The Central Bank of Nigeria has been doing something unorthodox of late that is getting everyone jaw dropped. It has been pumping billions of Naira into the economy through an unprecedented wave of monetary easing. It’s as if the CBN has suddenly opened the flood gates after years of squeezing the liquidity out of the life of banks.
In case you still don’t get what we are sating, the Central Bank is basically flooding the economy with cash by lifting the limit placed on how much of customer deposits banks can keep in their vaults untouched for lending. The result of such a windfall is that interest rates will drop drastically as banks now have so much money to throw around. In what seemed like a case of economic foolery, the central bank had for years embarked on a monetary scheme that will see them place a limit on how much banks can keep as deposits only to now borrow from the banks again at double-digit interest rates via it weekly treasury bills auction.
All that has now been thrown to the gallows (at least for now) as treasury bills rate have now crashed to lows not seen since the advent of democracy. The CBN has not come out to explain what its reasons are for this but this has not stopped analyst from speculating. Nairametrics spoke to some analysts and we arrived at the following plausible reasons for this stimulus.
Recession is looming
Some analysts believe the CBN’s policy move is a frantic reaction to a looming economic crisis. Unknown to a lot of Nigerians, the country is thought to be facing a massive contraction in economic growth that could end up turning into a recession. Slow economic growth means businesses will struggle to boost sales and increase bottom line. This is already evident in the spate of profit declines reported in the consumer and fast-moving goods sectors. Even the service industry such as hotels and travel are feeling the pinch.
Much of the current stall in economic growth has been blamed on the drop in oil prices which have effectively affected revenue accruing from the sale of crude. The CBN recognizes this risk and is acting fast to ensure there is enough liquidity to boost economic activity. With liquidity in excess, banks will need to increase its returns on equity to its shareholders and will be forced to take on higher risk by lending to small businesses who eventually should be the main drivers of the economy. One analysts likened this to the famine in biblical Egypt where the Pharaoh through the help of Joseph released all the food and cattle they had saved ahead of the famine. For the CBN, the liquidity squeeze it imposed on banks years ago was perhaps an arsenal it could deploy at times like this. For others this is just a coincidence.
There is also a school of though that believes the pumping of cash into the economy is in response to the exit of Nigeria from the JP Morgan Bond Index and the impending exit from the Barclay’s Bank Bond Index next February. Both exits portend negative consequences for Nigeria as it could effectively shut out foreign investors from our bond market. Fortunately or incidentally the CBN had within its grasp a pension fund market that was worth over N4 trillion or 5% of its GDP. Much of that money will still find its way into the FGN Bond market. The local demand for FGN bond market was also in place as fund managers took the easy way out in jumping at less risky and high yielding FGN Bonds. The CBN also wants to ensure that the local demand remains sustainable and thus released more cash to the banks to keep the momentum going.
The Buhari led government is said to be mulling a massive N8trillion Budget next year as it plans to fund its social programs promised during the election. An analysis of our revenue profile both present and in the near future does not indicate that the government has the money to fund this massive spending spree. It thus believed that the government could be targeting a debt drive that could run into trillions of Naira. In fact, analysts who spoke to Nairametrics opine that the proposed $25 billion infrastructure bonds could be sourced from a combination of local and foreign denominated debts. If the Government borrows at today’s ten year bond yield of 10% then it is in effect borrowing at the same rate that it would have assuming it was borrowing in forex (accounting for foreign exchange risk).
Some analysts also believe some of these policies are short-lived and as such the rates drop we are seeing will only be temporary. They point to inflation which is approaching double digits as a major reality check. It is believed that at some point, the CBN will have no choice but to tighten the nozzle either by devaluing or increasing CRR yet again.