In a recent press report, President Bola Ahmed Tinubu said, among other things, that the financial system was ‘’rotten.’’ The President did not elaborate on why he gave such a damning verdict which was capable of instilling fear and creating panic among local and foreign investors.

The financial system is the lifeblood of the economy. A  resilient financial system has been noted as ‘’one in which there are well developed crisis management arrangements for handling distressed financial institutions in such a way that public confidence in the financial system will not be undermined.’’

Financial markets are information driven, and information and communication are critical in governance. They can sway public sentiment either way, and can make or mar. Disinformation, misinformation, information mismanagement and information opacity can trigger crisis in financial markets particularly and in the polity generally. Thus, the need for proper information management and communication.

It is obvious that President Tinubu has an issue with the Central Bank of Nigeria (CBN), but some basic clarifications are necessary in order to put things in proper perspective, and for better understanding by the public, going forward. CBN alone does not constitute the financial system, but the Bank is a major and very prominent player and apex regulatory institution in the financial system.

The financial system is broadly segmented into the capital market and money market. Both consist of a network of financial institutions, financial markets and financial instruments. The capital market mobilizes long-term funds from surplus ends to deficit ends and is one of the most important factors for financing infrastructure with strong socio-economic impact. It is an organized market with rules and regulations and membership.

The Securities and Exchange Commission (SEC) is the apex regulatory institution in the capital market. CBN is a pillar of support and major player in the capital market, but it is self-regulatory. The stock exchange is the hub of the capital market. Stock exchanges play a vital role in the dynamics and growth of capital markets by enabling trades with efficiency, adopting adequate risk management measures and establishes transparent communication channels to benefit stakeholders.

Research shows that the capital market enables industries to grow faster, and yield higher real economic performance, and that countries with more liquid stock markets enjoy faster growth rates of real per capita GDP over subsequent decades, as they increase economic wide mobility of productive resources. Listings on the stock exchange attracts both foreign portfolio investors (FPI) and foreign direct investments (FDI), because investors prefer companies with sound corporate governance as they uphold the highest standard.

The money market provides short –term funds generally for a period of one year or less, and commercial banks are at the centre of most money markets as both suppliers and users of funds. Products in money market include bank accounts, term certificates of deposit, interbank loans, commercial papers (CPs) and Bankers Acceptances (BAs), Treasury bills, Bills of Exchange and others. CBN is the major regulator in the money market.

A robust financial system ensures macroeconomic stability which enables businesses to plan. CBN has often ensured financial system stability, with a particular reference to the banking industry under the money market. The Bank put in place a robust financial framework to that effect. The banking consolidation exercise by CBN in 2006 transformed and enhanced the banking landscape, though the exercise created some grievous and unintended consequences in the capital market.

But over the years, the regulatory institutions (SEC and CBN) made necessary adjustments to stabilize the capital market. Former CBN Governor, Sanusi Lamido Sanusi worked hard to clean up the banking industry. His successor, Godwin Emefiele did not relent either. Under Emefiele, the banking industry remained stable.

Among other measures, Emefiele introduced a residual dividend policy, as a proactive measure to strengthen and protect the banking industry, consumers and financial system, and ensure a more efficient economy. The policy was targeted at banks with high Non Performing loans (NPLs) and Low Capital Adequacy Ratio (CAR). The aim of the residual dividend policy was to facilitate sufficient and adequate capital.

In a circular, CBN noted as follows: ‘’No bank shall pay dividend on shares until all its preliminary expenses, organizational expenses, share selling commission, brokerage, amount of losses incurred and other capitalized expenses not represented by tangible assets have been made to the satisfaction of the bank for actual and contingent losses on the risk assets, liabilities, off balance sheet and such unearned income as are deductible therefrom.’’

Besides President Tinubu’s verdict on the financial system, he earlier indicated his preference for interest rate reduction to stimulate economic growth and employment. Interest rate is the cost of money. It is one of the major economic parameters. Exchange rate is also a key economic parameter which determines trade and capital flow. Both interest rate and exchange rate largely determine the dynamics, direction and health of an economy.

CBN has opted for a unified and floating exchange rate in place of the hitherto multiple exchange rate. Floating exchange rate is liberalized, and without the intervention of CBN. According to experts, the advantage of a floating exchange rate is that it does not require the holding of large foreign reserves by central banks to intervene and balance the exchange rate. Thus, the reserves can be used to stimulate economic growth and development and purchase of capital goods.

However, experts also noted that a floating rate regime may not be too suitable for a country that is facing economic challenges such as high unemployment, high inflation, low GDP. The reason is because the country may not be able to recover if the currency continues to depreciate.

CBN may therefore wish to conduct a rational comprehensive analysis to determine the exchange rate regime that best suits the economy. Some experts suggested that a fixed exchange rate works better for growing economies with unstable monetary policy, because it brings stability to an economy and attract foreign investments.

Also, in an article titled ‘President Tinubu and Issues on Monetary Policies,’’ which was published in Vanguard newspaper of June 19, 2023 and in other prominent publications too, I noted, among other things, the pros and cons of interest rate reduction, especially in the face of high rate of inflation.  Inflation rate is also another major economic parameter. It determines interest rate and other aspects of the economy.

Central banks fight inflation by increasing interest rate, as a contractionary or tight monetary policy, in order to restrict the quantum of money in circulation, which is a primary driver of inflation. CBN has consistently increased the Monetary Policy Rate (MPR) to fight inflation, and complemented it with other necessary policy initiatives which aim at boosting the supply side of the economy.

Thus, there is need for circumspection in the matter of interest rate reduction as indicated by the President, considering that inflation rate is presently 22.04 per cent and rearing to spike. Inflation is worrisome, but it is not peculiar to Nigeria. It has been a global phenomenon since 2022.

The International Monetary Fund (IMF) noted that the global inflation was caused by the Corona virus pandemic, war in Ukraine and fiscal policies; and that food and energy are the main drivers. In USA, inflation reached 9 per cent in 2022. It was reported that prices shot through the roofs to unprecedented levels not seen in 40 years, which caused Americans to freak out.

Some blamed it on President Biden’s policies which they termed as ‘’Bidenflation.’’In Venezuela, inflation reached 400 per cent, according to IMF. Some of the countries with very high projected inflation in 2023, according to IMF, are, Zimbabwe(98.6%), Argentina (71.6 %), Sudan (50.6%), Turkey (45.4%), Ghana (44.5%) and Haiti (42.7%).

Nigeria’s inflation rate is 22.04 per cent. Experts have identified some of the causes of inflation in the country. They include reduction in productivity, price of fuel, devaluation of the naira, increment in VAT, higher taxes on imported goods and increased wages.

Others include epileptic power supply, decreased food production especially in the North East, poverty, pre-election and campaign spending when politicians pump more money into the economy, government policies, incurring debt and printing money and increased money supply beyond the rate of GDP.

Nwobu, a Policy Analyst and Chartered Stockbroker, wrote via arizenwobu@yahoo.comTel: 08033021230