Re-Ndic And Payment To Depositors: Matters Arising
The editorial with the above title in the Guardian of Wednesday, January 11, 2007 refers. The plight of depositors caught in the quagmire of banking distress and failure should, no doubt be of utmost concern to a newspaper whose philosophy is conscience nurtured by truth. This in itself is the hallmark of responsible journalism driven by the desire to foster overall public good.
However, the concern should go beyond merely drawing attention to the plight of these hapless citizens denied access to their hard-earned money through no fault of theirs to a thorough and factual analysis of the true situation on the ground devoid of subjective conclusions. It should as deliberate policy guarantee fairness by extending the same searchlight to the distress resolution framework and strategies put in place by the authorities in order to ensure balance. The editorial in question failed to observe this simple maxim and in the process ended up drawing erroneous conclusions which cast aspersion on the integrity of the Central Bank of Nigeria, CBN.
What are the facts? The Banking sector Consolidation exercise came to a close on December 31, 2005 at the end of which 14 deposit money banks with negative shareholders’ fund that could not find merger partners had their licenses revoked by the CBN. The Governor of the Bank, Professor Chukwuma Soludo had then promised that unlike in the past where depositors were left in the lurch during the banking distress era of the 80s, private depositors of the 14 banks that were unable to meet the consolidation deadline should be rest assured of receiving their deposits in full.
The Governor did not promise that depositors of the insolvent banks would be paid on 31st December, 2005. Indeed, that was deadline for the banks to meet the capital/consolidation requirements. In addition, the revocation of the licences of the banks that were insolvent and failed to meet the set criteria did not take place until January 16, 2006. It was on that day that the Governor announced the policy that all private depositors would be paid all their deposits and not just the =N=50,000.00 under the insurance scheme, within the shortest possible time.
He specifically made it clear that the CBN was interested in protecting the hard -earned money of private depositors and that the Bank would do everything possible to ensure that the deposit resolution is effected within the shortest time possible. When asked by a reporter to give a time limit the Governor replied that given the processes involved, the minimum time before payment would commence should not be less than 90 days. It is perhaps this that has been misinterpreted to mean a three-month deadline in which all depositors would be paid. Even a severe interpretation would put that to April 15, 2006 and not December 31, 2005 as the Guardian Newspaper would want the world to believe.
Secondly, the number of banks involved is 14 and not 34 as the Guardian editorial purported. As at December 31, 2005 there were 89 mostly fragile and small banks operating in the country. On January 2, 2006, the CBN announced the emergence of 25 banks comprising 75 banks that independently or through mergers had met the set criteria. That left the 14 insolvent banks and not 34. The Guardian ought to know.
However, some of the promoters of the failed 14 banks out of selfish considerations instituted legal actions to challenge the revocation of their banking licenses. The legal obstacles prompted some delay in the failure- resolution of three out of the 14 banks.Although this was anticipated, it is on record that through the failure resolution option of Purchase and Assumption (P&A), the verified deposits of private depositors of the former Allstate Trust Bank Plc were by May, 2006 fully transferred to Ecobank Plc. This is particularly significant when viewed from the percentage of depositors that were involved as a proportion of the total population of the failed 14 banks. The transferred Allstates private depositors represent almost 50 per cent of the total for all the 14 banks.
Suffice to note that private depositors of the former Lead and Assurance banks had also been fully transferred to Afribank Plc while those of Trade Bank are being assumed by UBA Plc. In all cases, the private depositors involved now have unhindered access to their deposits and on top of it continuity of banking services.
All efforts are being made to speed up the process to bring succor to the depositors of the remaining four banks-City Express, African Express, Metropolitan and Hallmark.
We once again implore media practitioners to always take the pains to cross-check their facts. On our part, we will continuously strive to ensure that the two-way information flow is not impaired.
The attention of the Central Bank of Nigeria (CBN) has been drawn to news reports in most national newspapers credited to the chairman of the Independent National Electoral Commission (INEC), Professor Maurice Iwu, to the effect that INEC’s N20 billion was trapped in the CBN.
For the avoidance of doubt, the CBN does not have such a mandate for N 20 billion as alleged by the INEC chairman. From a total N184.07 billion mandate received from the Office of Accountant General of the Federation (OAGF), in respect of 3rd quarter capital release meant for government institutions and parastatals, INEC was allocated the sum of N5.442 billion.
As at October 3, 2006, the CBN was yet to receive any new mandate for any additional money meant for INEC except the N5.4billion received on September 21, 2006 which is to be paid from the 3rd quarter allocation when funded. The CBN normally effects payments on all lawful mandates within 24 hours of receipt of such mandate.
In the Punch of Monday 4th September, 2006 one Yemi Kolapo claimed that the CBN was not doing enough to tackle inflation. It is obvious that that statement is misleading as the CBN has been doing quite a lot on inflation control and the facts speak for themselves. For inflation to have been wrestled down to 8.5 per cent on year on year basis as at end June 2006 in a pre-election year, the Bank deserves commendation and not vilification.
In June 2005, the statistics showed that inflation was 18.8%, rose to 24.3% in September but declined to 11.6% in December 2005. By the end of the first quarter of 2006, that is, by the end of March, it remained more or less unchanged at 12.0%.
