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Desperation for forex and 18% treasury bills ‘awoof’!

By Henry Boyo

THE Central Bank of Nigeria offered six and 12-month Treasuries at yields higher than the country’s inflation rate to lure yield-hungry investors and attract dollar inflows. Notably, the CBN sold a total of N204.96bn ($650.67m) in bills, on 19th July 2017. Meanwhile, “Annual inflation rate has reportedly eased to 16.1%.
“However, the interbank lending rate rose from 5% to around 20%, on Thursday, 20th July after CBN sold Treasury bills, to mop-up excess money supply and also announced plans to auction dollars.

“Traders have suggested that the sale of Treasury bills left some banks short of cash, forcing them to scramble for funds to pay for their T/bills and dollar purchases from the interbank market; regrettably, that reaction inadvertently pushed up the cost of borrowing amongst lenders.”

The preceeding is a summary of a report titled “CBN Sell T/Bills above inflation to attract FX Flows” (see pg. 37 of Monday 24th July 2017 edition of Punch Newspaper). The popular translation of the above narrative, however, is that CBN will pay between 13.42-18.54% interests to borrow over N204bn ($650.67m) of the money market’s perceived surplus funds, presently held primarily by banks.

Ironically, despite the clearly shylock interest rates, inappropriately attached to these risk free government loans, the borrowed funds will be inexplicably simply sterilized from use by CBN, so that the system’s perceived, excess money supply, will not increase the already pervasive, oppressive social pain of inflation, beyond the reported horrors, of the still largely remote impact of terrorism on Nigerians.

Incidentally, these humongous CBN loans, exclude the strident, and regular incursions of the Debt Management Office (DMO) when it also borrows, for longer tenors, at equally disturbing rates of interest, to fund the projected, domestic component of the 2017, N2.85tn budget deficit; it is disturbing that a portion of these expensive debt, will simply be applied to plain consumption expenditure.

The above narrative invariably suggests that the high cost of domestic borrowing, cannot infact, be due to scarcity of loanable funds, since CBN, still borrows unceasingly to remove irrepressibly surplus funds, from the money market, despite the attendant oppressive high rates that make it suicidal for the productive sector to also borrow.

Nonetheless, one may be tempted to wonder why DMO continues to also borrow heavily with such oppressive rates, when CBN ‘perpetually’ sits on trillions of sterilized, mopped up, surplus ‘idle’ funds.

Ultimately, the plausible deduction from the preceding narrative is that despite the very heavy cumulative cost of increasing government loans and a contracting industrial/commercial landscape, CBN will invariably, still enthusiastically welcome DMO’s additional borrowings, as these huge loans will clearly support the Apex bank’s objective of reducing the undeniably troublesome level of money supply, to stop inflation from spiraling out of control.

However, in practice, even the restraint on liquidity from DMO’s borrowings will ultimately diffuse, when these loans, which are specifically obtained to fund budget deficits, inevitably flow into the money market, and the funds become applied to various projects and expenses during the fiscal year.

Sadly, therefore, the very high cost strategies adopted to simultaneously restrain excess money supply and inflation and also fund budget deficits, is clearly counter-productive, as the present 16.10% inflation rate, unfortunately, still remains far from best practice rates below 3% in more successful economies.

Nonetheless, even if cost of loans to government is inappropriately excessive, all may still not be lost, as CBN is clearly optimistic that government’s promise to pay over 18% interest rates annually, on its debt obligations will hopefully, attract speculative hot foreign exchange flows, to lift our reserve base and sustain Naira stability around the present N305-360=$1. However, it is evident that with the overt historical relationship, between higher reserves and Naira exchange rates, a return to the former N165=$1 rate, is obviously, sadly, no longer expected, even if oil price/output unexpectedly fortuitously soar once again.

Besides, if indeed, speculative foreign investors actually move to take advantage of the 18% plus, high interest rate offered in Nigeria, in place of less than 5% for such sovereign loans, elsewhere, these investors may still be concerned that, if inflation rate remains sticky around, 16%, the net profit on their investments may actually fall below 3%, to take the shine off the earlier promised bountiful yield. Consequently, the CBN and the DMO may become goaded, once more, to offer well over 20% interest rate, even on short term treasury bills, in order to bait hesitant foreign investors to bring in their dollars. Understandably, in such ambience, the commercial banks’ interest in funding the productive sector would at best remain patronizing, so long as these banks can earn over 20%, guaranteed, from lending directly to government, the same money that is, ironically, created by government.

Thus, any expectation for a diversified economy or campaign for patronage of ‘Made in Nigeria’ goods, would invariably be plain propaganda, because only few businesses can actually survive with such atrocious cost of borrowing. Furthermore, even if interest rate on otherwise, risk free government securities, exceed 20%, speculative investors may still require protection against devaluation; for example, if the dollar rate tumbles once more near N500=$, foreign holders of government securities, would seriously burn their fingers, if they cannot repatriate their funds at between 305-360=$1 when their investments mature.

Instructively, in such event, the urgent demand to liquidate foreign portfolio investments and repatriate funds, will, once again, send the Naira rate into a tail spin, as witnessed since 2016, when these speculators hurriedly withdrew about $15bn from the domestic forex market! So, the question is why have we failed to learn our lessons from even the very recent past?

Ironically, Godwin Emefiele, CBN Governor, has expressed concern, over government’s N2.51tn fiscal deficit between January-June 2017, as the high cost of government’s increasing debt, inevitably stifles the growth of the private sector; however, CBN’s Monetary Policy Committee, but sadly noted that the high cost of capital and simultaneous liquidity surfeit in the banking system, also created weakness in financial intermediation.

The additional loan of N205bn from T/bills mop up in July, notwithstanding, the CBN has again advertised its intention to again more mop up (read as borrow) almost N230bn with the sale of T/bills by 3rd of August 2017.

Ironically, any dousing impact on inflation by the N430bn mopped up by CBN between July and 3rd August 2017 may actually be made meaningless, by the disbursement of over N650bn as government revenue allocations for June 2017. The liquidity surge propelled by this huge allocation will invariably require further auctions of T/bills to mop up surplus Naira liquidity and restrain inflation, despite the crushing impact on the real sector.
Save the Naira, save Nigeria!!!


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