The N620 billion Nigeria Bank Stimulus: Some Economic and Financial Implications

THE N620 BILLION NIGERIA BANK STIMULUS: Some Economic and Financial Implications

Written By: Shafii Ndanusa MBA, FCCA, Abuja – Nigeria.

Nigeria and in fact the entire world economy has in the last five weeks witnessed the spectacle of the unfolding drama in the nations’ banking and financial landscape. A major stabilizing decision that was taken in the wake of the Central Bank of Nigeria’s intervention is the injection of some six hundred and twenty (620) billion Naira into the five hitherto unhealthy commercial banks.  This rather humane and socially-responsible action itself has elicited a wide range of reactions from a cross section of the populace. Although, there appears to be some balance of reporting in terms of those who favor and those who oppose the CBN intervention. My personal view is that Nigeria is a developing country. More than ever before, this is the time Nigerians should pay great attention to facts, truth and objectivity. Based on the above criteria, people should then decide where to pitch their tents in matters of critical national importance. The era of primitive sentimentality, blind accusations and ill-informed contemplation clearly belongs to the dustbin of history.

My favored approach to a lot of issues is to ask questions myself. Perhaps this is because of my willingness and openness to new perspectives of thought and action. To this end, the following is considered pertinent.

1. How will the 620 billion Naira stimulus package being made available to banks? Is it solely in cash or a combination of cash and financial instruments?  Note that attention has to be paid to the impact of cash injection to the overall money supply of the Nigerian economy and its attendant effects on interest rates.

2. Is there any possibility of excess liquidity being created as a result of the intervention? How much liquidity injection can the system comfortably cope with without adversely affecting the local and international value of the Nigerian currencies?

3. What effect could the more money in circulation lead to in terms of Retail Prices Inflation? What additional monetary policy measures are required both in the short and long term to stabilize the undesirable economic effects of this injection?

4. Noting that the 620 billion Naira stimulus was not created as a result of any real economic activity, what measures are required to ensure that the money created is given true economic value through its judicious application?

5. How will the N620 billion being administered by the regulator? The administration system must be transparent, accountable and fair to all the parties concerned. The system itself must also be capable of meeting the stiff and thorough tests of public accountability. Every aspect of the administration must be fully, properly, accurately and completely documented for posterity.

6. What are the rules for access to the bailout funds by the famous five banks? Are the rules fair and competitive? Do the rules encourage performance or over-reliance on the regulator?

7. What close monitoring mechanisms have been put in place to ensure that the bailout funds are not abused by the recipient organizations?

8. What is the short, medium and long term plans for the administrative and operational turnaround of these institution?

9. Regulators are expected to maintain arms-length relationships with operators within their industry. Having radically altered the competition dynamics in the industry, what measures are being taken by the Central Bank of Nigeria, the Nigerian Deposit Insurance Corporation and the Nigerian Stock Exchange to ensure that undue favor and privilege is not given to the five banks taken over? Note that this action is necessary to create an environment of fair play and healthy competition.

10. For regulation to be effective, the regulator must be ahead of the operators in all the key areas of regulatory interest. How much regulatory reform is required in terms of internal systems, structures, skills, staffing and strategy to ensure that future problems are not allowed to escalate before remedial action is implemented?