PRINTING money to solve an economic problem by a country. What are the economic implications? And can such be used to solve every economy problem?
These appear to be the contention since the Central Bank of Nigeria (CBN) reportedly admitted that it printed N420 billion used as bail-out fund for the five banks which managing directors were removed recently.
According to reports, the CBN Governor, Sanusi Lamido Sanusi, while responding to a question at a Town hall meeting with stakeholders in London recently, on how the apex bank sourced the N420 billion it injected into five banks in the country, had this to say,
“we printed money, we created an asset on the balance sheet basically to pump money into the system because money supply had been negative in the first last of the year. We did not borrow money.”
Since that statement in far away London, reactions have been coming in thick fast as regards the economic implication of such a move, and secondly, if the same measure can’t be adopted in bailing out other distressed sectors of the nation’s economy.
First on the line, was the Group Managing Director of Global Fleet Group, Barrister Jimoh Ibrahim, who had earlier suggested last year that the CBN should print more naira in response to the global economic crisis.
According to him, “the whole nation was aware when I made the suggestion, only for the CBN under Soludo to say that such would turn Nigeria into Rwanda,” noting that, “now the reality has shown that the CBN cannot sustain some of its bravadorial behaviour under Soludo for a long time.
Based on that, he predicted that the Federal Government would still print more money but advised the authorities to approach the current “recession,” which the country is undergoing with sound economic polices as opposed to fire brigade approach.
Also, reacting, Sir Lawrence Ukwu, publisher and media consultant to the World Bank and African Development Bank, explained that, the CBN intervened to help the liquidity of the five banks so as to pave way for the determination of their absorptive capacity as going concerns.
However, he noted that, it has been widely reported that the N420 billion injected into the five banks for a turn around was printed by the apex bank, adding that, “those in favour of this action argue that in a bail out, this could hold for developed economies.”
He further pointed out that, incidentally, what the CBN did was to lend the money to the five banks, adding that, “if the CBN then printed this sum of money for the stated purpose in a developing economy like ours, it could trigger off hyper inflation capable of destroying the good work it (CBN) set out to do.”
It will amount to the same outcome, if the same procedure is adopted for infrastructural development and other related areas, he added.
In his own view, the Chief Executive Officer of Nextzon Business Services Limited, Mr. Mac Atasie, the CBN is constitutionally empowered to increase or decrease money supply, act as lender of last resort and protect the stability of the financial system.
Atasie said that the CBN while acting in those context could always inject fresh money to meet their intentions for the economy and the financial system, stressing that the act empowers CBN to manage liquidity, adding that it would have been suicidal to pronounce some banks weak without injecting funds in to ensure they don’t go under.
“If this happened the financial system would have been in a worse shock situation than we have now. Injection of liquidity is critical in times like this. We have always known that injection of capital will be relevant to reverse the effects of the economic meltdown and this is surely a way to do same by passing it through the financial system”, he stated.
Speaking on reasons why there were no bailouts for other sectors has canvassed by some people, the Nextzon Business Services Limited CEO said that there have been liquidity injections into other sectors before this in the recent past.
He explained that for instance the N200 billion naira agric fund, the N70 billion textile fund and the like, though not as concerted, things have been done.
He said that in view of this, if we can fashion how to ensure funds are appropriately channelled, injection of liquidity is an absolute necessity to bring us out of the meltdown.
According to a senior lecturer in the department of Business Administration, The Polytechnic, Ibadan, Mr. Asim Olayinka Oladeji, there is seems to be some misconceptions about the current actions of the CBN or that the apex bank has not been so naked in order to be misunderstood by the public.
Oladeji said there are three possibilities in this issue viz; the printing of money, going into the consolidated account held by it or the discount window operation.
Explaining further, he said the first is highly inflationary and that it is always advisable which also needs the support of the National Assembly. He said the second point, the apex bank cannot unilaterally do without the National Assembly and that thirdly, it is one of the statutory and exclusive duties of the CBN.
Oladeji, a senior economics lecturer, said if the bailout was executed through the third means, it would be right and more result oriented than other points (from the point of the regulator).
He said govt can not on his own print money except through the CBN, stressing that it is not a good measure, that what is needed is a good linkage between the financial and real sectors of the economy, which he described as missing seriously.
“The apex bank should get the public minds disabused.”
