Central Banking As A Printing Business

By Obadiah Mailafia

Joseph Mubiru (1929-1971), was the pioneer Governor of the Bank
of Uganda. A highly competent technocrat; he was once ordered to
print some money by the country’s military strongman General Idi
Amin, to which he politely refused. On professional grounds. He was
dismissed and later assassinated. Central bankers live in a gilded
world. But their work clearly involves some huge risks.

A rather illiberal debate took place a fortnight ago between Edo
State Governor Godwin Obaseki and the CBN and the Finance Ministry.
Governor Obaseki revealed that some N60 billion were allegedly
printed by CBN for distribution under the monthly FAAC process.
Finance Minister Zainab Ahmed declared that what the Governor was
alleging is “very sad because it is not a fact. What we distribute
at FAAC is revenue that is generated… So, it is not true to say we
printed money to distribute at FAAC”.

But the Governor was adamant: “Zainab Ahmed should rally
Nigerians to stem the obvious fiscal slide facing our country.
Rather than play the ostrich, we urge the government to take urgent
steps to end the current monetary rascality, so as to prevent the
prevailing economic challenge from degenerating further.”

On his part, Governor Emefiele mumbled something to this effect:
“The concept of printing of money is about lending money and that
is our job…It will be irresponsible for the CBN or any Central Bank
or Fed to stand idle and refuse to support its government at a time
like this”.

The CBN Act 2007 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 needs
for cash in a growing economy. What they make from such printing –
the face value of the money over and above the cost of producing it
— is known as seigniorage.

In the nineties, the Bank of Japan (BOJ) invented a new monetary
policy instrument known as “Quantitative Easing” (QE). This entails
printing money to buyback securities from the capital markets as a
means of injecting liquidity into the economy during stagflation.
Remarkably, it worked. And it was not inflationary.

During the Great Recession of 2008-2010, western central banks,
particularly the American Fed, Bank of England and European Central
Bank, implemented successful QEs of their own. An influential paper
by Columbia economists Michael Woodford and Yinxi Xie, “Fiscal and
Monetary Stabilisation Policy at the Zero Lower Bound” (July,
2020), reaffirms the technical basis of QE.

The CBN has structured more than a trillion naira “intervention
funds” ostensibly to bolster economic recovery. However, there is a
qualitative difference between the classic QE approach and what CBN
has been up to. The advanced countries never printed money directly
to support budgets or for consumption. They instituted QE to shore
up liquidity in the economy via the capital markets. What CBN is
allegedly doing is printing money for direct consumption.

The late Chief S. B. Falegan, former Director of Research of the
CBN who passed away in February, confessed that in the nineties,
under the military dictatorship, the Mint was put on overdrive;
printing naira, which were then loaded into waiting trucks and
driven into the mist of the night. A banker of great honesty and
integrity, we have no reason to doubt his testimony.

Apart from the penchant for printing, there have been cases of
criminal recycling of old naira notes. It was also alleged that
billions of new notes disappeared from the Mint, including,
alarmingly, one of the steel plates for minting our currency. But
this was before Emefiele.

Can we therefore trust all the currency in circulation
to be genuine legal tender?

Let me also say that the CBN of today is not what we used to
know. It has been hijacked by vested interests in government and
the private sector. The cabal and the sharks have a game-theoretic
interest in maintaining multiple exchange rates for their own
corrupt and rent-seeking interests. And they would do anything and
pay any amount to ensure that no reforms are made that undermine
this “exorbitant privilege”.

In the 1970s, N1 exchanged for $2. In 1980, N1 exchanged for 80
cents. By 1985, naira declined to N1 = $1. The Gowon military
administration, despite its shortcomings, ran an innately clean
government. The Minister of Finance at the time was Chief Obafemi
Awolowo. He managed the public finances with sagacity. Nigeria did
not borrow a dollar from the international financial markets for
the war effort or for the post-bellum rehabilitation and
reconstruction. We were on the verge of industrial take-off. Top
international manufacturers had invested in our country, ranging
from Peugeot to Michellin, Volkswagen, Mercedez and others. Most of
the industries collapsed while some moved to Ghana and our ECOWAS
neighbourhood.

According to a social media influencer, before the locust years,
we were net exporters of refined petroleum, but today we are net
importers; we drove locally assembled vehicles, with a Peugeot
plant in Kaduna, Volkswagen in Lagos, Leyland in Ibadan, ANNAMCO in
Enugu and Steyr in Bauchi; many of the automobile 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 tyres and Isoglass producing the
windshields; companies such as Sanyo were producing our radios and
TV sets; Thermocool was producing our fridge-freezers and air
conditioners; we had pipe-borne water distributed through pipes
made by Kwalipipe in Kano and Duraplast in Lagos; we wore clothes
produced by a dozen textile mills in Kaduna and other cities,
employing almost a million people; electricity was relatively
stable and was distributed through cables manufactured by NOCACO in
Kaduna and Kablemetal in Lagos and Port Harcourt; we had a national
carrier with over 50 relatively new planes plying the entire world;
and most of the food we consumed was locally grown.

