Nigeria struggles to fund its budget. But a global liquidity glut, the aftermath of the global financial crisis of 2008, has seen the four largest central banks in the world – US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England – pump $13 trillion into the global economy.
Using M2 – the amount of cash and deposits, savings deposits, money market securities, mutual funds, and other time-deposits – as a rough measure, the banking sector in Nigeria is shallow. The banking system cannot finance the economy; it is just 20 percent of the goods and services produced per year.
In other words, 20 of every 100 naira required for running the economy is from the banks. In Egypt, which lately sorted out its illiquidity challenge to restore growth and stability, the figure is 92.3 percent.
Nigeria is unable to tap from the stash of cash the world is awash with because those who manage the economy have their minds fixated with growth and stability. Ayo Teriba, an economist, reckons that this is like focusing on an anaemic patient’s weight (growth) and blood pressure (stability) whereas the problem is lack of blood (liquidity).
When the blood available domestically is insufficient, the proper thing to do is to find blood donors externally. We ask, ‘where, then, can Nigeria get blood donors from?’ Can it come from foreign direct investments, remittances, international capital markets (e.g. Eurobonds) or from local banks and investors who buy its Treasury Bills and bonds?
Except for foreign portfolio investors, the flow of foreign direct investments into Nigeria is dwindling. Economic and regulatory uncertainties are scaring them away.
Thanks to multiple exchange rates, Nigeria gets just over 60% of what Nigerians abroad send home annually (unofficial records estimate the true amount is $40 billion).
Can local banks step into this vacuum? Forcing banks to give loans at a single digit interest rate is a tough sell. Buying government debt is far less risky and the returns are attractive. Treasury Bills and government bonds are much more appealing for banks and foreign investors because of double digit interest rates.
Local banks are constrained. They are mandated to keep 22.5 percent of customers’ deposits with the CBN. With only enough cash to meet transactional needs of the economy (most of the money in Nigerian banks are used for payments), there is little left, if any, to give out as loans. If banks do loan out monies, it’s to the bluest of blue chip companies, and, of course, the federal government.
We are concerned that undue attention to growth and stability while neglecting the liquidity required to achieve both is crippling the economy. But, thankfully, there are options.
Is Nigeria willing to attract some of the global surplus capital through sale of its shares in state-owned companies or telecommunications spectrum licenses or through asset-based securities (e.g. diaspora bonds) or rental income from a plethora of government property?
Money realised from the commercialisation, liberalisation, privatisation and securitisation of state-owned assets will attract enough foreign exchange to strengthen the naira. And deepen the financial market too. The CBN can do away with multiple exchange rates, reduce interest rates and better curb unruly increases in general prices. With enough cash in its coffers, the government can fund the soft and hard infrastructure (security, education, energy and transport) and stem the descent of millions into poverty.
It’s time to think the unusual: for instance, how to raise a 10 trillion naira bond. If the central bank governor, the soon-to-be announced Ministers of Finance, Trade and Investment, and Budget and Planning wonder where these ideas have been tried and tested, they can look to Egypt, India and China. We need to copy their hard work.
