Once again, the
Central Bank of Nigeria (CBN) runs down a previously navigated path.
Just as it did some 5 – 7 years ago, it is advertising its quasi-fiscal
responsibilities ahead of its “other” duty of managing the country’s
monetary policy.
On this score, I was
shocked to recently read the International Monetary Fund (IMF) blame
the “forced consolidation” of the sector in 2005-06 for the subsequent
crisis in the banking industry! I honestly thought the IMF lent its
cachet to the attempt then by the Professor Soludo-led CBN to “reduce
the number of banks (in the country) while increasing their individual
size”.
This initiative,
remember, became the poster child of a concerted effort by the managers
of this economy to steer it past the South African economy by 2020.
Propelling this goal was the argument that if Nigeria was to take its
place as a member of the world’s leading economies by 2020, we needed a
financial services industry with both the appetite and the muscle to
support big-ticket transactions. The middling operators available in the
nation’s banking space in 2004 just wouldn’t do.
However, this policy
quirk, and the CBN’s subsequent focus on its development function was a
letdown for many who had anchored their expectations of the apex bank
on the vision enunciated by the then CBN governor in his July 6, 2004
address to the Special Meeting of the Bankers’ Committee. Some of us
were justified in expecting a more efficient monetary policy thrust. If
for no other reason, Professor Soludo did promise to ensure that banks
in the country “engaged in strict banking business in terms of savings
intermediation”. In the end, the CBN focussed on its role as a
development agent, rather than the function for which it is
statutorily and structurally more suited – managing the nation’s
monetary policy. We then fell way short of both the development goals
on behalf of which the apex bank took its foot of the monetary policy
pedal, and of the goals of monetary policy itself.
What were the
chances that the new central bank leadership, which took office in 2009,
was going to rediscover the backbone to retrieve monetary policy from
the doldrums? Structural problems with this economy were always going to
matter a lot! Governments’ continued fiscal excesses are not so much
the problem. In fact, this aspect of our national life is but a symptom
of a much deeper problem: an astounding level of economic illiteracy at
the policy execution level. To take but one instance of this: why is it
still so difficult to persuade policymakers here that we cannot
simultaneously control for higher levels of official spending, low
interest rates, exchange rate stability, and low inflation?
It is axiomatic that
there is a relationship between these indices that guarantees that any
attempt to control for the movement of any three of them would be
reflected in the movement of the fourth one. This latter movement then
becomes the cost of the decisions we make. Good husbandry at the
macroeconomic level requires clarity about the trade-offs involved in
the manipulation of these indices and the costs associated with them.
In the last one
year, we have chosen to keep government spending (incredibly) high,
exchange rates stable, and interest rates low. Inflation should have
been on its way through the rafters because of this choice.
Nevertheless, it hasn’t moved as much as one would have expected. One
possibility is that we are measuring the wrong things. Either way, in
most other economies, central banks address inflation concerns by
varying the policy rate. In our own circumstance, the CBN is arguing
that structural problems, including the composition of the consumer
price index, make interest rate an ineffective tool for achieving its
“price stability” goal. This may be true.
However, it is difficult not to wonder by how much the low interest
rates the CBN has allowed has fuelled government’s bulimia for domestic
borrowing. We know by how much government borrowing has crowded out the
private sector from the domestic credit market. There are also
structural issues with the credit creation process. The problem is that
by focussing on quasi-fiscal measures, the CBN may have lost the
monetary policy plot. Same way it did some five years ago!
