The global financial system has been shaken lately by the failure of Lehman Brothers, the 4th largest investment bank in the United States. Merryl Lynch another giant in the US and world financial markets was barely rescued by a $50bn hurried lifesaving buyout by the Bank of America while the US Federal Reserve, which is the equivalent of our own Central Bank wedged the crumbling pillars of AIG, one of US biggest insurance companies with about $85bn to forestall the prospect of a ripple or domino effect of its collapse on the financial market and U.S. economy at large!
The global financial system has been shaken lately by the failure of Lehman Brothers, the 4th largest investment bank in the United States. Merryl Lynch another giant in the US and world financial markets was barely rescued by a $50bn hurried lifesaving buyout by the Bank of America while the US Federal Reserve, which is the equivalent of our own Central Bank wedged the crumbling pillars of AIG, one of US biggest insurance companies with about $85bn to forestall the prospect of a ripple or domino effect of its collapse on the financial market and U.S. economy at large! Although the impact of failures of such giants may not be felt directly or immediately by the ordinary American, ultimately, the adverse impact would impinge on not only the speculative fringe in the market, but also lead to loss of pension funds and economic disequilibrium for majority of citizens whose life savings are tied up in companies which have invested in the failed institutions! The consequent loss of confidence would also impact negatively on the ability of investors to seek new funds as people become wary of the security of their investments in the stock market. A pullback in the rate of investments would also increase rate of unemployment as failed corporate entities fold up and other start up investments become more difficult without a buoyant market for equity. The cumulative effect of the downward spiral if left unhalted would sooner than later bring down the whole economy with disastrous consequences reminiscent of the 1929 depression when erstwhile millionaires became penniless within days and a suicide leap from the windows of corporate offices became a favourite style of dealing with the sudden and unheralded turn of events on the stock market! Our domestic stock market in Nigeria on the other hand lost over 33% of its value in the last three months. On paper, this may, in fact be a worse scenario than what is currently the case in the US and Asian markets, which have lost between 7 – 20% of market value recently! However, in spite of evident weaknesses of regulatory and oversight Agencies, our government’s Economic team comforts us that all is well, and assures that our banks and stock market are well shielded from the ravaging fire on the international scene! The CBN Governor told journalists after the Monetary Policy Committee (MPC) special meeting in Abuja on 18/9/2008 that XX“there is no cause to worry much. All the indicators show that the economy is well”XX Guardian 19/09/2008, pg 1. But pray, what indicators are we talking about? It certainly cannot be the unemployment rate, which keeps rising as 64 million youths are jobless, or the debilitating commercial lending rate which currently hovers above 20%, or industrial capacity utilization which remains below 40%, or the exchange rate which remains resistant to increasing foreign reserves, or the cost of N1500bn subsidy for fuel imports which are also liberally smuggled to ‘help’ all the neighbouring economies such as Benin, Togo, Chad, Niger, etc, or is it the rate of inflation, which the CBN itself admits currently approaches 15% (an estimate some consider to be conservative)? In an attempt to stem further decline of prices on the Nigerian Exchange, the CBN did a policy somersault in the space of five days and cancelled its earlier order for a common year end for banks’ financial statements; this was in spite of the admonition from an International Rating Agency that a common year end would promote transparency and give investors a sound basis for market comparison! The CBN had earlier endorsed the incestuous framework where banks loaned out money to their customers for purchase of same lending bank’s public offers! The 20% share buyback option was also ratified to stem the tide. In spite of these measures, the stock market continued to dip and would probably have involved a sharper decline but for the artificial capping of daily downward share price movements at 1% while favouring 5% capping for upward movements. The fortuitous news that overseas Central Banks were pumping hundreds of billions of dollars to save the collapse of their stock markets finally gave our monetary authorities the excuse to do the unexpected within the Nigerian economic framework! Any observer of the operation of our economy in the recent past would notice that the issue of too much money (otherwise called excess liquidity) has been the albatross on the system as our government paid over N400bn predominantly to banks as interest charges for the joy of removing “excess” money from the system last year! Indeed, the CBN had decried the payment of increasing revenue to the three tiers of government every month because of its negative consequences, i.e. inflation, high interest rates, low investment, high unemployment, all offshoots of excess liquidity! But things may have changed as the CBN now sings a different song; XX“In order to lubricate the system, the MPC has decided to ensure that the financial system remains liquid. The MPC accordingly decided to reduce the Monetary Policy Rate from 10.25% to 9.27%, reduce Cash Reserve Ratio (CRR) of banks from 4% to 2%..., reduce the liquidity ratio from 40% to 30%..., and allow the CBN to also trade in equity!”XX Guardian 19/9/2008, pg 2. The combination of the effects of these measures will make about N1000bn immediately available to the banks! Wonders shall never end! The average monthly allocation of about N350bn to the three tiers of government has been condemned for pumping in more money that the economy cannot absorb, but here we have CBN deliberately releasing N1000bn into the system at a time that the same CBN claims that there is nothing to worry about! The revenue allocation for September will soon be paid to the bank accounts of the three tiers of government and it remains to be seen whether CBN would soon after resort once again to mop up ‘excess’ cash instigated by the cumulative cash injections of N1000bn and another N350-400bn from allocations! If this happens, we should all be concerned at the wisdom of the MPC’s management of monetary policy. Conversely, if CBN does not embark on its usual costly mop up operations in spite of the liquidity surfeit in the system, then, of course, the inflationary push and the attendant negative consequences on interest rates, employment, etc, will have freer rein to the detriment of us all! It is clear that amongst other factors, the hasty withdrawal of CBN’s botched African Finance Corporation’s investment is still having a ripple effect on the money market, as beneficiaries of the round tripped funds were stampeded to readjust their market positions! The CBN’s current largesse of lower MPR, CRR, and liquidity ratio is an indirect attempt to ameliorate the impact of the funds taken out of the market at the expense of fundamental growth indices such as improved employment, increased industrial capacity utilization, lower inflation, etc, etc! The deliberatively created liquidity surfeit will now provide banks with more money to trade once more in their own shares and very soon, share prices will once again rebound robustly on the exchange! However, to some analysts, these props appear as enduring as sand castles on the beach! Save the Naira, Save Nigerians!
googletag.cmd.push(function() { googletag.display('content1'); });
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of SaharaReporters
googletag.cmd.push(function() { googletag.display('comments'); });
googletag.cmd.push(function() { googletag.display('content2'); });