In the article referred to above, Kalopo used the example of three items that showed increase in prices to justify his claim. But surprisingly, he stated that inflation should be understood as increase in general price level which even falls short of the standard definition. What then is inflation? Conventionally, inflation is defined as a sustained or persistent increase in the general price level. Why sustained? Because according to economists, a a one time increase in price is not inflation. Neither is an increase in one or two items considered to be inflation. For there to be inflation, the increase must be in the general price level and it has to be sustained. One more thing, when the National Bureau of Statistics publishes figures that shows a decline in the rate of inflation, it does not mean that the prices are falling otherwise that would be deflation. What it means is that the rate of increase is slower !! Indeed, even in the industrialized countries, most of them record increases in their general price levels but the rates of increase are low. It is in that regard that the Federal Governement and the CBN aims to bring and keep inflation in Nigeria at single digit. An examination of Consumer Price Index (CPI) chart in several major countries will show a rising trend. Therefore, the chart that showed increases in the CPI is to be regarded as normal and its use is either calculated to mislead the reading public or Kolapo needs some education himself. Besides, according to him, the chart was for the urban people only. As a Lagosian, he did not take into account the rural CPI and those in the rural areas.
What has CBN been doing to tackle inflation? First, the CBN under the leadership of Prof. Soludo believes that a core function of the Bank is to ensure monetary stability and therefore price stability. Take one of the examples that Kolapo used: a generator that cost =N=9,000 in January is now (September) =N=14, 000. Now generators are imported items in Nigeria. But the exchange rate of the Naira has not only been stable it has appreciated. The question is what could have been responsible for such increase in the price? That would have been a worthwhile question for Kolapo to pursue. The purported increase must have been in the fertile imagination of Kolapo. Or was it a deliberate attempt to mislead the reading public?
Besides the widely commended effort of the Bank in stabilizing the exchange rate, the CBN has spared no effort to mop up excess liquidity in the banking system caused by the monetization of oil receipts exacerbated in recent times by the autonomous foreign exchange inflows. The effect has been to restrain the growth in monetary aggregates. One can only imagine what the counterfactual could have been if the CBN hadn’t undertaken such operations. In addition, to signal the stance of monetary policy, the Monetary Policy Committee at its meeting of August 9, 2006 expressed the intention to review upward the Minimum Rediscount Rate (MRR) should the threat to monetary policy continue.
Why is the CBN so concerned about inflation? One, because that is a key mandate of the Bank. In particular, the establishment and maintenance of macroeconomic stability is crucial for creating the conductive environment for sustainable growth. And of course, at the heart of macroeconomic stability is price stability which is dependent on the control of money supply. Secondly, we know that changes in the value of money has serious implications for wealth distribution and poverty alleviation. Hence without doubt, we believe that the fundamental task of the central bank is to preserve the value of the currency. The poor benefits so much from price stability since he has little flexibility to increase his income.
What is the framework for Monetary Policy? Mr. Kolapo gave the impression that the CBN has adopted inflation targeting. That is far from the truth. The correct point is that the framework for monetary policy in Nigeria today is monetary targeting . It involves the use of market (indirect) and non-market (direct) instruments to control monetary aggregates. It entails setting and continously monitoring the changes in one or more definitions of money supply. Under the framework, the ultimate objective of monetary policy is to control inflation. Generaly, the operational target is base money(currency outside banks plus reserves) while the intermediate target is broad money M2 . For the avoidance of doubt, monetary targeting is predicated on the notion and the empirical evidence that inflation is essentially a monetary phenomenon.Hence the monetary authorities attempt to restrain excessive growth in money supply in the belief that the control of such intermediate target will lead to control of the ultimate target: inflation.
Unlike the current monetary policy framework that is operated in Nigeria, there are several countries that have adopted inflation targeting. Essentially this involves, institutional commitment to price stability as the primary goal of monetary policy involving prior public announcement of medium-term numerical targets. However, that calls for a number of pre-requisites including central bank’s instrument independence, a data-rich environment, prudent fiscal policy behaviour and robust modern financial instituions.
Let me illustrate with a data rich environment, one of the preconditions for the implementation of monetary policy under the inflation targeting framework. This calls for full, timely, and accurate information on key variables such as GDP on at least a quarterly basis, a robust forecast of same for several periods in advance, financial data, trade data etc. But in Nigeria these data are available with lags of varying lenghts. While monetary and financial data are generally more readily available, real sector data on output, employment etc. come in with a long lag. As we begin to improve in generating and disseminating such data the CBN is considering moving in that direction.
On the issue of central bank independence, what is required for effectiveness, is instrument independence meaning that while the government should determine the ultimate goals of monetary policy, the central bank should be allowed to determine the appropriate instruments to use and when to use them to achieve the established goals. In other words, the central bank should be independent of undue political interference. This does not mean that the Governor should not be appointed by the President. But that his appoinment and removal should be subject to the confirmation of the National Assembly.
It must also be noted that monetary policy constitutes just a part of the general macroeconomic policy. And to be successful there is need for consistency in the policies. Moreover, the objectives of macro policies are sometimes conflicting and the deployment of some policy instruments may detract from the achievement of other desirable outcomes. Thus a delicate balancing act is required. Finally, let me state that in every country, the deleterious effects of inflation makes it public enemy number one; so much so that the existence of inflationary pressures calls for concerted efforts to change and bring under control. The CBN needs to be supported in this fight.
In this regard, any positive suggestion will be considered. This is what Kolapo failed to do in his write up.
Festus O Odoko, Corporate Affairs, Central Bank of Nigeria
National Clearing System Re-Visited:In January 1995, a revised clearing rule became operational to facilitate effective clearing of financial instruments and shorten the period of clearing.
Consequently, inter-state cheque clearing time was reduced from 21 days to 15 days, while intra-state clearing has been reduced from 12 days to 9 days.