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Omodele Adigun
Despite the denial by the Central Bank of Nigeria (CBN) that it has embargoed sale of treasury bills(TBs) to individuals and small firms from November 29, analysts continue to examine the likely implications of such ban on the economy.
The nation was awash with reports recently that the CBN has ordered commercial banks and other financial institutions not to sell treasury bills to individuals and small firms from November 29, 2019,but the apex bank said its directive only affect the Open Market Operations (OMO).
The apex bank directed that all banks to exclude individuals and local corporates from investing in OMO auctions with effect from October 23, 2019.
In his analysis of such likely embargo, obtained online, Uchenna Ndimele, the President of Quantitative Financial Analytics Ltd., said it would lead to hike in the demand for FGN bonds, fixed deposit accounts, capital flight and CBN’s lose of money supply control, among others:
“It has been reported widely that the Central Bank of Nigeria CBN, has directed banks and other financial institutions to stop selling treasury bills to individuals and small firms with effect from November 29th, 2019. According to the various publications, the reason for the directive was that the high rates of treasury bills were breeding “economic laziness” among Nigerians.
The directive will have far-reaching implications for the Nigerian financial system. Come to think about it, who will blame Nigerians for being smart enough to pile their money in treasury bills when inflation is trending in double digits, where there are no investment opportunities given the lack of infrastructures and enabling environment?
It is often said that when two elephants fight, it is the ground that suffers. It is not unlikely that this directive is a result of lobbying by banks which stand to gain by it. From all indications, the directive will punish the individual Nigerian while enriching the banks, as usual.
Fixed deposit accounts
With the directive in effect, the next option will be for individuals to keep their money in fixed deposit accounts in banks. The increased demand for fixed deposit accounts will push down the interest that banks will offer such individuals. The banks, will then turn around and invest the cumulative fixed deposit balances into the same treasury bills, thereby making gains from the spread. Positive gains to the banks and not so positive for the individual investors.
FGN Savings Bond
About two years ago, the Federal Government of Nigeria, through the Debt Management Office, DMO, introduced the FGN savings bond, as a means to avail individuals and small firms of the opportunity to participate in the Nigerian bond market. Though the demand has been impressive, the directive to bar individuals and small firms from investing in treasury bills will push them into FGN Savings Bonds. The implication of this is that such bonds will begin to attract lower interest rates, thereby reducing the cost of borrowing incurred by the government. This is a positive effect.
Money supply
Treasury bills are not only used to finance government deficits; they could also be used as a means to control money supply, as in when broadly defined. When used with open market operations, treasuries act as an instrument of monetary policy. With individuals out of the treasury bill market, it may introduce some difficulty in using this potent instrument to mop up excess liquidity when they arise. This is one negative effect.
Capital flight
One dangerous implication of the directive is that it may lead to capital flight. Technology and the internet have made it very easy to undertake cross border investment and money movement. Unlike commodities, trading can be restricted by closing the border, financial market investments cannot be so easily restricted. There are countries and markets that are willing to welcome and absorb Nigerian investors into their market. In Africa, for example, such markets as Ghana, Kenya, Mauritius, to mention but a few, can present profitable alternatives, especially when their currency rates are relatively better than that of Nigeria. Students of History of Economics will bear witness that directives such as this led to capital flight. For example, after the French government introduced the wealth tax, the country experienced a large exodus of wealthy individuals and their money.
Capital flight can be variously defined and may result from a litany of reasons or causes. According to Oxford Dictionary, “capital flight is money transferred abroad to avoid taxes or inflation, achieve better investment returns, or to provide for possible emigration.” The UK Overseas Development Institute defines capital flight as “the outflow of resident capital which is motivated by economic and political uncertainty.”
Effects
In most cases, capital flight has negative consequences for the country from which the capital flies. The flight of capital reduces the economic strength of a country. It can also lead to a slowdown of economic developments of certain and important sectors of the economy. Capital flight has been known to affect the purchasing power of the affected country.
The Nigerian economy has been a victim of capital flight since September 26th 1986, when the IMF deceived the then government in power to devalue the Naira from N0.5 to N4 to the dollar. This new directive will excruciate the troubling situation. Rather than punishing the poor individual Nigerians and blessing the banks, the CBN should look for a better way to make treasury bills less attractive. Efforts should be made to curb inflation, create awareness of alternative investment outlets like money market funds, FGN Savings Bonds, and by reducing the CBN MPR rate.
