The central bank as a printing company
By Obadiah Mailafia
Joseph Mubiru (1929-1971), was the first Governor of the Bank of Uganda. Highly competent technocrat; he was once ordered to print money by the strong man in the country’s army, General Idi Amin, which he politely refused to do. For professional reasons. He was fired and then murdered. Central bankers live in a golden world. But their work clearly carries enormous risks.
A rather illiberal debate took place a fortnight ago between the governor of Edo State, Godwin Obaseki, and the CBN and the Ministry of Finance. Governor Obaseki revealed that some N60 billion were printed by CBN for distribution as part of the FAAC’s monthly process. Finance Minister Zainab Ahmed said what the governor alleged is “very sad because it is not a fact. What we distribute to the FAAC are the revenues that are generated… So, it is not true to say that we have printed money to distribute to the FAAC ”.
But the governor was adamant: “Zainab Ahmed should rally Nigerians to stem the obvious fiscal slippage our country is facing. Rather than playing the ostrich, we urge the government to take urgent action to end the current monetary rascality, to prevent the current economic challenge from escalating further.
For his part, CBN Governor Godwin Emefiele said: “The concept of printing money is to lend money and that is our job … It will be irresponsible on the part of the CBN, any central bank or the Fed to remain inactive and refuse to support their government at a time like this ”. The 2007 CBN Act makes currency printing one of its mandates. Monetary authorities normally print legal tender currencies to replace old ones, while printing a few more to meet increased liquidity needs in a growing economy. What they make of such an impression – the face value of the money in addition to the cost of production – is known as seigniorage.
In the 1990s, the Bank of Japan, BOJ, invented a new monetary policy instrument called “Quantitative Easing”, QE. This involves printing money to buy back securities in the financial markets in order to inject liquidity into the economy during stagflation. Remarkably, it worked. And it was not inflationary.
During the Great Recession of 2008-210, Western central banks, especially the US Fed, Bank of England, and European Central Bank, implemented their own successful QEs. An influential article by Columbia economists Michael Woodford and Yinxi Xie, “Fiscal and monetary stabilization policy at the lower limit of zero ” (July 2020), reaffirms the technical basis of QE.
The CBN has structured over a trillion naira of “intervention funds”, apparently to support economic recovery. However, there is a qualitative difference between the classic QE approach and what CBN has done. Advanced countries have never printed money directly to support budgets or for consumption. They instituted a QE to consolidate the liquidity of the economy via the capital markets. What CBN would do is print money for direct consumption.
The late Chief SB Falegan, former CBN research director who died in February, confessed that in the 1990s, under the military dictatorship, the Mint was put into overdrive: impression of naira, which were then loaded into trucks waiting and driven through the night haze. A banker of great honesty and integrity, we have no reason to doubt his testimony.
Besides the penchant for printing, there have been cases of criminal recycling of old naira banknotes and it has also been alleged that billions of new banknotes have disappeared from the mint, including, alarmingly, the one of the steel plates to strike our currency. But that was before Emefiele.
Can we therefore believe that all currency in circulation is true legal tender?
Let me also say that today’s CBN is not what we once knew. It has been hijacked by special interests of government and the private sector. The Cabal and the Sharks have a theoretical gaming interest in maintaining multiple exchange rates for their own rent seeking interests. And they would do anything and pay any amount to make sure that no reform would compromise this “exorbitant privilege.”
In the 1970s, N1 traded for $ 2. In 1980, N1 traded for 80 cents. In 1985, the naira fell to N1 = $ 1. Yakubu Gowon’s military administration, despite its shortcomings, ran a naturally clean government. The then finance minister was Chief Obafemi Awolowo. He managed the public finances with sagacity. Nigeria did not borrow a dollar from international financial markets for the war effort or for post-bellum rehabilitation and reconstruction. We were on the verge of industrial takeoff. The largest international manufacturers had invested in our country, ranging from Peugeot to Michellin, Volkswagen, Mercedez and others. Most industries collapsed, while some moved to Ghana and our ECOWAS neighborhood.
According to a social media influencer, before the locust years we were net exporters of refined oil, but today we are net importers; we have driven locally assembled vehicles, with a Peugeot plant in Kaduna, Volkswagen in Lagos, Leyland in Ibadan, ANNAMCO in Enugu and Steyr in Bauchi; many automotive components were produced locally, such as car seats by Vono in Lagos and Exide producing the batteries, Ferodo producing the brake pads and discs, Dunlop and Michelin producing the tires and Isoglass producing the windshields; companies like Sanyo produced our radios and televisions; Thermocool manufactured our fridge-freezers and air conditioners; we have had water distributed through pipes through pipes manufactured by Kwalipipe in Kano and Duraplast in Lagos; we wore clothes produced by a dozen textile factories in Kaduna and other towns, employing nearly a million people; electricity was relatively stable and was distributed by cables manufactured by NOCACO in Kaduna and Kablemetal in Lagos and Port Harcourt; we had a national carrier with over 50 relatively new planes circulating around the world; and most of the food we ate was grown locally.
In 1986, N2 was trading for $ 1. In 1992, $ 1 traded for N10. Misguided structural adjustment policies, linked to debauchery, thoughtless money printing, commercial bank back-and-forth, and rent-seeking behavior of financial regulators were to blame.
Towards the end of Goodluck Jonathan’s lackluster administration in 2014, the naira traded $ 1 for N164. 8. Inflation was 8% per year. The national debt was $ 67.7 billion (11.24 trillion naira), of which the domestic component was $ 10 billion and the foreign component was $ 9.7 billion.
When the current APC administration came to power, the national debt amounted to $ 86.3 billion (N32.9 trillion), of which the domestic component was $ 53 billion and the foreign component was $ 53 billion. $ 33.3 billion. In 2014, our total national debt was 20% of GDP. Today it stands at 35.51% of GDP.
In six years, this administration has increased the debt by 27.47%. What is even more worrying is the external component of the debt, which increased by 243.3%. Most of these loans are owed to the Chinese in Shylock, for whom we would have pledged our national sovereignty and key national assets as collateral. With inflation exceeding 18% and an unemployment rate of 33% on average, we are living in a time bomb. The naira fell to N480 per dollar while the euro traded against N577 and the pound sterling at N672.
With the depletion of foreign exchange reserves, there is a flight to dollar security. Increases dollarization The economy still fuels the dollar shortage, while weakening the naira and reinforcing a vicious cycle of poverty and despair.
The classic scaffolds that underpin a healthy monetary system are: macroeconomic and geopolitical stability, diversified exports, low debt, stable inflation, national competitiveness, economic growth, robust public institutions, and a central bank renowned for both its integrity and its competence. We need to embark on a massive agro-industrial revolution to spur growth and create jobs while diversifying the economy away from oil dependency, but we also need to recognize that there are some things beyond the control of even the best central bankers: quality. national leadership, political stability, security and effective democratic governance.
Economics and the lessons of German, Zimbabwean and Venezuelan hyperinflations make it clear that there is a point beyond which you cannot continue printing currency without destroying your economy entirely. Caution is therefore imperative. The competence and reliability of central bank officials are important; just like their integrity, their patriotism and their attachment to the common good.