Transparency and Integrity


CBN Vs NESG : "A Battle of Wits? " - Simon Kolawole

Opinion By: Simon Kolawole. 

Amidst the series of tough decisions rolled out by President Muhammadu Buhari as the Nigerian economy gasps for breath under the weight of low oil prices and the coronavirus pandemic, a mini-war broke out between the Central Bank of Nigeria (CBN) and the Nigerian Economic Summit Group (NESG) last week.

In a statement with the title “Matters of Urgent Attention”, NESG dished out subtle and not-so-subtle criticisms of the CBN over its development finance, and questioned the transparency and sustainability of the interventions. The CBN, in a reply dripping with fury, defended its record and called to question the intellectual authority of the NESG leadership.

As journalists, we love “two fighting” because it gives us a litany of headlines. But this is not a joke. We are discussing matters that affect the life of every Nigerian — rich and poor, high and low, northerners and southerners, schooled and unschooled. NESG was set up as a non-profit private sector organisation in 1996 with a mandate “to promote and champion the reform of the Nigerian economy into an open, private sector-led globally competitive economy”. Therefore, the face-off between NESG and CBN should be seen as a “contest of ideas” on the economic health of Nigeria and Nigerians rather than some media relief from the socio-economic tension.

Although NESG raised many issues, most were aimed at the CBN: the efficiency of the agriculture intervention under the anchor borrowers programme; transparency in foreign exchange transactions, disbursement of intervention funds, and price fixings “without appropriate policy clarity”; provision of “immunity” for CBN officials in the newly amended Banking and Other Financial Institutions Act (BOFIA); “distortions” in the liquidity and interest rate management; and the “quantitative easing” (what you and I would call pumping money into the economy) by the CBN to fund the large deficit caused by low oil prices and effects of the pandemic.

For one, NESG got it wrong when it said CBN was seeking immunity for its officials under the amended BOFIA. The provision, according to the CBN, “protects the Federal Government, the Central Bank of Nigeria and their respective officials against adverse claims for actions or omission in good faith exercise of powers under BOFIA and other specified statutes including the Central Bank of Nigeria Act and regulations…” In fact, the “immunity” has been there as far back as 1991. This error makes NESG vulnerable to accusations of pursuing an agenda and questions its credibility, given the calibre of professionals within its ranks. Some also find it a bit curious that the NESG chose to go to the media rather than utilise its communication channels with the CBN and federal government.

But immunity is the smallest issue, if you ask me. The NESG wants the government to re-open our borders “given its negative impact on trade and employment”. Our work in ECOWAS, it said, “must also effectively harness trade opportunities within the sub-region”. That is, allow trans-border trade to continue unhindered. In an ideal world, you cannot fault the logic. In fact, some will argue that shutting the borders is primitive. But what do you do when, in practice, free trade becomes an open invitation to the smuggling of rice, eggs, cars, fuel and even arms — thereby ruining your own economy and security? This was not the intention of those who wrote the ECOWAS treaty.

Ideally, you say “beef up security then”. But what do you do when the people beefing up the security are the ones facilitating the illegal trade? The incentives to be corrupt or to corrupt the system are so high. It’s a no-win situation. Open the borders, you are damned. Close the borders, you are damned. Yet we all know that the borders cannot be closed forever. But some will ask: what is CBN’s business with the borders? It’s a good question. The CBN has, for all intents and purposes, become a major stakeholder having financed agriculture extensively and feeling threatened that if the borders are re-opened so soon, the gains particularly in rice and poultry farming will go down the drain.

The issue of border closure as it affects the economy should ordinarily be addressed by the ministry of finance or presidency, rather than the CBN. The bank still ventured an opinion, though, stating: “Benin Republic imports as much rice as China and nearly as much frozen chicken as the UK… In which country does the NESG think all these rice and chicken end up? How then can a Nigerian rice farmer or poultry owner survive?” However, the border closure also comes with unintended consequences. I would love to suggest how to effectively curb the illegal trade but I have no idea. ECOWAS countries should sit down and develop the solution. For now, Nigeria is the biggest victim.

