Since 2016, the Central Bank of Nigeria (CBN) has resorted to unorthodox policies and strategies to fix monetary challenges of the economy, with little or no complementary support from the fiscal side. One after another, all have been largely directed at addressing unintended consequences of prior unconventional policies.
While this may seem to work in the short-term, it is unsustainable as unanticipated shocks to the economy render these policies detrimental; the costs to the economy outweigh the benefits. It is like one using lies to cover previous lies. Hence, the CBN may need to consider returning to orthodox policies.
It is no longer news that Nigeria is faced with challenges and fixing these issues has remained the major objectives of the fiscal and monetary sides of authority in her economy.
At the most recent Banker’s Committee meeting – an umbrella body comprised of CBN officials and managing directors of deposit money banks – the CBN stated its stance on banks’ appetite for “cheap liquidity” to make “illicit profit”. It stated “OMO has now become poison as against honey that it used to be. Banks are enjoined to remove their eyes from OMO and play responsibly.”
Banks are among the major players in the Open Market Operation (OMO) – a financial instrument the CBN uses to manage liquidity in the financial market and achieving price stability. The CBN has restricted banks from this market –leaving only foreign portfolio investors (FPI). This is another unconventional policy of the CBN in its quest to make commercial banks take lending to the private sector seriously. A strategy the apex bank as adopted in order to spur economic growth –. This is very unusual as it defeats the notional purpose for the security.
Restricting OMO market transactions to foreign portfolio investors – following the earlier removal of individuals, non-financial institutions and now banks –means the CBN has succeeded in reducing the cost of managing liquidity which has been a burden since 2016. It will attract the inflow of dollars at rates currently attractive to FPI. It helps the “defend the naira at all cost” obsession of Emefiele. And crashes rates in the fixed income market making cheap for the federal government and corporates to borrow and boost banks’ lending to the private sector.
However, on the flip side, it is a move that isn’t beneficial to domestic investors. Domestic investors are left with the option of either accepting a negative real return on their investment or expose themselves to the highly volatile and risky Nigeria stock market. In the Nigerian Treasury bills market on Tuesday, average yields declined further by some 21 basis points to 3.90 percent as against 4.11 percent. This is far below inflation figures of 12.13 percent, hence a real income of -8.23 percent.
The CBN is working extra hard to paint a fairy tale of naira story against the view of reputable institutions that the naira is overpriced. It is in denial that a devaluation is inevitable and is upbeat about its ability to do; devaluation monger will wait in vain. Yet the foreign reserve is depleting amid the drop in crude oil prices due to coronavirus outbreak. It has declined to $36.42 billion, a more than 18 percent drop $44 billion in 2018.
While the unusual policies of the CBN may have paid off in some ways, it is doubtful if this stubborn stance will work in the medium- to long-term.
