Is the CBN biting more than it can chew? Dr. HARRISON EROMOSELE asks in this article:
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The current economic and sociopolitical environment in which the Central Bank of Nigeria (CBN) possesses certain monopolistic, statutory powers in the creation and management of national currency and foreign reserves is characteristically pained, complicated and stressed.
For instance, on the macroeconomic front, there is the unprecedented presence of virulent stagflation (the concurrent existence of unemployment and inflation) following import restrictions side by side with undue applications of ways and means which conspired with a series of external and internal debts that both aggravated the multiplier effect of money supply and crowded out private sector investment respectively.
This is, in addition, to exchange rate volatility in a heavily import-dependent economy, the uncontrollable balance of payments deficits resulting in dwindling foreign reserves, frightening national budget deficits leading to escalating national borrowings, and grappling with the existential challenge of a huge underground economy.
Like never before, political gladiators now wield state powers to restrain opposition parties from campaigning in certain strategic locations.
With the rising wave of impunity, there are reports of stack naira bills running into billions, held ahead of the 2023 general elections, apparently for vote buying and other political mischiefs.
Physical cash estimably put at hundreds of millions are paid daily across the 36 states and FCT as ransoms to bandits, terrorists, kidnappers, etc. in the land where hunger roars like a ferocious beast in the face of heightening insecurity.
The above structural background is of great national concern and should be tackled with a great sense of national urgency. However, it does appear from the body language of the CBN Governor and as contained in the CBN fact sheet that much of the solution lies in the CBN currency redesign.
This is not surprising as the CBN Governor has since interpreted its mandate beyond its conventional jurisdiction to include agriculture, industries, production, curbing of criminal activities oozing from the political and socio-cultural atmosphere and the moves to cushion the effect of COVID-19.
Is the CBN biting more than it can chew? Well, for one, the CBN Act mainly charged it, inter-alia the responsibility “to promote monetary stability and sound financial structure in Nigeria”.
This mandate reveals that the monetary authorities have limited powers to single-handedly address the above sociopolitical and economic crises hunting the Nigerian state. This symbolic warfare can only be won in the spirit of the sincerity of purpose, patriotism and proper policy coordination between the monetary and fiscal authorities.
Sadly, there are clear signs of rising discordant tones between both authorities. Earlier in October, the Minister of Finance had opened up on national media that her office (which is at the apex of the fiscal authorities) was not carried along with the initiative of currency redesign, even when the extant law made room for the Ministry to be adequately represented through the presence of the permanent secretary of the Federal Ministry of Finance in any of the CBN board of Directors sessions.
Meanwhile, the CBN Governor, rather than resolving the purported information gap quietly, chose to use the same media to inform Nigerians that he has the backing of the President.
Looking at the circumstances, first the economic realities; between December 2015 and September 2022, currency in circulation doubled from N1.46 trillion to N3.23 trillion.
This period coincided with the heavy quantitative easing of currency production via the monetary printing press which was a clear violation of section 38 of the CBN Act of ways and means lending, alongside the massive central bank intervention funds, particularly during the COVID-19 era to October 2022.
Unfortunately, about 85 per cent of N3.23 trillion (i.e. N2.7455 trillion) in circulation is outside the vaults of commercial banks.
In effect, monetary policy becomes impotent, as a chunk amount of currency is not within the CBN monetary control space.
The CBN is, no doubt, attempting to reverse the ugly trend it earlier induced through currency redesign. Nevertheless, the CBN Governor should not brush aside the fact that the potency of monetary policy also depends on the spread differential between the nominal interest rate and the real interest rate. Presently in Nigeria, the nominal interest rate is higher than the real interest rate which is a potential culprit that may truncate the efficacy of monetary policy.
The current, unusual boom-and-bust behaviour in the foreign exchange market (FOREX) cannot be largely attributed to the naira redesign program as FOREX can importantly be characterized as one exhibiting the animal spirit syndrome.
Indeed, a host of forces ranging from diaspora remittances, oil receipts and theft, FDI, FPI, the tremendous quest for foreign education, and heavy reliance on imported refined products like petro to remote forces like significant political upheavals, flooding etc. all play a role in determining who buys what and who sells what in the FOREX.
By elementary principle, if the demand for the dollar is higher than the supply of the dollar in the Nigerian FOREX then the value of the dollar will appreciate over the value of the naira and vice versa. However, there seem to be some extravagant expectations over the strengthening of the naira against the dollar following the new currency redesign policy.
Well, the naira redesign no doubt has its share of influence on FOREX. For one, it complements the CBN policy move to contract the money supply.
This means that there will be fewer naira units chasing the dollar. Hence naira will at best only tend to gain value over the dollar in the interim.
This effect is inconsequential to the impact the currency redesign will have on the naira via the naira dollar speculative channels.
Lastly, currency redesign cannot earn seignorage (the real revenue government earns from printing national currency) for the government as it is meant to replace existing currency in circulation from which seignorage had already been earned at the time of print.
In all, the currency redesign as an economic solution will not have much of the desired effect on tackling the macroeconomic crises confronting the masses, particularly as stagflation typically poses a policy dilemma.
The monetarists believe that inflation is a purely monetary phenomenon, yet empirical studies have shown that prolonged stagflation succumbs to supply-side solutions, an option that largely depends on the operations of the fiscal authorities.
However, the currency redesign will be an enabler in achieving certain secondary objectives that are within the purview of the fiscal authorities.
First, currency redesign will considerably mop up much liquid in circulation used for terrorist financing and other related criminal activities like banditry, kidnapping, narcotics etc.
It will also aid in minimizing money politics (i.e. guarding against vote-buying activities) in the upcoming general elections in February 2023. Quite frankly, whether these laudable goals will see the light of day strongly depend on the willingness, credibility and preparedness of institutions (EFCC, DSS, NSA, security agencies etc.) which operate within the fiscal authorities.
If these institutions are ready to pursue national interest against all odds, then we will be confident that the sociopolitical environment will once again occupy its pride of place in society where insecurity will be significantly minimized and a newly credible-electoral process is installed to usher in men and women of character, capacity and competence in governance.
One major reason the CBN was granted independence is to be free from any form of political influence. Hence, the CBN Governor should remain politically neutral.
This implies that while the primary reasons for the naira redesign to address currency counterfeiting, the high cost of physical cash management, worsening shortage of clean and fit banknotes in circulation, the enhancement of digital/electronic transacting channels of the naira and the strategic move to bank the unbanked are laudable, he should avoid the temptation of throwing his weight around critical national assignments like tackling social vices and political mischiefs.
The truth is the primary reasons for currency redesign are complementary (not competitive) to the secondary reasons which lie within the scope of the fiscal authorities.
Though the speed at which physical cash flows from the unbanked to the banked is still very unimpressive given the January 31st 2023 deadline, but then, any extension beyond this date will grossly compromise the checks and curbs of money politics.
I hereby strongly appeal to both authorities (fiscal and monetary) for the sake of national interest to put aside their differences having in mind that money is a ‘social contrivance’, a national instrument that makes the sociopolitical and economic alignments inseparable.
*Dr. Eromosele teaches at the Federal University Otuoke, Bayelsa State
