CBN’s Five-Year Plan: Chasing Shadows With A Charmed Audience!

The CBN Governor, Godwin Emefiele, reportedly, laid out to journalists, the outline and objectives of the proposed 5 Years (2019-2024) Policy Thrust of the CBN, in a detailed statement on Monday 24th June, 2019, in Abuja.

Emefiele announced that his team would work closely with the Fiscal Authorities (Government) to ensure macroeconomic stability and promote more economic inclusiveness, with double-digit growth rates, single-digit inflation rates, and wider access to finance, for more businesses, so as to instigate economic renaissance with more employment opportunities, particularly, amongst Small and Medium Scale Enterprises.

Furthermore, the Governor also explained that the current authorised capital base of banks is no longer adequate to expand credit to the real sector, principally, because of the massive Naira devaluation in the last 14 years or so. Consequently, the CBN Governor gave notice that banks would be required to increase their capital base above the present N25bn, which incidentally was equivalent to $195m (N127-N130=$1) in 2004 but, is sadly, barely $75m today! Incidentally, Emefiele gave no coherent reason for the abysmal Naira Exchange Rate, particularly when reserves have significantly, exceeded the $4bn level which supported an exchange rate below N90=$1, with about 4 months imports cover, before return to Civil Administration in 1999.

Hereafter, the possibility of achieving the desired level of macroeconomic stability, vibrant and inclusive economic growth expected by Emefiele, will be briefly examined against the backdrop of the related existing threats and challenges.

Notably, unbridled inflation is probably the greatest challenge to macroeconomic stability and inclusive economic progress; regrettably, however, international best practice inflation rates below 3 per cent, have, disturbingly, remained elusive in Nigeria’s economy for over 2 decades. In fact, the lowest recorded single-digit inflation rate of about 6 per cent prevailed briefly between 1999 and 2000, while Nigeria’s annual average inflation rate has, inexplicably, also remained stuck above 10 per cent for several years. In other words, all income earners have steadfastly shed over 50 per cent of the purchasing power of their incomes every 5 years or so, to significantly deflate consumer demand below the required level, to drive increasing production and investment with more job opportunities and increasing tax revenue to Government. Instructively, nonetheless, sliding consumer demand has never been a motivator for manufacturers and investors to expand their businesses and create more jobs. Consequently, CBN’s failure, so far, to sustain macroeconomic stability and foster more inclusive economic growth in Nigeria, is largely attributable to CBN’s inability to induce favourable inflation rates below the 3 per cent, rate witnessed, as standard practice in more successful economies elsewhere!

Notably, however, the CBN’s prime mandate, in its 2007 enabling Act, is clearly price stability, i.e. the sustenance of best practice low and stable prices which preserve the purchasing power of all income earners and support vibrant consumer demand, which in turn, would encourage manufacturers and service providers to expand their businesses, while simultaneously increasing job opportunities in the process. Consequently, the over 11 per cent annual inflation rates which have subsisted for several years, in place of a more benign rate below 3 per cent, has expectedly wreaked havoc on purchasing power and consumer demand with a serious deflationary collateral on production, employment and inclusive economic growth.

The palpable overhang of Nigeria’s tepid industrial base with scarce job opportunities is probably traceable to the diminishing purchasing power of incomes which have become victims of years of double-digit inflation rates and abrasive intermittent Naira devaluations since 1999.

Arguably, Nigeria’s recent ignoble identity, as the World’s Poverty Capital, is primarily the product of CBN’s abysmal failure to sustain its prime mandate of price stability since 1999!!

Evidently, consumers readily feel the pain and chagrin caused by the diminishing purchasing power of their incomes, because of unstoppable spiraling prices. However, more Nigerians probably may not easily recognise the relationship between the extensive debilitating impact of higher rates of inflation on macroeconomic instability, unemployment and failure to induce inclusive growth! Instructively, however, since it is irrational for anyone to lend money at rates which are lower than the inflation rate, it is therefore inevitable that cost of borrowing or rate of interest will always remain higher than the inflation rate!

Consequently, double-digit inflation rates, will also compulsively, induce higher double-digit interest rates, which will, in turn, drive higher inflation rates that will further restrain consumer demand, which in turn would reduce the output of goods and services, in an unending sequence, until the primary villain of inflation (i.e. perennial excess money supply) is arrested and better managed to reduce poverty and grow the economy!

Nevertheless, if the real driver of inflation, shrinking consumer demand and output, subsisting simultaneously, with the overt, undeniable, challenges of excess cash supply and extended capacity of credit, it is not yet clear how CBN would bring down inflation to best practice rates below 3 per cent, and achieve its prime mandate without squarely tackling this albatross of persistent Excess liquidity in Nigeria’s money market.

Sadly, CBN management and its Monetary Policy Committee have remained in denial that the PRIMARY INSTIGATOR of inflation is the additional bloated Naira sums, recklessly unleashed into the money market every month whenever CBN deliberately creates Naira substitutes in place of the actual dollar denominated revenue as allocations to Federal and State Governments and their Agencies. Predictably, these bloated Naira substitutes invariably increase the level of excess Naira supply, to drive higher inflation and interest rates, which, will invariably shrink consumer demand and output and ultimately degrade our economy!

So, the question, ultimately, is whether CBN can ever achieve best practice inflation rates, which traditionally support robust economic and inclusive growth elsewhere if the Apex Bank does not eliminate the seemingly eternal albatross of excess Naira supply which undeniably facilitates unfettered credit expansion in Nigeria’s money market, even when domestic output is declining!

Invariably, if higher inflation rates continue to compel higher and higher cost of funds, and constrain consumer demand and investment, Emefiele’s expectation that “working closely with our fiscal authorities” to target double-digit economic growth rates, within the next five years, will certainly remain just a pipe dream, so long as CBN continues to, consciously inundate the money market with excess Naira liquidity, with its obtuse payments system! In such event, unemployment will inevitably rise, as usual, rather than decelerate as Emefiele proposes, until it would ultimately become impossible for more Nigerians to exit the poverty trap, recklessly fabricated and brazenly sustained by CBN for years!!

Furthermore, apart from the poisonous inflationary fuel of excess cash in the market, the CBN, unexpectedly, still compounds its systemic oppressive debt liability by paying between 9 and 18 per cent AWOOF interest to borrow from banks and other investors in order to warehouse the borrowed cash and reduce the inflationary threat of excess cash and credit in the money market!! Notably, however, Central Banks in successful economies actually charge commercial banks a modest fee for warehousing their surplus funds from time to time!!

Incidentally, the banking sector earns between N600bn and N1trn, annually, as interest on those excess funds in the money market that CBN ‘eternally’ mops up, but inappropriately pays ‘astronomically’ high interest rates, in order to put a lid on inflation. Consequently, the critical question must be whether or not you would pay any interest whatsoever on the same funds that you alone also have power, in the first place, to create, especially when the funds you actually borrow will ultimately be inexplicably sterilised from any tangible or useful economic application in order to restrain the well-known horrid inflationary consequences of too much money (otherwise, euphemistically, officially defined as Excess Liquidity) in the money market.

Indeed, if CBN sustains its present payments strategy to achieve its prime mandate of price stability, it will, invariably, further compound Nigeria’s economic challenges by, inadvertently, creating additional fresh money supply for its direct interventions in presumed critical economic sectors. This process will, alarmingly, further spike inflation and instigate serial devaluation to make any hope of economic recovery a fading dream.