According to a recent World Bank report, intervention funds from the Central Bank of Nigeria (CBN) are fueling inflation in Nigeria. This is a worrying development as from the beginning, the CBN has grappled with the challenge created by imported inflation as Nigeria is an import dependent economy with inflation having a direct link to fluctuating prices. exchange rate, which has not been in favor of the naira.
This is worrying because the inflation stemming from the CBN’s activities as a regulator for all practical purposes cannot be contained with conventional inflation management tools. Indeed, the CBN has moved from its functions of regulator to that of operator in an environment that it is legally responsible for stabilizing. If one may ask, is CBN reinventing the wheel?
For the avoidance of doubt, GO Nwankwo (1984) ‘Nigerian Financial System p.19’ says, ‘As a banking institution, the CBN performs the actual banking functions that any central bank elsewhere normally performs. It is, for example, the issuer of the naira currency and the bank of the federal government and, at their discretion, of the state government. He is also a banker for the commercial banks for which he acts as a lender of last resort…. Like most central banks elsewhere, the CBN does not engage in commercial banking and does not have private accounts. “So direct or indirect retail lending to business units is the responsibility of the depository banks and not the CBN.
We must, however, give credit to the CBN for keeping the Nigerian economy afloat, especially in the face of the dismal failure of the Federal Ministry of Finance to implement a sound and sustainable fiscal policy to complement the monetary policy of the CBN in the maintenance of a stable economy in which the inflationary tendency is contained. Thus, the Nigerian economy is driven almost exclusively by the monetary policy of the CBN, which deviates radically from what it should be.
The genesis of the derailment of the CBN from its traditional function is the federal government’s misguided policy of withdrawing public sector funds from depository banks at the CBN in an effort to fight corruption through the maintenance of a single account of the Treasury (CUT). This policy was initiated by the administration of Dr. Goodluck Johnathan. This regime meant by economic management the maintenance of optimal financing of the economy for all significant economic activity. They left public funds in the TSA with depository banks because the economy thrives on the banks’ liquidity position. They have put in place structures to check unauthorized use of funds and other miscellaneous misuse.
There was absolutely no need, as events have proven, for the current government to centralize the collection of public revenue in the CBN through the TSA. The previous regime dealt with abuses that could arise in the administration of the TSA by government ministries, departments and agencies. The decision to withdraw funds from depository banks to the CBN was largely political to displease the previous regime as ignorant and incompetent. In doing so, they did not learn from experience.
In May 1989, the Babangida administration, through the Accountant General of the Federation, ordered all government agencies to transfer their deposit bank accounts and funds to the CBN. At that time, the CBN was under the Federal Ministry of Finance.
The effect was a drain of cash from the banking system. Many banks, especially merchant banks, have become insolvent. This action led to multiple bank failures in the early 1990s. Bank failure worsened with the cancellation of the 1993 presidential election which led to the bank run and further bank failures. were registered in 1995.
As we said earlier, credit should be given to the CBN for keeping the Nigerian economy afloat. The centralization of the TSA in the CBN instead of depository banks has hurt banks’ ability to lend. This led the CBN to leverage its development function to stimulate credit to the real sector by indirectly creating funds as a lending window to banks to on-lend to their customers at interest rates and d other flexible conditions imposed by the CBN on the sectors. such as agriculture, aviation, small and medium enterprises, etc. This is what fuels inflation according to the World Bank report. This essentially explains the steady upward trend in inflation in the economy that the CBN has so far struggled to contain.
Engaging in retail lending is not the function of the CBN. Nigeria being a developing economy, the CBN can justify its action by invoking its development function. But this led to development by inflation.
This writer and many other professionals are of the opinion that engaging in retail banking through CBN is not the way to go. There is no economy in the world where the public sector component of the money supply of the economy is close to zero. The warehousing of the TSA in the CBN has changed the money supply component because the domiciliation of the TSA in the CBN distorts the circular flow of cash in the economy. For development to thrive, the Nigerian economy must be optimally funded. This is especially true since the easiest way to kill an economy is to withdraw cash from the banking system. Gladly, as things stand, neither the Nigerian economy nor the banking system is optimally funded. Without deposits, banks cannot lend. Few analysts will disagree that the Nigerian economy has become a stationary economy. Nothing moves; I repeat, nothing moves. Factories close daily; other multinationals are moving from Nigeria to Ghana.
It is the considered opinion of this author that the Federal Government should turn around and return the ASD to the deposit money banks so that the banks have a sufficient deposit base to lend to loss-making units and revive the economy , create jobs and reduce crime. This is all the more true since the centralization of the TSA in the CBN has in no way prevented the looting of the treasury by officials at all levels, which is the reason cited by the current government for centralizing the TSA in the CBN.
Government is a continuum. The previous government introduced the TSA to fight corruption and has a checks and balances model to fight abuse. It will do us good if this model of the previous government is reintroduced, especially since it is an economic decision and not a political one that can vary from government to government. Need we say more?
Enyinnaya, a Fellow of the Chartered Institute of Bankers, wrote from Ikeja, Lagos State.