Currency printing is Finance Ministry’s responsibility, says Owoh

CBN

By Geoff Iyatse

 Godwin Owoh, a professor of applied economics and expert in central banking, in an interview with GEOFF IYATSE, speaks on the economic distortion caused by unrestrained Ways & Means (W&M) financing, the Central Bank of Nigeria (CBN)
supervision and other burning issues arising from the current operations of the apex bank.

• ‘For devaluing naira, govt should give Nigerians tax forbearance’

What came to your mind when you heard of the CBN’s dismissal of the boards of First Bank of Nigeria Limited and its holding company?

It was shocking to many economic agents to hear that that bank was under CBN-induced oxygen since 2016. Four years was too long for the CBN to maintain forbearance without the knowledge of the public. Also, the nature of the intervention was faulty. Until the initial change of board members by the bank and CBN’s query and subsequent reversal of the decision, nobody knows the state of health of the bank. That is capable of eroding public confidence in the financial system. Most people do not understand the message the decision must have sent to the international community.

Some of us who have had practical and theoretical knowledge of the institution feel bad that monetary authority conducted itself in the manner it did. Again, I was not personally shocked because I know that the skills in the commercial banks are higher than those of in the Central Bank, owing to the manner of its recruitment. The majority of the employees are tokens of nepotism and employment process that is not transparency and merit-based.

In India, the most difficult academic test is the civil service examinations. The top candidates are taken into its central bank while the next go into the civil service. Today, CBN’s fresh employees are ‘big men’ who are not ready to listen to anybody. It is a situation where somebody considered as junior can sack his boss or influence his redeployment. The extent of political capture of the monetary capture is of a serious concern.

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The choice of board members resides with members of the company and it is exercised at the general meeting; and a bank is first a company before it becomes a bank. Hence, every bank must follow the rules of CAMA while the rules of banking are additional specific regulations of the business. This is one of the reasons the Banking and Other Financial Institutions Act (BOFIA) ,as amended, is a bad law. The CBN cannot choose the board members of a company; it only comes in when there are infringements that have also violated CAMA. If you are fraudulent or not qualified to serve in the body, for instance, you have infringed CAMA. Any action that is not a violation of CAMA cannot stand under the fiat decision of the CBN.

In any case, at the point the CBN granted forbearance, it is expected that it had taken comprehensive evaluation of the operations of the bank and established red-flag points. If you had gone past that stage in 2016, why should we have this kind of confusion in 2021? The decision amounts to regulatory rascality.

What does the law say about forbearance?
Forbearance is an internal stability maintenance mechanism designed to give liquidity support to a bank that is in trouble, especially when the bank is systemically important. Let us not overemphasised systemically important banks because no bank is too small to be ignored. Every single bank is unique and important to the economy. Once a bank has a mismatch between receipts and outflows, the regulator should give a support that is time-based and defined. Such a support is given after the red flags are identified and those responsible for the misalignment are fished out.

As you are giving a liquidity support, you are also setting clear guidelines on the recovery.

If these were done, why should we still be talking about renewal of the forbearance four years after?
Sadly, it is difficult to substantiate these claims because the CBN has no audited accounts, showing its operations. Every item of forbearance has an impact on the balance sheet of the CBN and, by implication, the balance sheet of the country.

Now, what is the total sum of the forbearance granted so far and how many banks are the beneficiaries? What are the backup recoveries? Where have they tied the responsibilities regarding the cause of illiquidity? Was the illiquidity based on a certain time-lag or it arose from fraud? The regulator must answer these questions.

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Does the law foresee indefinite forbearance? What obtains in other climes?
Forbearance is a short-term liquidity support that should not last for over a year. Otherwise, you should take necessary regulatory actions because forbearance means that the bank is on oxygen. Somebody who depends on oxygen cannot be required to go to the farm. It is an invitation to disaster to give a hoe and a cutlass to somebody who is on oxygen.

In the CBN’s case, the local and international stakeholders were not informed that the bank was on oxygen; hence they continued to put in investments. Key stakeholders deserved to be informed so that they exercised some caution?
They should have been informed and assured of the steps taken to stabilise the system. Managing a forbearance for four years amounts to regulatory rascality and actionable. CBN has a responsibility to discharge its duty regarding the three C’s – that it is capable, competent and has the complete resource to ensure the stability of the banking system as contained in Section 2 of the CBN Act 2007.

Regarding other climes, in Somalia, forbearance must be discussed at the parliament. This is because the resource deployed is public funds and cannot be used the way the central bank wishes. Placing a bank on forbearance could trigger a moral hazard.

You have simply given the executives the licence to engage in unprofessional practices and get away with them. Forbearance must be disclosed, and its impact on the balance sheet of the CBN properly communicated, otherwise you have withdrawn information that is vital for economic agents to take a decision. CBN acted irresponsibly and could face class action in the future.

