…stronger market/private sector response functions will render unnecessary much of the bolshiness from the current management of domestic monetary conditions.
My first reaction to the fusillade of circulars last week, as the Central Bank of Nigeria (CBN) sought to deny parts of the economy access to its open market operations, was to scream: “Infringement!”. Without prejudice to the central bank’s responsibility for managing local monetary conditions, certainly considerations of equity should have a look in, in the design of policy. To impose costs on segments of the economy, or put differently, to confer unearned advantages on segments of the economy, to the disadvantage of, or for the benefit of other sectors, as the central bank appears to have done with its most recent policy intervention, surely is not consistent with the regulator’s responsibility for protecting consumers’ welfare. Nor can we argue in the case of fixed-rate securities that the preferable outcome for the economy, today, is one where only non-resident investors may have access to government’s short-term debt instruments.
The arguments against the central bank’s position are legion. To begin with, the CBN’s decision reduces the diversity of the investment portfolios of significant segments of the population. In the same order, it makes these portfolios riskier, and their returns more volatile. Almost without question, therefore, owners of these portfolios will act to compensate for this, including through increased dollar holdings. And with the balance on the gross external reserve at new lows, what’s to stop the CBN from imposing new restrictions on new quarters of the economy? Moreover, given how the fiscal authorities continue to close off avenues to legitimate commerce, it is a safe bet that overall some of the response to this policy twist will happen at the bleeding edge of the law. Arguably, this cannot be the intention of the central bank. But at the very least, it is inconsistent with the incumbent government’s resolve to strengthen domestic economic actors at the expense of non-resident ones ― as evident in its recent closure of the country’s borders.
But all that is to quibble. For the bigger part of the central bank’s work in the last four years has been to rapaciously erect and close internal borders. It recently raised one such border, when it mandated banks to boost their lending, such that for each N1 of deposits they raise, they were to lend 60 kobo (later increased to 65 kobo). Apparently, the banks found creative ways of meeting this target, especially through lending to customers in the understanding that the latter were to profitably place the funds in treasury bills. Accordingly, in the third quarter of this year, bank lending to the private sector rose, banks’ profits also rose; but the CBN did not see the uptick to real sector activity that its new loan-to-deposit ratio was meant to kick start.
Can we continue to create perverse incentives to behaviour locally, and be justified in our time-honoured plaint about the “average Nigerian’s” penchant for rule-breaking? The answer to this question is clearly “No!” Not so clear is the answer to a follow-up question: “How long can the central bank continue to try to drive the economy along with its heterodox policies?”
And on account of this, the central bank put the kybosh on corporates and individuals accessing its open market operations! But do you staunch bleeding in one part of the body by opening another wound? Far more serious than the obvious answer to this question is another puzzle: “Why does our local governance model imagine that the creation of perverse incentives is the way to go?” Without addressing serious concerns about the economy’s ability to create long-term value, we seek to force banks to lend, while insisting that their non-performing loans must stay within a conservative bound. Then we go blue in the face when banks find creative ways round this. In response to this, we impose a raft of even more perverse incentives. Interestingly, the succession of CBN circulars last week around this matter betrayed its concern with the different ways by which it was sure the market would try to go beyond the restrictions.
Can we continue to create perverse incentives to behaviour locally, and be justified in our time-honoured plaint about the “average Nigerian’s” penchant for rule-breaking? The answer to this question is clearly “No!” Not so clear is the answer to a follow-up question: “How long can the central bank continue to try to drive the economy along with its heterodox policies?” Especially, when the policy portmanteau undergirding its philosophy simply creates an obstacle course for domestic entities, criminalises behaviour that would ordinarily not attract anyone’s attention, and disincentivises initiative.
Last week, the World Bank released its index for doing business costs across the world. And Nigeria continued to climb up the ladder, in terms of its elimination of red-tape and bureaucracy. One wonders, though, given the lack of correlation between improved business conditions and improvements in domestic output how much of our economy’s problems are derivable from the cat’s-cradle of red-tape that binds it. Is there a case for adverting the same attention to strengthening domestic market conditions as we have to eliminating bureaucracy?
I’d argue in the affirmative in response to the latter poser. For, if nothing else, stronger market/private sector response functions will render unnecessary much of the bolshiness from the current management of domestic monetary conditions.