By Chris Enyinnaya
Recent World Bank Report has it that the Central Bank of Nigeria’s (CBN) intervention funds is fueling inflation in Nigeria. This is a disturbing development because all along, the CBN has been battling with the challenge created by imported inflation, Nigeria being an import dependent economy with inflation having a direct link with exchange rate fluctuations which has not been in favour of the naira.
It is disturbing because inflation arising from CBN activities as a regulator in all intents and purposes cannot be contained with conventional tools of inflation management. This is because the CBN has derailed from its functions as regulator to an operator in an environment it is statutorily mandated to stabilise. If one may ask, is the CBN re-inventing the wheel?
For the avoidance of doubt G.O Nwankwo (1984) ‘Nigerian Financial System p.19’ says: ‘‘As a banking institution, the CBN discharges the actual banking functions which any Central Bank elsewhere normally undertakes. It is, for instance, the issuer of the naira currency and the bank to the Federal Government, and at their discretion to the state government. It is also a banker to commercial banks for whom it acts as a lender of last resort …. Like most Central Banks elsewhere the CBN does not engage in commercial banking operations and does not have private accounts. “Thus, direct or indirect retail lending to business units is the function of deposit money banks not the CBN.
We must, however, give credit to the CBN for keeping the Nigerian economy afloat especially in the face of abysmal failure by the Federal Ministry of Finance to implement a robust and sustainable Fiscal Policy to complement CBN Monetary Policy in the maintenance of a stable economy in which inflationary trend is contained. Thus, Nigerian economy is driven almost exclusively by CBN monetary policy which is a radical departure from what it should be.
The genesis of the CBN derailment from its traditional function is the ill-advised Federal Government policy in withdrawing public sector funds from deposit money banks to the CBN in a bid to fight corruption through maintenance of a Single Treasury Account (TSA). This policy was initiated by Dr Goodluck Johnathan administration. That regime understood economic management of keeping the economy optimally funded for any meaningful economic activity. They left public funds in TSA with deposit money banks because the economy thrives on the liquidity position of banks. They did put structures in place to check unauthorised use of the funds and other sundry abuses.
There was absolutely no need, as events have proved, for the present government to centralise the collection of government revenue in CBN via TSA. The previous regime took care of abuses that may arise in the course of administering TSA by Ministries, Departments and Agencies of government. The decision to withdraw the funds from deposit money banks to the CBN was largely political to spite the previous regime as clueless and incompetent. In doing so, they failed to learn from experience.
In May 1989, the Babangida administration, through the Accountant General of the Federation, ordered all government agencies to transfer their accounts and funds from the deposit money banks to the CBN. At that time, CBN was under the Federal Ministry of Finance.
The effect was drain of liquidity from the banking system. Many banks, especially the Merchant banks went insolvent. This action led to multiple failures of banks in the early 1990s. The banks’ failure got worse with the annulment of the 1993 Presidential election that led to run on banks and more bank failures were recorded by 1995.
