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Published On: Sun, Oct 5th, 2014

Emefiele’s crocodile tears over N300b surplus

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Emefiele GodwinBy Boniface Chizea

That was the screaming headline of an article written by that irrepressible veteran Economist Henry Boyo in his column in the Vanguard of Monday, September 29, 2014. If there is anything to be said about Mr. Boyo is the fact of his consistency with the criticism of the Central Bank with the way and manner it monetizes the dollar revenue that accrues to the Federation Account amongst the tiers of government which he tenaciously believes is the root cause of persistent excess liquidity in the Nigerian economy. I would be surprise to find that there are compatriots who track such issues who are not conversant with the Economists’ cure-all prescription for this malaise is that the Central Bank should instead issue dollar denominated Certificates to the various tiers of government and that once this approach is adopted the Central Bank should go to sleep and the problem of excess liquidity in the economy would be a thing of the past. But what we intend to do in making this rejoinder is to critically interrogate this prescriptions to highlight its many shortcomings. But before we do this it is advisable to put the following discussion in context.

Following the Monetary Policy Committee (MPC) meeting which held on 18/19 September, 2014 the Committee expressed its concern regarding the worrisome development of the availability of excess liquidity amongst the Deposit Money Banks to the tune of N 300 billion lamenting that sitting on such idle funds was certainly inimical to the growth prospects of the real sector of the economy which is languishing from lack of badly needed credit. The Committee also expressed heightened concern regarding the anticipated injection of an estimated amount of N 800 billion in October this year as a result of the redemption of maturing AMCON bonds. According to Governor Emefiele, ‘’given the apathy to lending to the real sector, banks may become more inclined with the imminent injection of N 866 billion to lend their surplus cash, ironically, to a captive Central Bank.’’ The Committee along with other critical considerations embraced this discovery to rationalize its decision for a hold on key monetary policy variables reminding all stakeholders that the stark reality was that the possibility of further tightening was distinctively on the cards but was resisted.

Now Henry Boyo piches in with his now familiar argument, ‘’Clearly, the CBN is not sincerely committed to liquidating the scourge of excess liquidity as it seems to shy away from addressing the root causes of eternally surplus, and idle cash in the system. Undoubtedly, excess liquidity is caused by the monthly substitution of Naira allocations for dollar derived revenue by the CBN; nonetheless, a little objectivity will confirm that the adoption of dollar certificates as the instrument for paying dollar derived revenue will immediately extinguish the decades long profligacy of placing government deposits at zero percent and forever mopping up same at double digit interest rates. Furthermore apart from appropriately restoring cash equilibrium and caging inflation with this strategy, the Naira will practically defend itself and become stronger in the forex market without much interference from the CBN. The CBN is aware of this solution which is also amplified in the monetary policy thrust statement of the Vision 20:2020 blue print.’’

Let us assume that the Central Bank is prepared to consider this recommended strategy for managing excess liquidity in the system which Henry Boyo has consistently and persistently recommended for so many years now; in fact since the time of Governor Joseph Sanusi, my former boss at UBA Plc and for which some of our compatriots, even the informed would seem to be persuaded by as I have in past engaged in robust arguments regarding this prescription with some of my friends at Ikoyi Club 1938. If the CBN allocates the dollar Certificates instead of Naira would it not be speedily redeemed by the tiers of government as this allocation is the life line of not a few States?

Of course, we would expect that these Certificates would be deposited in Domiciliary Accounts with the Banks. And since the sub national governments have argued when the feasibility of the Excess Crude Account was being discussed that they do not understand saving for a rainy day when they are already drenched as it were; could one imagine the speed with which the State governments would want to convert such deposits into Naira which is the legal tender currency in the country? And if you have gone to the banks to withdraw large sums of money in the past; little mercies for the prevalent Cashless policy and have been told by the Banks that there is shortage of cash requesting one to come back; one begins to imagine the chaos which would follow if such an illegality is perpetrated. In my well-considered opinion it would tantamount to jumping from the frying pan to fire!

Emefiele was quite categorical in his statement is his five year Agenda for the Central Bank that one of the ills that have affected the Central Bank in its management of monetary policy is what the Governor categorized as the dollarization of the economy. What the Governor did here was to sound a note of warning to all concerned that the well know practice of economic agents asking for payments to be made in dollars was not acceptable to him as it clearly offends the law of the land which recognizes the Naira as the legal tender currency and will contribute definitely to the pressure on available foreign exchange. How then can the Governor of all offenders be the one that will now proceed to be allocating official foreign exchange revenue through the instrumentality of dollar Certificates? Going by the above logical one would recommend to my elderly colleague to go back to the drawing board for a more thoughtful prescription as the issuance of dollar certificate for the allocation of the revenue accruing to the Federation Account is a nonstarter.

It would also appear that there is a lack of deep appreciation of the use of Open Market Operations (OMO) by the Central Bank. OMO which embraces the sale and purchase of financial assets such as Treasury Bills in the Open Market for the purposes of achieving goals of monetary policy; stable domestic prices, stability of short term interest rates, sustainable balance of payments, full employment and economic growth is an indispensable tool adopted by the Central Bank to discharge its core mandate of financial and price stability. Henry Boyo had argued interminably that the banks obtain government deposits at zero percent to turn round to purchase government securities at double digit interest rates and that this situation explains why the banks are not pressured to lend to the real sector. Even if tomorrow the banks adopt aggressive attitude to lending to the real sector the Central Bank cannot dispense with OMO as a veritable instrument for the regulation of liquidity in the system. The OMO which was first introduced in June, 1993 for managing short term liquidity is now I should suppose considered by the Central Bank as a settled indispensable complement monetary policy tool. And the coupon rates on such instruments are not amenable to arbitrary reduction as it is contractual and any such move could be destabilizing as particularly foreign portfolio investors vote with their feet as they move their investments to more attractive destinations elsewhere.

Dr. Boniface Chizea is managing consultant, BIC Consultancy Services, Lagos

 

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