N1trn mop up: driving economy harder

• How Policy May Solve Forex Issue
• Stakeholders urge CBN To Regulate Interest On Lending

Economists often argue that excess liquidity in a country’s financial system is dangerous, especially when demand condition improves to expand lending rate. They always insist it would result in increased inflation.

But is this the case in Nigeria, where government is planning to mop-up about N1.8trn from the country’s financial system at a time when Nigerians are crying over liquidity squeeze and biting macroeconomic conditions? Government’s decision to mop up the huge sum from the economy through the sale of treasury bills has sent shocks in some quarters.

Specifically, the Central Bank of Nigeria (CBN) said recently that it would sell N933.2b of secondary market and N933.2b primary market bills before June ending.

Joseph Nana, deputy governor, financial system surveillance of CBN first gave hint of the impending action to stabilise the external sector, suggesting liquidity mop-ups after 2016 budget was passed to stabilise the domestic currency.

Speaking at an interactive session between the National Assembly Joint Committees on Appropriation and top government officials in Abuja recently, he said: “Naira problem is our own making. Some individuals are speculating on the dollar to naira’s detriment. Why should $20b be lying idle in different domiciliary accounts,” he queried.

But the policy is coming when hundreds of state civil servants across the country are being owed several months salaries and the purchasing power is at an all-time low.

Championed by the CBN, the policy is aimed at selling treasury bills to borrow from the public and is one of government’s budgeting tools to redistribute cash in the economy.

The policy is also coming barely a month after the CBN’s Monetary Policy Committee (MPC) reviewed the monetary policy rate from 11 to 12 percent, thereby tightening the country’s monetary policy.

With the huge sum expected to be sucked out of the economy many are worried over the likely negative impact on the financial system, especially as it was one of the recommendations of the International Monetary Fund (IMF), which is in the bad books of many over the nightmare it has inflicted on the economy over time.

However, experts argue that the policy is not out of place, as it would serve as a means for government to borrow from the people to finance its budget, a situation that would reflate other sections of the economy with funds that would have hitherto been hoarded by banks and other wealthy individuals.

But they caution that the funds must be duly deployed for the purpose it was borrowed, otherwise the economy would be up for a double jeopardy.

Associate Professor of Macroeconomics and policy analyst in the Department of Economics at the University of Lagos, Femi Saibu, said the move serves as one of government’s first step at implementing the 2016 budget through domestic borrowing, and that the policy would put pressure on inflation, as well as arrest the disparate foreign exchange in the official and parallel markets.

Said he: “It is going to reduce the amount of cash in commercial banks, as well as individuals having excess funds. More or less, they are trying to finance the budget from domestic borrowing.

“The move is also to put pressure on inflation, so that the rate would drop. When too much money is in circulation, it results in inflation. So, government has to make a move to reduce its rise. It is a way to provide opportunities for people with money to invest, as well as prevent people from spending money recklessly.”

Stating that the move is a sort of reallocation of money, he explained that when government gets the money and uses it to finance the budget, the money still goes back to the system.

“So, nothing is really lost,” he said. “What happens is that while we may see it as people losing money, other people are getting what is lost elsewhere. Problem only arises after the money is mopped out of the system and it is not put back into the system. We can see the move as a means to reflate other sections of the economy, too.”

On how the policy may likely impact the forex market, he said, “If treasury bills’ rate is high and competitive enough, it may attract those holding dollars. Those in that business are enjoying economic rent. Since it would provide something that is more certain, it would distract them from pursuing foreign currency. It would also put pressure on the dollar. We are likely to see stability in the currency.”

On borrowing from a people that are already cash-strapped in the face of prevailing economic situation, he said: “Government needs to get funds to be able to finance the budget, which would eventually lead to payment of salaries. It helps government to meet these demands. It is simply taking from the public to give back to the public. In simpler terms, government wants to finance budget through domestic financing options.

“The only problem is when money is taken through treasury bills and it is not spent on the economy. This would deal a huge blow to the system. But if it is for the budget and is used to finance things that have impact on peoples’ lives, it would help in creating employment and generating jobs. It would also generate enough returns to neutralise the cost of the borrowing. They would get something beneficial from the money, which may help in easing the negative effect of borrowing.”

He said treasury bills are oversubscribed in most cases, because the rate is always competitive and it is a sure form of investment by anyone, as government can never default.

“The interest rate can be compared to the rate anywhere else. That is why people would definitely buy into it. They are now allowing commercial banks to urge their customers to buy. But it is not bought in the open market, but through investment agents or through the banks. Sometimes, if one has money in the bank, one can instruct one’s bank to buy the bills.

“But these days, many banks have resorted to buying it because it enables them use customers’ money rather than theirs to buy. And the money remains with them,” he added.

President of Nigeria Association of Chambers of Commerce, Industry, Mines and Agriculture, Chief Bassey Edem, who spoke from China on the matter during the week, said the move by the apex bank to mop up the huge sum from the monetary system will have negative effect on businesses, as “it will increase interest rate on lending,” which he said is already high.

“If they mop up, it will affect businesses that are already nose diving in Nigeria. If it is true that CBN wants to do that, it means commercial banks have increased liquidity. That the banks are offering only five percent on deposit is an indication of excess liquidity in the system. But their interest rate on lending is between 20 and 28 per cent, when it should be below 10 per cent to stimulate rapid economic recovery. The mop up will affect borrowing because interest rate on lending will go further up from 28 percent and that will not be good for businesses. The CBN should force the banks to reduce their interest rate, rather than mop up,” he said

To Opeyemi Agbaje, a policy, economy advisory and research specialist, reducing liquidity through mop up is not the right way to go now in Nigeria. He, therefore, advised the CBN to stop playing to the gallery, since it has officials that are knowledgeable enough to do the right thing.