CBN’s Monetary Policy Framework Is Injurious to the Economy

How would you appraise the tenure of Lamido Sanusi?

Sanusi and his predecessor, Soludo (Chukwuma), both promoted policies that have helped to destroy the economy. With regards to banking regulation and supervision, both of them came with reformative posturing but this has not translated to a disciplined banking sector. The huge differential between savings and lending rates is an instance. You put money in the bank and they give you three per cent but when you want to borrow, they charge you over 20 per cent. What the banks are saying by this is that our deposits matter little to them. When allocations are made on monthly basis, the banks are the main beneficiaries. So you can understand why there is a huge disparity between the lending and savings rates. From Soludo to Sanusi’s time and even the previous, there has been failure of monetary policies. A central bank governor that continues to sustain a monetary policy framework that is patently defective and injurious to the economy cannot be a central bank governor.


What would you consider to be his achievements then?

Beneficiaries of his largesse would say he has achieved something. The banks would certainly say he has achieved something because he has managed to pump N5.7 trillion into their hands. He has also tended to reduce the operational cost of the banks through the e-payment/cashless system. He said about one-third of the cost of banking operations is the result of cash handling, etc. So when the banks are able to reduce their cost, they will be able to advance credit at a cheaper rate. But that has not happened. The banks still don’t lend to the real sector, particularly the SMEs, which are the engine of growth. In the area of price stability, they have failed because the cost of funds, at over 20 per cent, cannot be said to be a success.

Inflation on the other hand at eight per cent, year-on-year, is not worth celebrating because in reality it implies that income values have declined. In the UK at two per cent inflation rate, they are not celebrating it. In the US, it is 1.5 per cent. Even Zimbabwe, which used to have hyperinflation at a time, now has the lowest inflation in Africa at 1.5 per cent, because they applied the right monetary framework of not printing their currency at every opportunity and pumping them into their system like we still do. When we earn dollars, we should make allocations in dollar certificates rather than printing the naira currency and sharing to states at a pre-determined rate. Once the CBN stops printing naira equivalent for every dollar that we earn, inflation will drop to 1.5 per cent or less and the country’s economy will be better for it. So it is not a matter of who is there as central bank governor; it is a matter of what policies the person is pursuing and if he understands the system well enough to choose the right policies.


What are your expectations regarding a new CBN governor?

The first few sentences in the CBN Act 2007 specifically confirm that price stability, including exchange rate stability, is the paramount expectation. A subsidiary requirement also is that the CBN is expected to regulate and supervise the banks and set parameters for them. The parameters that the CBN sets must be in line with parameters that will induce price stability in line with its core mandate. So any person chosen to be CBN governor must have a sound knowledge of economics, particularly monetary economics. And it is clear that so far, the various central bank governors we have had in the last 15 years – or possibly more – did not have a sound grounding in economics. In the area of banking supervision and control, ideally that should be derived from those instruments for maintaining price stability. If your monetary policies are good, the banking sector will similarly be good. But if your monetary policies are ad hoc and do not address the fundamentals that you want o achieve in the economy, you will find that at the same time there will be a drift in the regulation of the banking system.

Are you saying core bankers should not be made governors of CBN?

It would be inappropriate for you to take somebody who has been a beneficiary of the awkward monetary policies that have given the banks so much profitability. Unfortunately, our CBN Act demands that a governor must be someone who has held a top position in the bank. Do you think a governor who comes from the same milieu of people who have benefitted from the wrong application of monetary policies will put up monetary policy framework that would dry up excess liquidity and create an enabling environment for SMEs to borrow at low interest rate, or for inflation to come down to two or three per cent? No.  For the past 20 years or more, there has always been a burden of excess liquidity induced by the faulty monetary policies of government. A system where you have too much cash domiciled in the banks without monetary controls that limit their usage, you are going to have a very lackadaisical banking sub-sector because you pay the banks huge interest to mop up this excess liquidity. A governor coming from the banking sector will not likely stop the ease of making money by the banks. So we will remain in poverty for many years to come. But an independent-minded economist would ensure that we make monetary policies that make banks earn their money while supporting the real sect

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