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One of the most damning broadsides
directed at the Central Bank in recent times has come from the office
of the National Security Adviser, General Aliyu Mohammed Gusau (rtd).
The Central Bank of Nigeria’s (CBN) recent intervention “seemed to have
damaged economic activities in the banking sector to the detriment of
the larger society,” Mr. Gusau said in his address at a security
awareness seminar organised for newly appointed ministers by his office
in Abuja two weekends ago.

Alarmed by both the
strength of this indictment and the very senior person making it, the
analogy which readily came to mind, was of an anthropomorphic kind.

Confronted by a
brain-dead patient on some fancy life-support system, what is the right
thing to do? This is one helpful way of addressing the dilemma raised
by the general. It is easy (one of the benefits of hindsight) to
attribute the “seven years of plenty” that preceded the current crisis
in the economy to the activities of the banks. And to proceed from this
to the argument that by hobbling the banks, the CBN is directly
responsible for the current fortunes of the economy. The difficulty
with meeting the falsities in this argument lies in being able to avoid
talking down to one’s interlocutors.

So why not have the
General Gusaus respond to two related questions: How much of the
massive growth in credit to the private sector, which happened in the
years of plenty, went the way of productive activity, and how much to
speculative ones? What role did structural policy play in the many
private decisions to allocate resources in that period?

A hard decision well made

As with the patient
on life-support, the decision to pull the plug on non-performing
economic entities is not readily made. But it is justified in terms of
a cost-benefit assessment and useful when closure definitely would have
a cathartic effect. Rarely, if ever, have those whose call it is to
pull such plugs been accused of murder.

Evidently, to
prefer the financial services sector the way it was before the advent
of the current regime at the CBN is to lose sight of one of the more
important lessons from Japan’s recent economic history. In the late
1980s, when Japan allowed the yen to rise in response to American
concern over its huge current account surplus, the asset price bubble
and the “lost decades” that followed were in part the result of a
failure to implement structural policies in aid of the transition from
external sector-led growth to one driven by domestic demand. The most
notable of such failures, if the IMF’s April World Economic Outlook is
to be believed, was the failure to “clean up the banking system.”

As the main
financial intermediator in any economy, the biggest danger from banks
is that lax controls allow them earn more money from trading on their
own account and for favoured clients, rather than from arbitrating the
efficient allocation of financial resources in the economy.

What manner of gains?

The gains from
greed and enlightened self-interest are not the same thing. Neither is
their effect on the economy. The one is the excess that results in
crapulence, indigestion, and obesity, all harmful in equal measure to
all that indulge in it.

The other involves
the pursuit of personal gain, while acknowledging the rights/needs of
others. The emplacement and enforcement of laws and rules in any
society based on competitive capitalism should aim at incentivising the
latter set of behaviour, while clamping down on the former.

Even though the
current management of the CBN appreciates this fact, the bank still
needs to do a lot more to cleanse the banking sub-sector in a way that
makes monetary policy management easier.

Take for example
its latest directive to banks to quote their rates as a function of the
policy rate. Imagine the moral outrage when deposit rates are quoted as
MPR-5, and lending rates as MPR+10. Yet, the problem is not with rates
at the retail end of the market. It is instead about the structure of
the MPR itself.

For so long, it has been out of
alignment with all the rates it is meant to control, only because it
has no relationship to inflation. Would General Gusau support a policy
rate expressed as the sum of the inflation rate plus the trend growth
rate of the economy?