A major challenge which financial managers the world over, face is how to maintain sufficient funds to meet their obligations at any point in time.
The Central Bank of Nigeria (CBN) in its Monetary Policy Series No. 4 (2011) showed that liquidity is the overall monetary conditions, indicating the extent of mismatch between demand and supply of monetary resources. It also considered liquidity in the context of the financial markets, as the ease of undertaking transactions in financial assets at narrow bid-ask spreads.
Thus, we view liquidity as the availability of funds to meet financial commitments or maturing obligations at a reasonable price at all times. It measures the extent to which financial assets can be sold at, or close to, full market value at short notice. From a liquidity management perspective, there are three broad types of liquidity namely: Central bank liquidity which refers to deposits of financial institutions at the central bank, often known as reserves or settlement balances; Market liquidity which relates to the ability to buy and sell assets in reasonably large quantities without significantly affecting the asset price; Funding liquidity which describes the ability of an individual or corporation to raise cash or its equivalent in reasonably large quantities either through asset sales or by borrowing.
It is noted that the direct cost of cash management to the financial system rose from N192 billion in 2012 to about N300 billion in 2018 with costs of cash-in-transit, cash processing and vault management accounting for 24 percent, 67 percent and 9 percent of this figure respectively. This expense represents a huge burden to the financial sector and the larger economy. To put this in perspective, the costs of liquidity management seem to outweigh the combined annual Internally Generated Revenue (IGR) of states in some geo-political regions of the country such as North East, North Central and South East.
Added to the above, another instrument that helps the CBN to influence liquidity is the sale and purchase of foreign exchange. Though the main objective of the foreign exchange operations is to ensure stability of the Naira, CBN acts as the net supplier of foreign exchange in the market given that the government surrenders almost all of its foreign exchange earnings from oil sales to it. About $20-30 billion of foreign exchange is currently supplied by CBN on annual basis through its bi-weekly auctions window, to manage liquidity and defend the local currency at the same time.
On the fiscal side, the Nigerian government through the debt management office spent approximately N1.5–2.0 trillion on debt services (interest payment alone) on annual basis over the last for years. It is noted that debt service to revenue ratio is currently high at about 40 percent and in the absence of deliberate and well implemented fiscal reforms, this ratio is projected to rise in the coming years.
To moderate the downsides of liquidity, we believe that market segmentation in the money market on the basis of perceived credit risk need to be monitored more closely. We noted that as rates for standing facilities increased, banks with excess liquidity appear to prefer deploying their funds to the CBN Standing Deposit Facility (SDF) instead of supplying them into the interbank market. Thus, some banks considered as high credit risk have little or no access to credit from banks with excess liquidity. This created a situation whereby some banks have liquidity shortages while others are awash with excess liquidity. This has compounded the problem of determining the optimal liquidity needs for the system.
Another driver of the prevalence of excess liquidity in the financial system is the lodgement of large funds by bankers bidding for foreign exchange during the weekly or daily auctions. Furthermore, admitting AMCON bonds for discount window operations was another factor contributing to excess liquidity (IMF, 2013). Besides, banks are said to be reluctant in giving credit to private sector operators due to their poor credit ratings. Interestingly, recent steps taking by the CBN such as the 65 percent loan to deposit ratio and award of fines to contravening banks seem to be yielding some fresh outcomes.
On foreign exchange burden and fiscal sustainability side, we largely align our thoughts with Teriba (2019), in his paper titled, “Unlocking liquidity in Nigeria”. In the article, he evidenced that Nigeria could adopt the following options to raise domestic and external liquidity thresholds:
Securitise (not sell) equity holdings in NLNG and other oil and gas joint ventures to give Nigerians at home and in diaspora opportunities to invest in these assets and earn some of the dividends.
Privatise to attract brownfield FDI by securitising all wholly owned corporate assets to joint ventures stakes in which government owns up to 49 percent by privatising (yes, selling) the rest to allow foreign investors own minimum of 51 percent like the NLNG.
Liberalise to attract Greenfield FDI by breaking government monopoly in all infrastructure sectors to encourage entry of foreign investors who could operate in parallel to the joint ventures.
Commercialise idle or under-utilised government owned lands and built structures by leasing (not selling) them, relocating uneconomic activities from prime locations and repurposing such locations for leasing to open new streams of lease/rental income into government coffers.
Doing these will change Nigeria’s economic, fiscal and financial narratives by unlocking vast amounts of liquidity for Nigeria to strengthen the Naira, rejuvenate fiscal, financial and foreign exchange streams, accelerate growth, eradicate poverty and unemployment, rebuild infrastructure, diversify growth, and lay the foundations for shared prosperity.
Vincent Nwani
Dr. Nwani is the managing consultant at RTC Advisory Ltd