By 1986, N2 was exchanging for $1. By 1992, $1 exchanged for
N10. Misguided policies of structural adjustment, linked to
profligacy, mindless printing of currency, round-tripping by
commercial banks and rent-seeking behaviour by financial regulators
were to blame.

Towards the end of the lacklustre Goodluck Jonathan
administration in 2014, the naira exchanged at $1 to N164. 8.
Inflation stood at 8% annually. The national debt was $67.7 billion
(N11.24 trillion), of which the domestic component was $10 billion
and the foreign $9.7 billion.

When the current APC administration came to power, the national
debt rose to $86.3 billion (N32.9 trillion), of which the domestic
component is $53 billion and the foreign $33.3 billion. In 2014,
our total national debt was 20% of GDP. Today, it stands at 35.51%
of GDP.

Within 6 years, this administration has expanded the debt by
27.47 percent. What is even more worrisome is the foreign component
of the debt, which has increased by a staggering 243.3 percent.
Most of these loans are owed to the Shylock Chinese, for which we
have allegedly pledged our national sovereignty and key national
assets as collateral. With inflation hovering above 18 percent and
unemployment averaging 33%, we are living on a time-bomb. The
nairahas plummeted to N480 to the dollar while the Euro exchanges
for N577 and the pound sterling at N672.

With dwindling foreign reserves, there is a flight to safety in
dollars. Increased dollarisation of the economy is further fuelling
dollar scarcity while weakening the naira and reinforcing a vicious
cycle of poverty and hopelessness.

The classic scaffoldings underpinning a sound monetary system
are: macroeconomic and geopolitical stability, diversified exports,
low indebtedness, stable inflation, national competitiveness,
economic growth, robust public institutions and a central bank
reputed for both integrity and competence. We must embark upon a
massive agro-industrial revolution to boost growth and to create
jobs while diversifying the economy away from oil dependence. But
must also recognise that some things are beyond the control of even
the best central bankers: the quality of national leadership,
political stability, security and effective democratic
governance.

Economic science and the lessons of the German, Zimbabwean and
Venezuelan hyperinflations make it clear that there is a point
beyond which you cannot continue to print currency without
destroying your economy entirely. Prudence is therefore imperative.
The competence and trustworthiness of the Central Bank leadership
matters; as does their integrity, patriotism and single-minded
commitment to the Common Good.

By Obadiah Mailafia

Joseph Mubiru (1929-1971), was the pioneer Governor of the Bank
of Uganda. A highly competent technocrat; he was once ordered to
print some money by the country’s military strongman General Idi
Amin, to which he politely refused. On professional grounds. He was
dismissed and later assassinated. Central bankers live in a gilded
world. But their work clearly involves some huge risks.

A rather illiberal debate took place a fortnight ago between Edo
State Governor Godwin Obaseki and the CBN and the Finance Ministry.
Governor Obaseki revealed that some N60 billion were allegedly
printed by CBN for distribution under the monthly FAAC process.
Finance Minister Zainab Ahmed declared that what the Governor was
alleging is “very sad because it is not a fact. What we distribute
at FAAC is revenue that is generated… So, it is not true to say we
printed money to distribute at FAAC”.

But the Governor was adamant: “Zainab Ahmed should rally
Nigerians to stem the obvious fiscal slide facing our country.
Rather than play the ostrich, we urge the government to take urgent
steps to end the current monetary rascality, so as to prevent the
prevailing economic challenge from degenerating further.”

On his part, Governor Emefiele mumbled something to this effect:
“The concept of printing of money is about lending money and that
is our job…It will be irresponsible for the CBN or any Central Bank
or Fed to stand idle and refuse to support its government at a time
like this”.

The CBN Act 2007 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 needs
for cash in a growing economy. What they make from such printing –
the face value of the money over and above the cost of producing it
— is known as seigniorage.

In the nineties, the Bank of Japan (BOJ) invented a new monetary
policy instrument known as “Quantitative Easing” (QE). This entails
printing money to buyback securities from the capital markets as a
means of injecting liquidity into the economy during stagflation.
Remarkably, it worked. And it was not inflationary.

During the Great Recession of 2008-2010, western central banks,
particularly the American Fed, Bank of England and European Central
Bank, implemented successful QEs of their own. An influential paper
by Columbia economists Michael Woodford and Yinxi Xie, “Fiscal and
Monetary Stabilisation Policy at the Zero Lower Bound” (July,
2020), reaffirms the technical basis of QE.

The CBN has structured more than a trillion naira “intervention
funds” ostensibly to bolster economic recovery. However, there is a
qualitative difference between the classic QE approach and what CBN
has been up to. The advanced countries never printed money directly
to support budgets or for consumption. They instituted QE to shore
up liquidity in the economy via the capital markets. What CBN is
allegedly doing is printing money for direct consumption.

