The Central Bank of Nigeria (CBN) may have bought the federal government some time to come to terms with the need for reforms after restricting non-bank institutions and individuals from taking part in the transaction of short term securities it issues. This unorthodox monetary policy which is fully in line with its right to determine who takes part in open market operations has lowered the interest rate the federal government pays for treasury bills, boosting some financial indicators temporarily. However, what happens afterwards when the market adjusts to the ban?
The CBN policy has seen interest rates on Nigeria T-bills crash to single digits for the first time since 2016 making borrowing costs lower for the government. It has also provided some respite for the Nigerian equity market as idle funds went after stocks with sound fundamentals.
The short-term gains that the policy provides are worth applauding; some company stocks have reversed losses improving the market value position of investors. Even more, lower treasury yields reduce the federal government’s high debt service cost which in the past has eaten into revenues and hindered capital spending. It also provides companies the opportunity to borrow at cheaper rates.
However, these benefits can be sustained over a longer term only if complemented by fiscal reforms in key sectors of the economy. Hence, the need for bold reforms. This is so important to the survival of an already crippled economy.
For example, deregulating the downstream petroleum sector to adopting a market-reflective electricity tariff is sufficient to turn around investors’ negative sentiment that has weighed on stocks market value.
The government’s fixation with debt, and hence the need to lower its borrowing costs overlooks the equity option; it can attract some of the global surplus capital if it sells its shares in state-owned companies or issues telecommunications spectrum licenses or issues asset-backed securities (e.g. diaspora bonds) or generates rental income from leasing a plethora of government properties. Equity can be raised through the privatisation of redundant government assets and opening up of new sectors for the private sector to take part. This reduces the need for government to borrow and cuts down debt service costs.
Nigeria’s dependence on stable oil prices further poses tests to the CBN unconventional policy. The volatile oil market has overtime proven its ability to bring Nigeria back to its knees, and can reverse the gains from restricting who trades in CBN securities.
In Nigeria, fixing fiscal challenges with monetary policies have often failed just like we saw in 2016 when the CBN governor remained hell-bent on defending the naira, burning through its reserves. Obviously, that didn’t work until the investors’ and exporters’ foreign exchange window was created.
It became clear that Nigeria’s dependence on crude oil exports as the sole source of foreign exchange for the government was always going to make aspirations for a stronger naira impossible.
Godwin Emefiele, the CBN Governor, cannot keep playing the role of saviour of last resort to the government. Whatever gains his unconventional monetary policies have made in fixing fiscal challenges, they are artificial and short-lived.
Bold reforms are the way to go. Theban on who can take part in open market operations may have benefitted the stock market and some high yield stocks, however, the challenges in the economy remain. As is evident from the third quarter GDP results of the economy published by the National Bureau of Statistics: the economy is struggling to grow at a rate of 2 percent. The challenges of Nigeria are much bigger than short-lived benefits of unorthodox monetary policies.