On the power sector, I was initially critical of Mr Godwin Emefiele, the CBN governor, for the apex bank’s intervention. I kept asking: why should the CBN be providing loans to the power sector? Today, I look back and conclude that but for the CBN, the sector would have collapsed long ago. The liquidity problem was grave. The fiscal authorities did not want to approve tariff increase for obvious reasons. You would be justified to argue that it was not CBN’s business to intervene. But doing nothing, especially when you have the leeway to provide the financial oxygen, also has dire consequences for the economy. Let’s now hope the industry will be saved with the new tariffs.

We can apply similar arguments to agriculture intervention. I wrote a sceptical article some years ago when Emefiele announced a forex ban on 41 import items, including rice. I argued then that what we really needed was a fiscal policy, not just a monetary one, to grow our agriculture and become self-sufficient. This is typically the position of free market economists. To them, restricting imports under any guise is a no-no. We could not legally ban rice import because of WTO rules, but we could stop funding rice imports. We could help our local industry grow and reduce the pressure on the exchange rate. That was what CBN did and we have clearly made progress in rice farming.

The NESG made a valid point, in my view, about the sustainability of CBN’s interventions, especially the deficit caused by minimising the impact of COVID-19 on the economy. Their argument is that the government should “consider a strong communicating (communication) strategy that engages the people and prepares them for tougher times ahead whilst the current reforms take effect”. It said that the “current business as usual disposition is not sustainable”. Except there is something unsaid here, I think this is a fair point. The CBN cannot afford to pump money into the system for too long; at some point, the bubble will burst. It’s going to be a painful journey to recovery.

Still, the CBN defended its “quantitative easing” by drawing parallels with how central banks across the world reacted to the pandemic by expanding their balance sheets through monetary measures that would otherwise be considered “unorthodox”. The US Federal Reserve Bank provided loans to non-banking institutions and bought corporate bonds usually classified as below investment grade. The bank pumped a stimulus of $3 trillion into the American economy, and there is no plan to stop until the economic impact of COVID-19 begins to ease significantly. We don’t know when. The European Central Bank also pumped in $1 trillion as the pandemic bit harder in the European Union.

Even the Bank of England that initially said it would resist “political influence” ended up opening its treasury to the UK government to save the economy. The UK government, in trying to save jobs, undertook to pay as much as 80 percent of staff salaries for certain businesses. It provided “bounce back” loans of maximum £50,000 to small businesses, repayable over five years after a one-year moratorium. The government also did an “eat out to help out” scheme to save the eateries and restaurants. In all, the Bank of England injected over £750 billion into the UK economy by buying government and corporate bonds. Nothing is cast is stone about economic theories.

By the way, I am not against this battle of ideas. We can have a decent debate devoid of rancour and ill will. For instance, some think we should re-open our borders; others think it is premature except we want to hurt the little progress we have made. Check both ideas. Neither is 100 percent right or wrong. In all policy decisions, there are always trade-offs. We left the border open for decades and suffered immense damage to the economy and security — but it also promoted legitimate trade and created legitimate jobs. We’ve now closed the border and have reduced smuggling and protected some sectors of the economy, but legitimate trade is also suffering! There must be a way out.

Emefiele has come under heavy criticism but the whole truth is that the economy is in a big mess. Fiscal mess. Monetary mess. We are in desperate times. We are taking desperate measures. Even before the coronavirus pandemic, we were living on borrowed time. Our overreliance on oil was bound to drown us one day. The severe distortions that come with poorly managed oil-powered economies have damaged the normal economic, social and political order. All the arguments about trade, agriculture and monetary policies, etc, are products of an economic and socio-political system built on a feeble petrodollar foundation. Let’s hope we have finally reached the turning point.

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