The late Chief S. B. Falegan, former Director of Research of the
CBN who passed away in February, confessed that in the nineties,
under the military dictatorship, the Mint was put on overdrive;
printing naira, which were then loaded into waiting trucks and
driven into the mist of the night. A banker of great honesty and
integrity, we have no reason to doubt his testimony.

Apart from the penchant for printing, there have been cases of
criminal recycling of old naira notes. It was also alleged that
billions of new notes disappeared from the Mint, including,
alarmingly, one of the steel plates for minting our currency. But
this was before Emefiele.

Can we therefore trust all the currency in circulation
to be genuine legal tender?

Let me also say that the CBN of today is not what we used to
know. It has been hijacked by vested interests in government and
the private sector. The cabal and the sharks have a game-theoretic
interest in maintaining multiple exchange rates for their own
corrupt and rent-seeking interests. And they would do anything and
pay any amount to ensure that no reforms are made that undermine
this “exorbitant privilege”.

In the 1970s, N1 exchanged for $2. In 1980, N1 exchanged for 80
cents. By 1985, naira declined to N1 = $1. The Gowon military
administration, despite its shortcomings, ran an innately clean
government. The Minister of Finance at the time was Chief Obafemi
Awolowo. He managed the public finances with sagacity. Nigeria did
not borrow a dollar from the international financial markets for
the war effort or for the post-bellum rehabilitation and
reconstruction. We were on the verge of industrial take-off. Top
international manufacturers had invested in our country, ranging
from Peugeot to Michellin, Volkswagen, Mercedez and others. Most of
the industries collapsed while some moved to Ghana and our ECOWAS
neighbourhood.

According to a social media influencer, before the locust years,
we were net exporters of refined petroleum, but today we are net
importers; we drove locally assembled vehicles, with a Peugeot
plant in Kaduna, Volkswagen in Lagos, Leyland in Ibadan, ANNAMCO in
Enugu and Steyr in Bauchi; many of the automobile 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 tyres and Isoglass producing the
windshields; companies such as Sanyo were producing our radios and
TV sets; Thermocool was producing our fridge-freezers and air
conditioners; we had pipe-borne water distributed through pipes
made by Kwalipipe in Kano and Duraplast in Lagos; we wore clothes
produced by a dozen textile mills in Kaduna and other cities,
employing almost a million people; electricity was relatively
stable and was distributed through cables manufactured by NOCACO in
Kaduna and Kablemetal in Lagos and Port Harcourt; we had a national
carrier with over 50 relatively new planes plying the entire world;
and most of the food we consumed was locally grown.

By 1986, N2 was exchanging for $1. By 1992, $1 exchanged for
N10. Misguided policies of structural adjustment, linked to
profligacy, mindless printing of currency, round-tripping by
commercial banks and rent-seeking behaviour by financial regulators
were to blame.

Towards the end of the lacklustre Goodluck Jonathan
administration in 2014, the naira exchanged at $1 to N164. 8.
Inflation stood at 8% annually. The national debt was $67.7 billion
(N11.24 trillion), of which the domestic component was $10 billion
and the foreign $9.7 billion.

When the current APC administration came to power, the national
debt rose to $86.3 billion (N32.9 trillion), of which the domestic
component is $53 billion and the foreign $33.3 billion. In 2014,
our total national debt was 20% of GDP. Today, it stands at 35.51%
of GDP.

Within 6 years, this administration has expanded the debt by
27.47 percent. What is even more worrisome is the foreign component
of the debt, which has increased by a staggering 243.3 percent.
Most of these loans are owed to the Shylock Chinese, for which we
have allegedly pledged our national sovereignty and key national
assets as collateral. With inflation hovering above 18 percent and
unemployment averaging 33%, we are living on a time-bomb. The
nairahas plummeted to N480 to the dollar while the Euro exchanges
for N577 and the pound sterling at N672.

With dwindling foreign reserves, there is a flight to safety in
dollars. Increased dollarisation of the economy is further fuelling
dollar scarcity while weakening the naira and reinforcing a vicious
cycle of poverty and hopelessness.

The classic scaffoldings underpinning a sound monetary system
are: macroeconomic and geopolitical stability, diversified exports,
low indebtedness, stable inflation, national competitiveness,
economic growth, robust public institutions and a central bank
reputed for both integrity and competence. We must embark upon a
massive agro-industrial revolution to boost growth and to create
jobs while diversifying the economy away from oil dependence. But
must also recognise that some things are beyond the control of even
the best central bankers: the quality of national leadership,
political stability, security and effective democratic
governance.

Economic science and the lessons of the German, Zimbabwean and
Venezuelan hyperinflations make it clear that there is a point
beyond which you cannot continue to print currency without
destroying your economy entirely. Prudence is therefore imperative.
The competence and trustworthiness of the Central Bank leadership
matters; as does their integrity, patriotism and single-minded
commitment to the Common Good.