Download disinformation on government debt accumulation

DISINFORMATION ON DEBT ACCUMULATION
BY HENRY OLUJIMI BOYO
The following is an excerpt from a media report titled “CBN to Auction N140bn in Treasury
Bills” (pg. 25, Punch Newspaper, 23/4/2012).
“The Central Bank of Nigeria has announced plans to issue N140bn ($894.86m) in treasury bills,
ranging from three months to one year maturation at its regular monthly debt auctions, this
week,….” The report continues; “the CBN issues treasury bills regularly to reduce money
supply, curb inflation and help lenders (primarily the banks) manage their liquidity.”
The preceding sentence makes such CBN borrowings appear economically benign, and
supportive of economic growth. This interpretation of the object of the mopping up exercise
has become a permanent identical feature in media reports on the economy! It is amazing
and distressing how the government, or is it the Media presents this essentially government
propaganda with aplomb, as if to assure the unlettered populace of the competent management of
the economy by the apex bank.
Now, let us take a closer look at what the CBN is actually doing when it sets out to help lenders
(primarily money deposit banks) manage their liquidity. But first, let us recognize that the need
to reduce money supply presupposes an acknowledgement of “too much money in the system”.
Inadvertently, this raises the paradox of apparent too much money existing side by side with the
inability of the banks to lend to the real sector because of presumed paucity of funds!
It also raises questions on why CBN’s humongous bailout packages still became necessary in
spite of its perennial claim of cash surplus in our money market.
Much more bewildering is the reality of the burden of oppressive rates of interest incurred by the
CBN for the joy of helping the banks manage the inexplicable spectre of excess funds in their
tills.
The strategy of liquidity mop up (reduction of money supply) is universally applicable, but in
successful economies elsewhere, it would be unusual in the first place, to have so-called excess
cash in the system simultaneously with a shortage of loanable funds for the real sector! That
apart, it would be political suicide in such successful economies, for their own Central Bank to
pay an interest rate of more than 3% to banks (its predominant lenders) as cost of taking excess
cash out of the system, and control inflation.
It should be pertinent to ask at what cost our own CBN manages the same problem! For example,
in a Punch newspaper report of 29/03/2012, titled “CBN to Issue N735.63bn T.Bills in Q2”, the
paper indicated as follows: “A statement by the CBN had said that it sold N34.65bn of the 91-day
treasury bills at a 14.8% rate, up marginally from the 14.4% yield at a previous auction. It also
sold N20bn worth of the 182-day bills at 15.5%, lower than the 15.09% previously and N85bn in
the 364-day instrument at a marginal rate of 15.55%, compared with 16.89% at the last auction.
Traders had attributed the following yields on the longer dated treasury bills to the surge in
demand from offshore investors”.
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Diligent readers will note that the CBN has not declared that the moneys it seeks to borrow would
be put to any productive use; in fact, the CBN has often brazenly affirmed that such moneys are
simply kept sterile in Central Bank vaults and account records.
So, fellow countrymen, why would anyone feel constrained to keep idle, moneys they have
borrowed at a cost as high as 15%, while the same monetary control procedure attracts less than
2% in successful economies? With such high returns for risk-free sovereign loans, it should be no
surprise that banks will prefer to lend to the CBN than to the real sector.
It is instructive that even distressed economies in the European Union are not so reckless; for
example, a Daily Independent Newspaper report of 19/4/2012, pg. 24, states as follows “… Spain
sold 12 month bills at 2.63%, up from 1.418 at the last auction on March 20.” The Bank of Spain
(equivalent of our own CBN) reported, “…the Treasury also sold 18 month bills at 3.11%
compared with 1.711% last month.
Well, readers will observe the huge difference in the cost of borrowing for a depressed economy
in Europe and a successful economy, consistently, successfully growing its GDP at over 7%! In
similar vein, Nigeria’s Debt Management Office (DMO), has in the last five years also accessed
long-term funds for largely non-specific intangible purposes, at over 16% interest rate.
Instructively, the Spanish economy in spite of its travails “auctioned bonds maturing in January
2015 at an average of 2.89%..., while bonds due in October 2016 yielded 4.319% and securities
maturing October 2020 were sold at 5.388%.”
This raises the question on why the DMO should borrow at extortionist rates of 16%, when our
own idle reserves and Sovereign Wealth Savings earn less than 4% premium. Indeed, the reason
for increasing offshore interest in our equities may be patently obvious.
On the contrary, can we imagine, how public perception will change if, in place of the dubious
propaganda on government borrowings, the Media should report as follows: “The Central Bank
has indicated that even though the banks do not appear to have money to lend to the real sector,
the apex bank has intervened in reducing what it considers to be an excessive cash flood in their
hands; to this end, the Central Bank has decided to borrow part of the surplus cash in the system
from the money market (predominantly the money deposit banks). The Central Bank would,
therefore, borrow over N200bn this month and pay the money deposit banks an average cost of
about 15%; it does not seem to matter to the apex bank that it is reckless to pay such a high cost
for borrowing money you have no use for, and will therefore be kept idle in CBN coffers. Worse
still, the CBN created the scourge of excess cash in the system in the first place, when it paid
naira allocations for dollar-derived revenue.
Meanwhile, the sum of over N500bn allocated for debt servicing will together with fuel subsidy
provisions account for over 25% of total expenditure in the 2012 budget.
If CBN’s and the DMO’s borrowings were faithfully described in the preceding format, I am sure
most rational Nigerians will be alarmed at such recklessness, especially when inflation, the target
object of such borrowings remains largely untamed at around 15%.
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