By Simon Osigwe
To gauge the level of consumer spending in Nigeria, visit the average fast food joint and notice that the queues of yester years have disappeared. In other sectors, it is obvious that consumer spending have diminished. This is because disposable income is at an all time low.
It is now a clear fact that 27 states cannot pay workers salaries. The collateral effect is that wealth is not spreading. The stock market is at an abysmal low position. The index is continually nose-diving because of confidence and liquidity concerns. The construction industry is yet to bounce back, due to outstanding debts by governments. The upper end housing market is still a shadow of itself.
It is in the face of these daunting macro-economic challenges that the CBN is still using the language “excess liquidity”. The apex bank had moved in last week to mop up the so called excess liquidity by issuing a N245b Treasury bill. In Nigeria, we like to move in vicious circles. How did the recent liquidity arise in the banking section in the first place?
And, what is the use of the current treasury bill issuance? According to the CBN, the excess liquidity in the banking system is as a result of the release of the capital vote in the 2016 budget and the redemption of matured bonds and treasury bills. When the banking system received these two funds, the immediate reaction of the Monetary Policy Committee (MPC) was to increase interest rate; their interbank rate from 12% to 14%.
This is a move not in tandem with the primary law of economics. In the demand /supply analysis, prices (rates)are expected to go down when supply is increased. But here, there is an increased supply of money without any demand increasing, yet price (rates) still went up. Is this not an aberration?
Treasury bill is an instrument used by the government to borrow from the local credit market to finance its operations. The issuance of such instruments ought to be in tandem with the policy objectives of the years’ budget. I want to believe and expect that the N245b treasury bill last week, is for the purposes of financing the budget and not otherwise. However, the monetary authorities have told us that the purpose was to bring stability to the financial system and control excess liquidity in the economy.
It is interesting to note that the funds that generated this excess liquidity situation has not left the banking system into the larger economy. It is this same money that has been withdrawn. In simple terms, the money left the vaults of the CBN into the vaults of the commercial banks’ and back to the vaults of the CBN. What a vicious circle? These movements yielded a whopping 18.5% interest to the banks.
In other words, the government has simply given the banks18.5% interest for doing nothing. I have held this view over the years that there is a conspiracy between successive federal governments and the Nigerian banking system to impoverish the Nigerian people. This view is buoyed by my experience in the stock market, where operators complained and still complain of excess illiquidity. What this implies is that the financial system is not efficiently allocating resources between the surplus units with the deficit units.
This has been creating negative impact on income distribution, consumer spending, employment and growth. This is the reason why the gap between the rich the poor widens everyday. It must be recognized that in a developing economy, government plays a large role in economic activities.
Their spending determines investment and consumption patterns in the larger society. By acts of omission or commissions, government leaves large volume of funds within the banking system and turns round to borrow same funds. This is more disappointing when this is done through front – end methods, thereby creating huge opportunities for rent seeking at the expense of enterprise.
A bank or high net worth individual would buy treasury bills worth billions and collect the 18.5% interest upfront and not bother to do any other business. It is sweeter, when the money is an OPM (other peoples’ money) With this scenario, why will the banking sector bother about lending to the real sector, when the opportunity for stress free profit is begging?
One can understand the concern of our monetary authorities, as noted by the MPC in 24th November 2014: “ the pressures in the foreign exchange market were aided mostly by excess liquidity conditions in the banking system, and speculative activities. It has become increasingly worrisome that improvement in liquidity conditions in the banking system, designed to enhance the resilience and stability of the banking system has not translated to increased credit expansion to the real sector, engender inclusive growth and boost employment.
“Rather, it has led to upward pressure in the foreign exchange market and the standing deposit window of the banks; while banks continually exercise cautious approach to lending.”
The MPC further noted, “available data indicates that the banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short end of the market. While the committee remains fully committed to the goals of promoting inclusive growth through lower interest rates in the medium- to- long terms, banks, as agents of financial intermediation, have a critical role to play in the nation’s development process.
“A banking system with an overtly high profit motives negates the core tenets of banking license.” It is surprising that after making those pronouncements, nothings has changed. The CBN continues in the damnable vicious circle.
“I have held this view over the years that there is a conspiracy between successive federal governments and the Nigerian banking system to impoverish the Nigerian people…. by acts of omission or commissions, government leaves large volume of funds within the banking system and turns round to borrow same funds. This is more disappointing when this is done through front – end methods, thereby creating huge opportunities for rent seeking at the expense of enterprise”.
Simon Osigwe, Is CEO, Scientific Trust Investment Ltd, Lagos, Nigeria, and a progressive financial analyst.