Far more consequential would be that on the back of its ability to raise funds relatively cheaply through security market issuances, government may by means of these windows absorb savings that might otherwise finance private investment. This is the notorious “crowding out” effect that public sector borrowing is supposed to have on the private sector variety.
First, two uncomfortable truths. Rising domestic prices sit at the heart of the argument over the extent to which the Tinubu government’s reforms have worsened the living conditions of the average Nigerian. The naira’s loss of its main function as a store of value is why the currency has lost out against the US dollar. Then, the main story. Both these facts describe the wide and swinging negative gap between the return on naira-denominated assets and the consumer price index. Seven years ago, the Central Bank of Nigeria (CBN) sought to fix this problem by restricting local investors’ participation in its Open Market Operations (OMO). It failed. The pressure on the naira did not lift until a semblance of the market was recently allowed to substitute for the many windows through which the central bank then traded foreign exchange. Interest rates remained elevated. And lending to the real sectors of the economy invisible.
Still, the CBN’s decision, mid-August, to lift the OMO restriction asks more questions than it answers. At its first auction under the revised arrangement, the bid rates for the CBN’s ₦450 billion allotment ranged from 19.90 per cent to 20.46 per cent, with a stop rate of 20.39 per cent.
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First, the answers. With the opening of an extra channel for monetary policy transmission, the OMO market now allows the ordinary Nigerian saver respond directly to the CBN’s monetary policy stance. Under this arrangement, tight monetary policy conditions would drive OMO yields up, providing strong incentives for retail savers to move money into OMO. As a result of this, bank’s funding costs will rise, as deposits become more expensive. And lending rates will come under upward pressure. A classic description of central banks’ preferred tool for taking away the punchbowl, just as the economic “ówámbé” gets going (apologies to William McChesney Martin Jr.)
Up until now, banks have opted to reward savings deposits at the minimum rate of 30 per cent of the monetary policy rate (MPR) specified by the CBN’s “Guide to Charges.” With the MPR at 26.50 per cent, 30 per cent of MPR has had the interest rate on savings at around 7.95 per cent. Against the backdrop provided by the OMO stop rate and the rate on the 91-day treasury bill, the OMO reopening effectively creates a new market benchmark that shifts the question on bank performance from whether Nigerian banks are paying enough on savings accounts, to how much of the return they earn on risk-free CBN securities that Nigerian banks are willing to share with their depositors.
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The first question matters, in a qualified sense. There are distributional consequences to the fact that millions of Nigerians who lack the sophistication, access to, or minimum capital needed to participate in the securities market are effectively being taxed by rising domestic prices. The wealthy can preserve their purchasing power by warehousing their wealth in T-bills and money market instruments. Ordinary savers cannot. This leaves us with the contradiction, unintended probably, that the person whose behaviour monetary policy seeks to change may not actually experience market rates.
The second question matters even more, in the sense that if OMO yields remain elevated and banks continue paying 8 per cent on savings deposits while offering only modestly higher rates on term deposits, it could be argued that the banking system is benefiting from considerable deposit-market power. However, were banks to start to aggressively reprice deposits, then the OMO reopening will have demonstrated that competition was being suppressed partly by the absence of an accessible alternative for retail savers.
In the end, the bigger macroeconomic impact of the new policy would not lie in the extent to which it encourages financial disintermediation, by creating additional opportunities for people and companies to move idle funds out of regular bank deposits and into Treasury bills, money-market securities and other interest-bearing instruments. Nor would its restraint of private sector credit and investment by pushing up bank funding costs matter the most.
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Far more consequential would be that on the back of its ability to raise funds relatively cheaply through security market issuances, government may by means of these windows absorb savings that might otherwise finance private investment. This is the notorious “crowding out” effect that public sector borrowing is supposed to have on the private sector variety. Several arguments play out here. First, is the simple acknowledgment that the private sector, operating out of fairly competitive markets, deploys and uses funds better than the public sector, public goods excepted. Then, there is the other fact of government’s deficit’s harmful effect on the economy, especially by driving a depreciation in the domestic value of the naira.
Uddin Ifeanyi, a journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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