In his own view, the CEO and Managing Director of Stuffsonline Limited, a subsidiary of Unicorn Holdings Ltd, Mr. Ayodeji Mafikuyomi, printing money at that period is necessary if the banks need help to avoid collapse.
He said, according to the CBN act, they are empowered to act in that way, as lender of last resort, stressing that there is no way they could allow the bank to go under and put depositors money at risk, “therefore, there coming in was for intervention.”
Speaking on bailouts for other sectors of the economy, Mafikuyomi, stressed that such may bring up problem and trouble that may ground the economy, stressing that every other sectors will be demanding for its own.
He said, banks remains a volatile business, that oil the economy, that no government will fold its arms and allow collapse to come into that sectors.
According to him, what is needed for other sectors, especially the manufacturing sector, is for government to encourage local content, disabuse the mind of Nigerians from importing what we can produce here safely.
He said govt must also tackle the issue of smuggling and infrastructural challenges bedeviling the sector, especially the power generation problem.
However, the issue took a constitutional dimension, when the House of Representatives Committee on Justice petitioned the Attorney General of the Federation (AGF) and Minister of Justice, Chief Michael Aondoakaa over the controversial N420 billion bailout granted five ailing commercial, banks by the Central Bank of Nigeria (CBN) about three weeks ago.
Governor, Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi had in the wake of the bank crisis announced some emergency measures including the sack of the managements of Intercontinental Bank, Oceanic Bank, Union Bank, Afribank and Finbank.
The apex bank, however, walked its way into a complicated legal and constitutional controversy when it also went ahead and injected a total of N420 billion into the five banks presumably to save them from an imminent collapse.
The apex bank has since then come under a flood of criticisms, but in what could be termed the strongest official opposition to the bailout, the Justice Committee of the House of Representatives said the CBN erred in its unilateral decision to raise the said funds and inject same into five private enterprises in which the Federal Government had no proprietary interests.
The Justice Committee admitted that the CBN governor under the Central Bank of Nigeria Act and the Banks and Other Financial Institutions (BOFI) Act had enormous powers to exercise, it had no powers under the law to deploy public funds into private businesses without due authorisation from the National Assembly.
Chairman, House Committee on Justice, Honourable Henry Seriake Dickson said “the circumstances under which the N420 billion was raised and unilaterally injected” into the banks was not an ordinary action of the banker of last resort in the ordinary course of banking but “a monumental policy decision” outside the contemplation and scope of the CBN Act and the Banks and Other Financial Institutions (BOFI) Act.
In a petition dated September 4, 2009 and addressed to the Attorney General of the Federation, the House Committee on Justice described as “a dangerous proposition” the argument of the CBN governor that he was empowered by the law to deploy such funds without appropriation and legislative approval. It argued that not even Mr. President as head of the Federal Executive Council and chief executive of the Federal Government is authorised by any law in Nigeria to deploy funds without seeking the approval of the National Assembly.
“The position of the governor of the CBN that appropriation is not necessary as the funds were not taken from the Consolidated Revenue Fund established by Section 80 of the Constitution is not tenable. This is because a comprehensive reading of the Constitution shows clearly all funds, monies, revenues raised or received by the Federation (except monies made payable into other public funds established for that purpose) are subject to appropriation howsoever the way or manner the funds were raised or received.
By this, even internally generated funds of the Federal Government and its Agencies are subject to appropriation by the National Assembly, unless otherwise provided for by an Act of the National Assembly,” the petition said.
“To agree with the proposition of the CBN governor on his right, power and authority to unilaterally raise, disburse, lend or inject a staggering sum of N420 billion of public fund (howsoever raised and no matter the amount)is an invitation to constitutional anarchy.
“The CBN governor in that case is the only member of the Federal Executive arm who can do what even Mr. President cannot do as head of the Federal Executive arm being the chief executive of the Federation by virtue of Section 130 of the Constitution.
“The Nigerian people through their representatives in the National Assembly must be party to the decision as to whether or not the resources of the federation should be deployed in aid of private commercial enterprises and if so, how much of the public funds and on what terms since the federation does not owe any duty to stop any private enterprise from failing especially, if it is as a result of malfeasance or incompetence of its owners or managers as alleged by the CBN governor.
“Chapter 2 of the Constitution of the Federal Republic of Nigeria provides for a capitalist free market economy. The banks in question are private enterprises in which the Federal Government of Nigeria has no proprietary interest. In our system, the responsibility of government is to provide an enabling environment for free enterprise to blossom.
