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The substance and form of debt


[FILES] Central Bank of Nigeria’s (CBN) governor Godwin Emefiele

Accidentally, the United States central bank – The Federal Reserve – stumbled on a powerful monetary policy tool in the 1920s. After the First World War, the new regional Federal Reserve banks found they had almost no financial relationship with the banks they were supervising in their regions. The implication of this was that these Federal Reserve banks could not generate any revenues to carry out their most basic obligations.

In a bid to find other ways of earning money, early in 1992, the Federal Reserve banks started buying government bonds from banks so they could at least earn some interest. It soon discovered something interesting – as it bought the government securities from the banks, the banks’ reserves were boosted. The second order effect of this was that interest rates started to come down as the banks all had more money to deploy. Thus the Federal Reserve figured out that when credit was scarce and interest rates were high, it could buy up government securities from the banks to boost liquidity and lower those rates. By extension the reverse was also true – when there was too much money in circulation and interest rates were too low, it could sell government securities to banks. By May 1922, the Federal Reserve decided to formalize this process and create what was called the Federal Open Market Committee (FOMC) to coordinate how this new powerful tool was to be used and when.

These days Open Market Operations (OMO) is nothing new of course but in 1922 one can only imagine how innovative they were. All of a sudden there was a market tool which could be used as a lever to control interest rates without having to use any other crude methods. Over the last 100 years since the invention of this tool, Central Banks across the world have borrowed and deployed it in their own countries to achieve the same goal of managing the supply of credit in the economy and interest rates in general.


Until the coming of the Great Godwin Emefiele, Nigeria’s Central Bank governor, that is. In the last 2 or so years in Nigeria, the meaning of OMO has been completely redefined. The name remains the same and in the Central Bank’s annual activity report, it still says that the purpose of its OMO activity is ‘to moderate the excess banking system liquidity’. On the face of it, that sounds like the same thing the US Fed discovered almost 100 years ago. But when you dig deeper into what is going on in Nigeria, you see something totally different.

The first thing is to ask a simple question – how come CBN’s OMO involves foreign investors? Much of the securities being sold by the CBN to ‘mop up’ excess liquidity in the banking system is being bought by foreign investors. Has the CBN finished mopping up the liquidity in Nigeria that it is now mopping up foreign liquidity as well? As anyone who has been following events knows, what happens is that the CBN sells securities to foreign investors at ‘mouthwatering rates’ that they cannot obtain elsewhere. Since these foreign investors only have dollars and the CBN’s securities are denominated in naira, the CBN takes their dollars and exchanges it to naira for them. At the same time, it gives them a cast iron guarantee that when they need their dollars back in 1 years’ time, it will sell it to them at an agreed rate no matter what the actual rate at that time is. These investors then take their naira and buy securities from the CBN and count their interest for one year.

In 2018 alone, CBN sold a total of N22.4trn ($62bn) worth of OMO securities ostensibly to ‘mop up’ excess liquidity. Was there really that much money sloshing around the Nigerian banking system that needed mopping up? At any rate, there was hardly any movement in interest rates during the year since the CBN itself needed to keep them high to keep attracting foreign investors to buy the securities. Herein is the final evidence that if the inventors of OMO were to reincarnate in Nigeria today, they would not recognise their own creation. Nigeria’s OMO does not mop up excess liquidity and does not have any effect on interest rates.

So what is the best thing to call this redefined OMO? Nigeria owes the foreign investors who buy the OMO securities and it owes them in dollars. The CBN has merely found a way to increase Nigeria’s external debt using what Diezani Alison-Madueke famously called ‘non transparent opacity’. When you go to the Debt Management Office (DMO) website, what you see on the front page is FG’s share of Nigeria’s foreign debt that currently stands at $21bn. As the CBN’s OMO is mostly short term for 1 year, it is hard to tell how much the outstanding balance is. But whenever the CBN decides to make this figure public, we should be honest enough to treat it as what it really is by adding it to the figure of Nigeria’s external debt.


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