The CBN And Quantitative Easing: The Chicken Has Come Home To Roost

By Christopher Akor

Nigerians must see the decision of the Central Bank of Nigeria to redesign the Naira and withdraw old currencies from circulation for what it is – a futile attempt to control runaway inflation in the country. Of course, in an opaque system like Nigeria with a huge trust deficit, official reasons are almost always different from the real reasons given for policy choices and actions.

Since 2017, we have been sounding the alarm over the illegal and rampant funding of the government by the CBN against its own laws. But Nigerians could not be bothered. In July 2017, Mr Doyin Salami, then a member of the Central Bank’s Monetary Policy Committee, (MPC) accused the CBN of providing “piggy-bank” services to the federal government against its own rule:

“Perhaps the most challenging of the present characteristics of the economy in Nigeria is the adoption of a quantitative easing stance by the management of the Central Bank. Monetary data shows a rise in the extent of CBN financing of the government deficit,” Salami said at the time.

CBN deficit financing of the government rose 20-fold in 2017 alone. Mr Salami then correctly noted that the “massive injections of cash” to the government doesn’t reflect in higher inflation and currency weakness at the time because the CBN through “special auctions” raised the cash reserve requirements for banks beyond the stipulated 22.5 percent thus skilfully crowding out the private sector. 

“We thus find ourselves at a point where government borrowing from the CBN is neutralised by raising the CRR of banks, thereby limiting private-sector access to credit”, said Salami who later lamented that “Monetary policy management is presently about funding the federal government.” To be sure, the cash reserve ratio (CRR) is the share of a bank’s total customer deposit that must be kept with the central bank in the form of liquid cash.

But we all pretended we didn’t know what was happening. In fact, in 2020, the presidential candidate of the All Progressives Congress (APC), Bola Tinubu, urged the government to print more Naira to meet the exigencies of the moment.  Of course, the CBN continued printing more money for the government and kept raising the CRR to fight inflation and keep the value of the Naira artificially high.

For instance, in 2020, it raised CRR to 27.5 percent, holding N10 trillion out of a total naira deposit of N17 trillion. At the time, this was the world’s highest CRR. This is in addition to directing banks to maintain a loan-to-deposit ratio of 65 percent, coupled with a regulatory requirement for the banks to maintain a 30 percent liquidity ratio. This battery of insane rules was described as “mathematically impossible” and a sign of a confused CBN whose rules don’t even add up. How do you justify stifling the private sector which is supposed to be the engine room of the economy just to continue to fund the government? The message to the private sector and the international investment community was that the private sector is an unimportant player in the Nigerian economy.

Yet, we all kept quiet and the CBN kept printing money for the government, raising the CRR and interest rates to boot. As at the last count, CBN’s claim on the federal government stands at N21 trillion. Just last month – precisely on September 27 – the CBN, once again, raised the CRR yet again to a world record of 32.5 percent and interest rates to 15.5 percent to keep pace with inflation, which was officially said to be 20.52 percent.

As expected, these measures are not having the desired effect. Inflation – particularly food inflation – has continued to surge and the CBN has lost the ability to defend the beleaguered Naira, which has been in a freefall over the last 18 months. Of course, both Foreign Direct Investment (FDI) and Foreign Portfolio Investments (FPI) have since dried up as no one will be foolish enough to invest in a country where the currency is on a daily decline and the spread between the official and black-market exchange rate is over N400.

Diaspora remittances, although still robust, are being continually channelled through non-traditional means and beyond the reach of the greedy government and the CBN. What is more, Moody’s Investors Service on October 21, downgraded Nigeria’s “local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2”.

This policy of redesigning and reissuing the Naira is therefore the CBN and government’s counter-intuitive and last gap measure to try to claw back the money in circulation and restore some price stability. It may bold-facedly lie and peddle false statistics to justify the actions, but real and perceptive watchers of the economy know what is going on.

It is absolutely false to claim that 80 percent of the currency in circulation is outside the bank vaults. According to the Nigerian Interbank Settlement System (NIBSS), the overall money supply in Nigeria stands at N45 trillion. Only 7 percent of this (N3.2 trillion) is in cash. The rest (N32.84 trillion) are increasingly payments via electronic transfers through business-to-business transactions that are non-cash based.

Also, according to SBM intelligence, the value of electronic transmission, year-to-date, stands at N271.5 trillion. “The value of point-of-sale (POS) transactions for the first nine months of 2022 (₦6.05 trillion) has almost outpaced the total value for all of 2021 (₦6.4 trillion). Even accounting for many cash withdrawals now occurring through POS channels, most money in effective circulation is decidedly non-cash.”

It is therefore clear that the real reasons for this action are not the officially stated reasons. Try as hard as I did, I could not differentiate this action from a similar one crudely undertaken by the military junta of the same Muhammadu Buhari to catch those with so-called looted funds. It is just that now, most transactions are cashless and even for high net-worth individuals and looters, it is uncommon to find anyone storing money in Naira that loses value daily. Cash is mostly stashed in dollars and unaffected by this dead-in-the-wood action of the government.

One doesn’t need a PhD in economics to know that this is a futile endeavour and would achieve nothing. Mr Salami has crossed over to work for the government full-time, first as the head of the Economic Advisory Council and now as Economic Adviser to the president. Yet, quantitative easing and other irrational policies have continued unabated. The CBN and the government is determined not to tackle the problems at their roots but to keep rolling out one foolish policy after another just to keep Nigerians excited and talking while kicking the can forward.

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