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The one thing that
can be said about the meeting, last week, of the central bank’s rate
setting committee is that it was finally brave enough to apportion
responsibility for the management of the different departments of the
economy. Not too long ago, the apex bank had argued the strength of the
domestic economy in the face of rising contagion from the global
financial and economic crisis. And for good reasons too. For beginning
in 2003, the second term of the Olusegun Obasanjo administration
embarked on the path towards fiscal responsibility: due process; excess
crude accounting; the fiscal responsibility act; etc. Because of this,
the economy entered the current crisis by far stronger than it had ever
approached any other downturn in its recent history. But vulnerable it
remained. And when the hot money that had driven the rapid rise in
prices on the stock market began to flee in response to a drop in
investors’ risk appetite for emerging market instruments, it was
inevitable that the system that had provided most of the credit that
drove local purchases of equities was going to suffer.

Almost a year ago,
the central bank commenced its most aggressive intervention in the
banking sub-sector. Its efforts at repairing the financial sector
focused on removing inefficiencies in the market, and addressing
failures in the regulatory and supervisory framework. Banks,
thereafter, had to provide fully for their portfolio of non-performing
assets, the previously stratospheric growth in gross earnings and
profits reversed almost overnight, and the credit taps were turned off.
Now, some recollect this sequence of events a lot differently.
According to the new narrative, the CBN’s intervention precipitated the
credit crisis. The CBN either through its incompetence, or through the
pursuit of a pre-scripted agenda concealed behind the fancy rhetoric of
its new governor, had hurt the economy badly. At the heart of this
latter day narrative is a sense of the apex bank’s over-riding
responsibility for the fortunes of the domestic economy.

The last rate
committee meeting set itself squarely against this reading, by
reminding as many who cared to read its communiqué that the main
mandate of the CBN is to ensure price and financial stability within
the economy. It almost did not matter that members of the rate-setting
committee were chuffed at the relative success achieved in the pursuit
of this goal, as “reflected in relatively stable exchange rates,
interest rates, and moderating inflation”. More important is the fact
that this new reading necessarily casts a number of moot points in a
different light. Thus, rather than being designed to foul up the
economy, the central bank’s recent intervention in the banks was
designed to “improve the supply side (of the credit market) through the
various reform measures to strengthen the DMBs’ balance sheets, remove
toxic assets, and generally repair the financial system to promote the
flow of credit”.

If all this has
happened, it is only proper to ask why private sector credit growth is
dwindling. We all know that credit is material to a recovery in final
domestic demand. Moreover, with the market for long-term fixed-income
securities long exhausted, bank credit might just be as important as
captains of industry regularly make out. Now, the rate committee tells
us that “credit growth is a function of demand and supply factors”.
Apparently, the problem with the economy might be the result not of
CBN-induced impediments to the banks’ ability to create risk assets,
but the consequence of a collapse in demand for credit. What to do
about this then? If the central bank is to be trusted on this question,
recovery in the demand for credit “would necessarily require critical
reforms in the real sector, particularly power, energy, and key
infrastructure to reduce the cost of doing business and improve
investment climate to generate bankable projects”.

From this vantage,
the apex bank and its most important committee could not have put the
crisis facing the economy in better perspective. It clearly does not
matter how much liquidity domestic banks are currently sitting on.
Someone has to need the money in order to close the loop. But even if
you have credit in this economy, what do you do with it?