be a reduced incentive for profiteering and racketeering. 

Furthermore, as I said in the last paragraph on the CBN development role, a growing intervention in the real sector by the CBN in conjunction with the expansionary fiscal policy can put pressure on domestic price level (the inflation rate is now 13.22%) and the exchange rate. But with the CBN and/or FGN’s refusal to officially devalue the naira further, the Real Exchange Rate (RER) is becoming overvalued.  With a weak productive capacity and the growing expansionary fiscal policy, the CBN is in a fix actually. A growing inflation means the Nominal Exchange Rate (NER) should fall further. That will be a devaluation. The Federal Government may not be disposed to doing this either because of the effect on the raw materials prices as Nigeria still imports a lot of her raw materials or due to populist consideration. Therefore, Nigerians may continue to experience growing inflation rate.  

The last point of disagreement is on the CBN liquidity and interest management. This is very interesting as I believe it should generate an exciting interest among the people in policy circles. Here are the NESG words about it: “The NESG observes with concern some distortions in the liquidity and interest rate management of our financial system which has resulted in rate distortions causing grave disadvantage to domestic investors and pensioners. This will occasion major disincentives to savings and investments and thereby, be a disadvantage to Nigerian pensioners and long-term savers. This is inimical to this administration’s concern for the elderly, the weak, the infirmed and those who had served this Country meritoriously in their prime. It must be stressed that our country needs to mobilise domestic savings and investments even as we seek to attract foreign investment and we should be careful not to initiate policies that appear to discriminate against or discourage domestic savings and investors. Policies making average Nigerians poorer by the day should not be encouraged.” This is a great observation.  

Here is the CBN response: “Given that in an ideal economic textbook/theory, saving should be equal to investment, we expected total deposits should closely mirror total loans. Yet, over the past several months, we have noticed an increasingly large gap between total deposits in the banking system and total credit to the economy. While total deposits stood at about N25 trillion in January 2020, total loans stood at N17 trillion. As of August 2020, while total deposits have increased to N29.7 trillion, total loans were only N19 trillion. Many rich cooperates (sic) have simply been content with saving their cash balances and collecting huge interest payments, rather than expanding their investment, which should lead to hiring more people and producing more goods. In other to forestall a continuation of this trend, the CBN had to act to discourage these practices for the good of the economy. In other words, the rationale for moving to reduce the saving rates by banks is actually to encourage more lending. We also need to note in light of COVID-19 and to encourage more investments, many Central Banks have cut their saving rates to nearly zero. In fact, some Central Banks, including the European Central Bank, the Bank of Japan, Denmark’s Central Bank and the Swiss National Bank, are now operating “negative interest rates”, which means customers pay banks to keep their deposits.” This is equally a valid point. However, between these two extreme points lies another real issue. 

The NESG is concerned from the perspective of a saver especially long-term savers who will be hurt in real terms as the nominal savings rate is slashed. In economics, the nominal interest rate (NIR) is the addition of the real interest rate (RIR) and the inflation rate (IR). The nominal rate is basically the monetary returns a saver earns on his savings deposit. The real rate is the purchasing power of the savers’ fund and it captures the amount of goods and services the saver can buy. The real rate is also the difference between the nominal rate and the interest rate. So, with a growing inflation rate and a dwindling nominal rate, the real rate will be negative.  This means, over time, the purchasing power of the savers will be falling. As an example, the minimum savings rate is 1.25% per annum, but the inflation rate is currently at 13.22%. Hence, the real return is –11.97% , a negative value. Flowing from this example and from the standpoint of a depositor/saver who wants a positive real return, it does not make sense for her to save her money in savings account.  This is truly a source for concern.  

The viewpoint of the CBN is however about a growing gap between the total deposit and total loan in the economy. It is of the opinion that the gap/differential can only be bridged if there is more lending by the deposit money banks and by extension more investments. This is interesting and there is a valid point in it.  Yet, it seems the CBN is looking only at the one side of the market. Looking at one side of the market will lead to some questions being asked. At the heart of the savings-lending issue is opportunity cost, which in economics is known as the cost of the next best thing that is foregone in other to carry out another thing. [Rich] savers prefer to keep their most liquid assets (cash) in banks as deposits. And the question will be why are they doing that? Is that the best use they can put their savings to? Are there no better risk-adjusted opportunities elsewhere? Conversely, why are banks able to pay higher returns on those rates before now even if there is growing gap between total deposit and total lending in the system as noticed by the CBN? What are the forces contributing to the phenomenon?  One of these powerful forces is the opportunity cost which is about doing something whose relative cost is low.  Hence, for the savers that prefer to keep their asset in cash at bank, the opportunity cost is low. That is, the benefit or opportunity elsewhere as compared to the return on their savings is low. They are essential foregoing lesser returns.  In another view, are the expansionary fiscal policy and the real sector intervention by the CBN responsible for the growing deposit-lending gap despite the efforts of the CBN at continued mopping of the liquidity? Or are banks simply not interested in lending to the threshold preferred by the CBN? What are the real issues?  The CBN also cited other advanced countries that operate either zero or negative interest rates. I don’t think the financial conditions and the Nigerian economic structure will allow that in Nigeria. Our growing inflation rate will ensure the real yield move further into the negative territory. This will be a disaster for the long-term savers and the low-income earners. Their wealth across time will be crushed. Therefore, it will be difficult to mobilize saving for investment which appears to be one of the CBN’s key intentions of contributing to the fiscal authority effort at output growth and employment generation. Besides, a negative interest rate will punish the lenders / creditors/savers while it will gift some freebies to the borrowers/debtors/depositors. Basically, it will prick our fragile financial system. It will even be more difficult for the CBN to conduct its monetary policy.  

In my view, to the extent that there are expansionary fiscal and monetary policies, combined with our static and low economywide productive capacity, low level of worker productivity, to that extent will the incidence of rising inflation may not stop and it will make the long -term savers continue to experience negative real return.  This is a subject that should interest both the handlers of fiscal and monetary policies.  All told, this exchange between the CBN and the NESG is welcome and it is similarly robust. It centers on the macroeconomy and specifically on the political economy happenings in Nigeria. Such a debate should be encouraged as the economy can surely benefit from the actionable points that may emerge from it. 

▪︎Shola Ogunniyi, a Risk Advisor, wrote in from Lagos

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