There is no obligation on the part of the Federal Government to bail out private enterprises unless the people of Nigeria consent to it. This expression of consent can only be through an Act of parliament. This decision or judgement of the CBN governor purporting to act under Section 42 of the CBN Act is not effectual for this purpose as the issues involved clearly border on constitutionality and sovereignty which are outside the contemplation, capacity or scope of the CBN Act under which the CBN governor claims to have acted,” the letter read.
Honourable Dickson (Sagbama/Ekeremor Federal Constituency, Bayelsa State) said the action of the CBN on respect of the bailout amounts to not only a breach of the constitution and distortion of the nation’s economic order but a usurpation of the powers of the National Assembly.
He urged the Attorney General of the Federation to take urgent steps to propose an emergency Appropriation bill pursuant to Section 83 of the 1999 Constitution to establish a Contingency Fund from which the Governor of the Central Bank of Nigeria could draw to meet the exigencies of the present bank crisis as the crisis was neither anticipated nor covered by the Appropriation Act 2009 and the Supplementary Appropriation Act 2009.
He also appealed to the Attorney General of the Federation to ensure that the Economic and Financial Crimes Commission (EFCC) and other security agencies involved in the investigations of the current crisis in the banks respected the sanctity of corporate and individual property rights while ensuring that the laws of the land took its normal course in the justice delivery system.
But the apex bank, in a statement over the weekend said it had noted with interest and concern comments on the legality or otherwise of the injection of N420 billion into the five banks whose managing directors were removed and the suggestion that the CBN Act be amended in view of an alleged conflict with the constitution and wishes to clarify as follows:
The core mandate of the CBN among others, are monetary policy formulation and implementation and the promotion of a sound financial system. It was in pursuance of these objectives that the CBN provided liquidity support to the five banks.
The injection of N420 billion into the five affected banks is neither equity nor a bailout by government but the normal and statutory central banking function of lender of last resort to deposit money banks facing acute liquidity problems. The loan is an accommodation facility intended to improve the liquidity position of the banks to enable them meet their obligations and will be repaid.
The CBN Act empowers the CBN to manage money supply in the economy through different mechanisms. The CBN, as banker to other banks, has been increasing money supply by lending money to the banks through the Expanded Discount Window (EDW) and the injection of the N420b into the five banks is similar to that function.
The money is not from the government treasury and the CBN does not require any appropriation by the National Assembly in order to perform this function which in any event, is not often foreseeable.
It should further be noted that the Constitution of the Federal Republic of Nigeria 1999 authorises the expenditure of public fund outside the Consolidated Revenue Fund of the Federation and outside appropriation, provided such expenditure is authorised by an Act of the National Assembly. In this regard, Section 42(2) of the CBN Act, which is an Act of the National Assembly provides as follows:
“Notwithstanding the provision of Section 29 (1)(c) and 34(d) of this Act, the Bank may grant loans and other accommodation facilities at such rate of interest and on such terms as the bank may determine, to any bank which may be having liquidity problems.”
Therefore, the call for the amendment of the CBN Act is rather unfortunate as there is no conflict whatsoever between the relevant sections of the CBN Act regarding liquidity management/liquidity support for distressed banks and the relevant sections of the constitution regarding appropriation by the National Assembly of all government expenditure (Section 80(1) of the 1999 Constitution of the Federal Republic of Nigeria).
Thus, any attempt to amend the CBN Act to prevent the CBN from playing its role of lender of last resort will not only be counter-productive but unprecedented in the history of central banking in the world as this would simply make it difficult for the Central Bank of Nigeria to perform its vital role of ensuring the safety and soundness of the financial system.
There is no central bank in the world that has to have appropriation from the legislature to perform the vital functions of lender of last resort. And while it is not all central banks that have the mandate to directly supervise banks or even print currency, All central banks have responsibility for monetary policy/price stability of which the lender of last resort function is a critical component. It should also be noted that this function is similar to the ways and means advances the CBN is statutorily authorised to extend to the Federal Government to cushion temporary budget deficiency under the CBN Act.
The CBN is a responsible corporate citizen and will not act illegally or in any manner that is contrary to the dictates of the constitution. The CBN is committed to ensuring the safety, soundness and stability of the financial system and will continue to take all necessary measures to protect depositors and members of the investing public.