Why CBN won’t bridge official, parallel market exchange rates –Utomi
One of the topical economic issues in the minds of many Nigerians is the ongoing redesign of the naira. Some have expressed mixed feelings about it, but the Central Bank of Nigeria has restated the motivation and the gains. What are your thoughts on that move?
There are many perspectives out there, but I think people need to interrogate what the goals of the CBN are. Is it to save the further slide of the naira and re-evaluate it or does it have to do with the elections? There is also the possibility of that decision affecting many people who have taken money out of circulation and stashed them away in houses to use for elections or whatever it is they do. Obviously, it could put such persons under pressure to try and change the money and then expose those doing such things. To that extent, that appears to be an advantage of the process. So, it is not all doom and gloom. However, intentions and execution clarity are two different things and that’s what I’m a bit worried about rather than the question of whether or not the Ministry of Finance, Budget and National Planning was briefed which is a big red herring because the ministry is represented on the board of the CBN. So, let’s tip the conversation away from those side issues. The key question is whether that move can help to curb inflation and that would depend on what is done by those who have the responsibility. We have to get it right and be careful with execution because the last time we tried to do this in 1984, 53 suitcases of money arrived.
Some people have capitalised on the fact that the CBN Governor, Godwin Emefiele, is a card-carrying member of the governing All Progressives Congress and that some of his decisions could have political undertone. What do you make of that perspective?
I think the reason we talk so much about the autonomy of the central bank is because it is critical for it to be able to come to conclusions without being affected by either partisan or political considerations at all. I think it is unfortunate that we are dealing with whether or not the central bank governor is politically neutral. It’s not a good thing. I believe that part of the reconstruction that must take place in Nigeria, let’s be clear in our heads, is that Nigeria has reached rock bottom. Part of what must be done as we begin to find our way back is to insulate institutions like the CBN. Somebody asked me months ago what I would do with the CBN if I were the president and I said I would hire Raghuram Rajan and the person was scandalised. Rajan, an Indian, is a Professor of Finance at the University of Chicago from where he became Chief Economist at the International Monetary Fund and from there, he went to be the governor of the Reserve Bank of India (equivalence of the central bank) but when the current Prime Minister (Narendra Modi) came, they didn’t seem to agree with him and he left the job. I believe he is back at Chicago now.
Besides the fact that I think Rajan makes a great central banker, I think it is important to inoculate the central bank from the errors of the last 20 years or thereabouts by not just getting the right person but somebody who is as neutral as a foreigner. After all, people forget that the last governor of the Bank of England was a Canadian and they actually tried to hire Rajan to replace him. So, we need to strengthen the institution and make it more professional. Right now, there are perceptions that it is not a neutral institution and cannot be trusted to act in the best interest of the overall economy and you know that sometimes perception is more important than reality. We don’t know what the real facts and the truth are, but those perceptions are enough to begin a major reconstruction of the central bank as an institution.
The CBN governor said, while announcing the naira redesign, that out of the N3.2tn in circulation, about N2.7tn was outside the banks’ vaults. How abnormal is it?
It’s not ideal at all. To start with, the central bank has said a lot about going cashless. So, if that goal is desirable, as much cash as is possible should be back in the vault of the CBN. Having so much cash in circulation makes it difficult sometimes to apply monetary policies that affect the economic environment. In the past, it led to decisions by the CBN that ended up hurting the economy. In the 1980s when the central bank was struggling to deal with so much money outside the banking system and the resultant inflation, the instrument it chose was stabilisation securities. Banks would suddenly realise one morning that the CBN had debited their accounts, just to contract money supply. That created many other problems. Before that instrument was introduced, it used to be easy to get seven-year loan, on the average. But after that, most loans became 90 days and people were using commercial papers. Those kinds of mismatch contributed to the crippling of the economy because it resulted in a decline in the propensity to invest, which began to be self-defeating. Part of the reasons banks were liberalised was to make them competitive and attractive so that people would find compelling reasons to leave their money in the bank rather than under their beds. We have to recognise that what we need most now is capital to jumpstart sectors of the economy that have been dormant.
It is critical to note that money outside the banking system is wasting opportunity, because most of that is doing nothing; waiting under the bed till when they are needed. But the very logic of banking is intermediation. Capital deficit areas go to banks when they have fantastic ideas that can create more value and the banks take the money from capital surplus areas – the people who have the money but don’t want to spend it now – and lend to those who need it for basic economic growth, and everybody profits and prospers as it were. But when all the money is outside the banking system, it’s not available for lending.