What if the CBN needed to deal with the issue confidentially to sustain the confidence in the banking sector?
Such an assumption could be likened to keeping bad eggs for a dinner. Is it not better you disclose that the eggs are bad so that people could think of an option? That amounted to deceit. When you hide what you think is confidential, you open the system to all kinds of guesses that could be more detrimental. That is a very crude way of sustaining confidence.

To maintain stability, you must understand the difference between supervision and regulation. Supervision is a real-time process of enforcing compliance. Once there is an impression that you hide the true state of the financial system, you run the risk of overtly colluding with the establishment.

A lot of things are wrong with the CBN. For instance, people now complete their tenures as deputy governors or directors at the CBN and move on commercial banks as directors or board chairs. What that implies is that they use their careers at the CBN to prepare their future. We must stop employees of Central Bank from accepting bank appointments for at 10 years after they retire as regulators otherwise the regulatory rascality we witness today will worsen in the coming years.

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This is the reason some climes separate banking regulation from monetary policy. They are two different things but rolled into one in Nigeria. To make things worse, the printing of currency responsibility is given to the same agency.

Would you think there is something fundamentally wrong with the CBN’s supervisory role?
Certainly, there is something wrong with it. If you look at the report coming from the Nigerian Deposit Insurance Corporation (NDIC), you will wish that it takes over banking supervision fully. Drafting of memos is not supervision or regulation.

Supervision means you understand fully the dynamism in banking software and e-product design. You need to be ahead of the banks in terms of skills. Look at the drama during the ban of banks from transacting in digital currencies. The skills are lacking; the human capital capacity is diminishing. Regulation is not an armchair job; CBN’s process is elitist. They need to be on the ground. For regulation to be effective, you must show technical superiority. But that is not happening.

The new BOFIA requires CBN officials to observe board meetings of banks. Will this make any difference?
The new BOFIA is a backdoor amendment that excessively personalises banking regulation.

You don’t need to witness deliberations of board meetings to be efficient. It is irrelevant and unnecessary taking into consideration that you get operational returns on daily basis.

Being in their meetings makes no difference because no operational action takes place there. Besides, the CBN is entitled to a comprehensive copy of what transpires at the meeting. Attending the meeting will only increase the air of ‘bossiness’ of the CBN.

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The balance sheet of the CBN has become a subject of debate lately just as the apex bank has been involved in an avalanche of interventions which Nigerians do not have the benefit of knowing the true state? What is the position of the CBN Act on balance sheet?
That is a big problem. Beyond the balance sheet, Section 49 (1) requires an audit of the currencies printed. The law also makes it compulsory that balance is made available to the President and the National Assembly after which it is gazetted.

The idea of gazetting it is to give the public access to the document for necessary analysis. It is required for economic analysis and accountability.

Doing otherwise is a flagrant violation of the Constitution and the CBN Act itself. This is because Section 50 of the Act requires the publication of the CBN account and gazetting same. It is a public document; we need to know the volume of interventions made; who approved the interventions and the outcome of the interventions. We also need to see the forbearance granted and the budget supports extended to the state governments. These data are also required at the World Bank and the International Monetary Fund (IMF) for comparative analysis.

Most importantly, we need to analyse the state of health of the CBN to be sure that the country is not bankrupt.

How do you expect commercial banks to comply with regulatory returns when the regulator is not complying with the laws?
How would the commercial banks’ boards perform optimally when the CBN’s recruitment is not merit-driven? You create a complete institution to solve complex problems, not simple ones.

Do you mean the CBN’s responsibilities are simple?
I mean they have reduced their complex jobs to routines. If the man on the street can make the decisions they make, it means they are not doing their jobs. A CBN thatcannot sack a board or institute one? The macroeconomic indices have completely gone ‘mad’. The three macroeconomic pricing have gone haywire and nobody is addressing them. We are talking about an exchange rate that has continued to go up; we are talking about an interest rate that is not linked to any productive outcome and we are talking about an inflation rate that has gone out of control.

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South Africa, Egypt, Kenya, Ghana and other countries at our development stage have clear inflation targeting. But in Nigeria, this has taken a back seat… ?
Yes, the key issue is inflation targeting. Every year, you should create a band of inflation targets. In Algeria, the monetary was offloaded because it failed to meet its target. But in Nigeria, nobody takes a responsibility for inflation. The core mandate of the CBN is financial stability, and the key indicator of financial stability is inflation. Inflation targeting is the way to go because it will prevent the CBN from undertaking unending forbearance and currency printing because they know the impacts those decision will have on inflation. Once there is no inflation targeting, the CBN is free to do anything and engage in ventures it knows will fail. When you target certain inflation rate, you will control exchange and interest rates since they are correlated.

There is an argument that our inflation is cost-push and has little to do with money supply? How true is this? What percentage of inflation comes from the money supply?
Those who make the argument are like students who set an examination for themselves, write it, mark it and grade themselves. The inflation figures reported are even underestimated. Unfortunately, the National Bureau of Statistics (NBS) is the only organisation that can pronounce inflation rate otherwise the figures are grossly underestimated. Take one or two empirical examples to test the figures that have been communicated officially. The World Bank has taken inputs from independent professionals, and it was proven that the inflation figures are wrong.

