Nigeria – Quantitative easing by stealth

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In late September, Godwin Emefiele, Nigeria’s central bank governor, disagreed with assertions by outspoken and outgoing monetary policy committee (MPC) member, Doyin Salami, that the apex bank was overfunding the government. In his personal statement for the 24-25 July MPC meeting, Dr Salami challenged the somewhat furtive quantitative easing stance of the Central Bank of Nigeria (CBN), highlighting the sharp rise in the apex bank’s financing of the government’s fiscal deficit. Specifically, since December 2016, the government’s borrowing from the central bank increased twentyfolds to N814 billion, dwarfing a marginal 0.4 percent rise in lending to commercial banks. Others include a 30 percent rise in the central bank’s purchase of treasury bills, to the tune of N454 billion, a 5 percent increase in government overdraft to N2.8 trillion and an increase in the ‘mirror account’to N1.5 trillion in April 2017 from just N3 billion in December 2016. Put simply, Dr Salami asserts the CBN has been providing “piggy bank” services to the central government. And it has been starving commercial banks of liquidity in tandem, raising the amount of reserves they must park with it.

After putting a positive spin on Dr Salami’s candour as evidence of the CBN’s independence, Mr Emefiele analogized the CBN’s supposed overfunding of the government as no more than a bank customer overdrawing on an account. He further argued that whatever funding the CBN provided the central government most certainly underwhelms the balance in the authorities’ revenue account at the bank, the so-called treasury single account (TSA), estimated to have a balance of more than N7 trillion in April. John Ashbourne, Africa economist at London-based Capital Economics, wonders about the overdraft analogy; “it may be normal in some countries for banks to automatically extend a limited amount of credit to private customers, but that isn’t how central banks usually treat governments.” Besides, even if government is expected to pay back on the overdraft it takes, what is the lag period? Is there a consistency? And is the CBN adequately compensated? And if the TSA is so reportedly buoyant, why does the government need an overdraft? More importantly, is the CBN constrained from performing its monetary policy functions consequently?

Be transparent
But is there anything particularly wrong with quantitative easing (QE)? That is, the creation of money by a central bank to buy assets. Not necessarily. This is also the view of Tajudeen Ibrahim, Head of Research at Chapel Hill Denham, a Lagos-based investment bank: “in my view, nothing is really wrong [with QE], but the economy is not feeling this type…as it is not supportive of private sector growth.” Typically, QE is aimed at spurring inflation, as is the case in America, Europe and Japan for instance, where inflation is very low. “But that certainly isn’t the situation in Nigeria, where above-target inflation is currently a big problem, Capital Economics’ Ashbourne opines. Irrespective of the objective, though, the least the CBN could do is be transparent about it. This is the sentiment shared by market participants. Mr Asbourne puts it rather succinctly: “This move into unconventional policy is a worrying sign, especially since it has not been communicated very well to the markets.” As yet, the CBN has not formally declared it is actively engaged in QE. The American experience is instructive. With a balance sheet of just under US$1 trillion in September 2008, the Fed doubled its assets to US$2.1 trillion in just 4 months on the back of QE. More than 8 years later, when the Fed may begin to unwind these assets, its balance sheet size is about US$4.5 trillion, more than quadruple the size at the start of the global financial crisis. But for the deft communications of the Janet Yellen-led American Federal Reserve, an imminent tapering would have jolted the markets. The increased transparency was informed by the market tumult that followed earlier miscommunication by former Fed chair Ben Bernanke (the so-called “taper tantrum”). If the CBN must adopt a policy with origins in America, the least it could do is also take lessons from their experience.

No good deed goes unpunished
It is not clear whether the CBN has a timeline for when it would discontinue granting the central government a blank cheque. Besides, the jury is still out on QE; it is too early to tell whether it is a viable monetary policy tool. Since clearly, the CBN is printing money to fund the government, it could be reasonably inferred that its hawkish stance may last for longer; albeit the market is currently pricing in a possible rate cut soon. There would likely also be inflationary effects. As the private sector is increasingly starved of credit, the QE policy would also weigh on growth. [Never mind that] “businesses have to borrow at significantly high interest rates on the back of this”, Chapel Hill Denham’s Ibrahim adds. More importantly, the policy works against the CBN’s goal of bringing down inflation. Besides, did it have a say in the matter? Because if all that happened was that the central government simply ordered it to print money, then the erosion of the CBN’s independence may be worse than earlier thought.

In light of the recent QE move by the CBN targeted towards large corporates, these earlier thoughts are pertinent. An edited version was published by African Business magazine in November 2017.

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