Let me give you a true but not so funny example. In the 1980s in Onitsha Market, I had an interview with some people when there was a fire incident in the market. People lost millions in cash kept in their shops, whereas there was a bank across the street. So, the question was why didn’t they keep their money in the bank? One of them said the risk of losing a business opportunity was higher if they had to run to the bank and join a long queue rather than enter the shop and bring out money. In their calculation, and it was a rational choice; the risk of losing N100m in a fire was lower compared to the risk of losing a business opportunity because they had to run to a bank to make withdrawal. There is so much the CBN could do.
We know that the primary duty of the central bank is to focus on managing inflation and monetary policy. It is also a champion of capital formation. How do you make capital available that it can create value and improve the quality of people’s lives? You find that one of the biggest impediments in our kind of political economy is that we have lots of assets that are not energised because we do not have what the Peruvian economist, Hernando De Soto, referred to as ‘The Mystery of Capital’. That was the title of his book. The point he made was that the poor have assets, which unfortunately become dead capital because there are no institutional frameworks that make it easy for them to be used to get a credit facility they could use to create wealth.
very simple example is representational systems, the Land Registry. Every plot of land in Europe or the United States is documented in the Land Registry. So, if your grandfather in Yorkshire dies and leaves you three acres of land, that land immediately has value because it is documented in the Land Registry, and it means those acres of land are fungible, meaning they can be translated into another value. You can go to a bank, use it as collateral to access a certain amount you could use to start a business that will employ people, create more value and grow. You also become richer. However, because we don’t have representational systems that work, you see that as far as our system is concerned, any land that is not in Ikoyi, Victoria Island, Maitama and Asokoro is totally of no value to the banks. That is a problem. This is the kind of area you expect the CBN to be interested in to make access to capital easier. But that is not where the energies are going. Unfortunately, the CBN has become an agricultural lender, whereas there are development banks in the country; we have Bank of Agriculture, Bank of Industry and Development Bank of Nigeria, so why will it be giving money to people to go and plant cassava or rice? That is that of the reasons why people accuse the CBN of being political because they claim that some of these monies are going to partisans and they are not easy to recover. So, our challenge today is how do we crack the mainstream of capital and does the CBN play a catalytic role in that?
I think you can trust him for a variety of reasons. He would be president, but he’s not an all-knowing man. What we have adopted is a collegian leadership approach. The third force built long before he (Obi) even joined was focused on defining how Nigeria can make progress and have a people that have shared responsibility to be held accountable as a collective. That remains intact and that is why we have what we called the big tent. We have people who are not in the Labour Party that are also supporting this process. The critical thing is that we have clear commitment of service to the people. Many of the failed economic policies now are not failing because they are not good ideas; they are failing because ab initio, the nature of the traditional political parties like the All Progressives Congress and the Peoples Democratic Party is state capture for the personal aggrandisement and benefit of those who capture it. If the government is focused on the common, how is it that one man does not feel ashamed that he is using such an extraordinary part of the resources of this country to keep himself alive? Flying the presidential jet, travels to treat himself, but the rest of the country is dying and nobody is treating them, literally. Something as simple as malaria is an epidemic in Nigeria. It is killing people than any war. What it takes to cure malaria is less than $10, but most of the people are too poor to spend $10 to overcome that biggest killer. Yet, one man who runs that country spends thousands of dollars to go and treat himself. It is morally unacceptable. Ideally, state resources should be used proportionately and fairly for citizens. You can preach whatever you want, but those who run the country are of the mindset that this is our time to enjoy. It’s a pity that the way our financial system is managed is at variance with what most Nigerians desire. There is a book people should read, ‘When genius failed’ by Roger Lowenstein. It’s about the failure of a bank called Long-Term Capital Management, which was founded by top and very bright bankers. But the bank failed.
Even your own dollar that you deposited with banks, you have to line up to get it. I pray the Holy Spirit helps us that we don’t become like Lebanon and would have to use a gun to get our money from the bank (laughs). You asked why it is impossible to bring sanity into that market. It’s because of interests. People are not honest in serving the economy; they are serving private, personal interests and they placed those above the common good. I am pained about what has happened because of what it took us to build a forex market. Let me go back to history. There was a time when we had exactly what we are having now. The arbitrage was so huge that if you had connection, that was all you needed to be rich. They would supply you dollars and you could sell at twice the cost and you would live like a king for doing nothing. That was the case in this country. Then, we had block currency and the central bank allocated forex for different purposes. After inflation got worse, the system decided that what was needed was price control. So, Nigeria got what was called Productivity Prices and Incomes Board.
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