Today, the inflation rate is between the range of 26 and 28 per cent. There is a relationship between the rate of inflation and unemployment; once there is no econometric alignment when you compute the two, you know that there is figure smoothing to arrive at a predetermine decision for a political reason.

Of course, the Central Bank has been captured by the political elite. The actual meaning of the autonomy of the Central Bank is that it should be disentangled from the political authority. The reality is that the CBN is being pushed around by politicians; the leadership is hobnobbing with politicians, taking essentially partisan decisions. And this is morally hazardous. Once this starts, it is often difficult to reverse. Perhaps, this is also the reason the balance sheets of the
CBN are not published. The monetary authority should be setting the pace for economic growth while the politicians are busy building their political structures. The CBN plays a political role than the technical responsibility it is saddled with.

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The inflation you see today is over 70 per cent driven by money supply that is not tied to any tangible production of goods and services, which is reason the naira had the steepest fall during the COVID-19 lockdown when economies were closed all over the world. Who was buying dollar to travel where and to import what? The CBN is a monetary authority, and once it prints money, it is performing a fiscal function. Who controls who?

Do you mean printing of money is a fiscal and not monetary function?
Yes, it is fiscal. In Ghana, currency printing is a fiscal responsibility of the treasury. In Kenya and South Africa, currency printing is a treasury function, leaving the design of monetary policy for the central bank.

And the amount to be printed has to be agreed on and approved.

This is the reason Section 19 of the CBN Act tactically says the President must approve the printing of the naira.

This mimics the treasury responsibility but how can you saddle the President with a treasury function?
That role should be handled by the Ministry of Finance; this is what happens all over the world, including the United States.

In reality, how does Nigeria’s currency printing works? What are the control mechanisms?
There is no control because it is the regulator that determines the amount to be printed, prints and issues the currency. The only control is in Section 49 (1) which empowers the Auditor General of the Federation to, apart from auditing the account of the CBN, audit the currency issuance to be sure that the monetisation process is complied with.

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Does the process follow this provision of the law?
There is no evidence that it does. The Auditor General’s statement should be published if it exists. But I have never see a report on currency printing. That should have shown us the quantum of the amount printed that is directly related to monetisation and the proportion that is related to the Uganda mythology.

The Uganda mythology is a situation where you just print money and issue while monetisation means the local currency equivalent of whatever is earned from exports is print since you cannot spend the foreign currency earned. Any other currency printed outside monetisation is related to the Uganda mythology, which is the major challenge facing Nigeria today.

I supposed the Edo State Governor, Godwin Obaseki, whose state is a beneficiary of this, was propelled by the gods to save the country of the disaster waiting to explode. The closest legal support to what the CBN is doing is Section 30 (2) of its Act, which grants it the power to provide temporal budget support to the Federal Government, not the state governments. And this must be paid within the fiscal year before any other request can be granted. And this must not be extended to the state governments.

How do you weigh this with the statement of the CBN Governor, saying it would amount to irresponsibility if it fails to support the government?
It is like a soldier who goes to the street and starts shooting everybody under the guise that his job is to shoot. You cannot print money outside the monetisation cover. Any other printing must be within what the law allows. In other jurisdictions, ways and Means (W&M) facilities are debated at the parliaments. For emphasis, the monetary authority is not responsible for the currency printing. In the US, quantitative easing is debated extensively by the Congress. In the US also, currency printing is handled by the treasury and not the Federal Reserve. The same model is copied by India.

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Printing of currency outside monetisation should be extensively debated at the National Assembly because it has a direct impact on the people. We must know that any money printed outside monetisation is a form of taxation on the people. This is because it devalues the money earned by Nigerians. Ideally, Nigerians should be given tax forbearance for the impact this has had on their purchasing power.

Also, interventions as we have witnessed should go into the consolidated account and be appropriated because it belongs to the people. So, the CBN invention programme is a flagrant violation of Section 80 of the Constitution.

The government, including the states, currently faces an illiquidity crisis. Does this not indicate that there is no end to quantitative easing?
The states do not have liquidity because they do not invest in projects that have strong cash flow. The highest level of deceits is that government cannot do business. Today, one of the most efficient airlines is British Airways.

Is it not a government enterprise? Business means accountability, thorough evidence before taking financial decisions and guiding against waste, which is the import of the National Assembly. Should the government do corruption since it cannot do business and turn around to say there should be an oversight by the National Assembly? Is that not a contradiction? Now, the loans the CBN said the states should pay back: who owns the money? Who are they going to pay to? If it is the people, why did it not go through the National Assembly for appropriation? Does it not suggest that the CBN is a state within the state headed by President Muhammadu Buhari?