On secret recordings and monetary policy

On secret recordings and monetary policy

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First of all, a disclaimer. I am not a fan of espionage in real life. In books and television shows it can be exciting but in real life it can be a bit unnerving, and probably illegal. It’s not great really. Earlier in the week there were reports of all WhatsApp users being vulnerable to malware that basically granted the attacker access to everything on your phone. Cueglobal paranoia. I don’t have anything particularly incriminating on my phone, but I still got a bit paranoid. Imagine if your private conversations were published for the world to hear. Long and short, I don’t approve anyone being secretly recorded.

 

Secondly, you don’t need to be a fan of conspiracy theories to know that the timing of the release of the recording was not accidental. A purportedly damaging recording released shortly after the governor was nominated for a second term and before his confirmation at the senate? He obviously has some very powerful friends who were not happy with his reappointment. Friends who were fortunately not smart enough to actually know what was going on in the recordings. News flash: there was no N500bn theft being covered up. All disclaimers aside, the recordings shed some light on what was, and still continues to be, problems with the central banks monetary policy strategy.

 

Monetary policy over the last five years has been almost solely focused on one thing: managing the exchange rate. After the central bank abandoned its attempt to maintain an exchange rate of N199 per US dollar by force, it changed strategy towards a more “flexible” exchange rate system with investors allowed to buy and sell dollars on a willing buyer willing seller basis. However, to entice investors to bring foreign currency to Nigeria it sold open market operations (OMO) securities at juicy rates. OMO securities are very similar to treasury bills and essentially work by investors loaning money to the central bank for interest payments. Ordinarily the CBN would buy and sell treasury bills instead of selling its own securities but the federal government has tried to limit its own sales of these short term securities because they were getting very expensive. Also, the scale of the CBNs OMO sales has reached unprecedented levels.

 

The thing is, when the CBN buys and sells treasury bills issued by the federal government, it is the investor because the federal government is the party that issues the securities and is liable for interest payments. But when the CBN issues its own treasury bills then it is the borrower and is liable for interest payments. If you add its determination to keep exchange rates fixed then the CBN is essentially taking foreign currency loans from foreign investors at very juicy interest rates. Interest rates so juicy that Nigerian carry trade is currently the most attractive in the world. As at the third quarter of 2018 there were about N12.7tn worth of CBN bills in circulation which translates to roughly $5bn in interest payments annually depending on how you calculate it. It has helped stabilize exchange rates, but the interest payments have wrecked havoc on the CBNs balance sheet.

 

Then there is the small matter of the CBNs budget support to the federal and state governments. Technically these are loans but if anyone thinks the government is going to pay back anytime soon then I have a bridge to sell you. The “loans” are not insignificant too. In the three quarters from January 2018 to September 2018 the CBN essentially gave the federal government N1.1tn worth of interest free loans, mostly through overdraft facilities.That is roughly $3.2bn.

 

So, you see the problem here. On the one hand the CBN is taking expensive loans from banks and foreign investors. On the other hand, it is giving interest free loans to the federal government. It has to fulfill its obligations to banks and foreign investors, but the federal government is unlikely to clear its overdrafts. If you’ve ever run a business or done some basic accounting classes then you know this is disastrous for the CBNs balance sheet.

 

So, what is going on in the recording? It’s basically the CBN officials trying to make it work somehow. “Making it work somehow”is allegedly very common in the financial sector and this is just CBN officials doing what their peers on broad street do all the time? Is it illegal? I don’t know. In more honest environments it would count as misleading the shareholders, but this is Nigeria. The real question however is not whether it’s illegal or not. The real issue is that it demonstrates the currently unsustainable path of monetary policy. Monetary policy that is still fixated on maintaining a fixed exchange rate at all costs. On this exchange rate matter as far as the CBN is concerned; we die on the line.

 

Nonso Obikili

Dr. Obikili is chief economist at Business Day.



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