Fasua vs Rewane: Different takes on money supply, budget deficit, printing N60bn

By Tope Fasua

So I just listened again to Bismarck [Rewane, the economist, on Channels Television]. Here’s my take on his take:

1. He starts with an analysis of money supply – M1, M2 M3. 8% of money supply in Nigeria is cash. This is N2.8 trillion. This does not explain the dynamics of printing N60 billion in cash if that is what happened. N60 billion will be easily subsumed even in the 8% of money supply that is cash

2. He then talks about budget funding. He explains that to an investment banker if the budget is not backed by depositors and investors commitment, then it can be elegantly stated that it is finance by ways and means.

I disagree on this. What funds a budget deficit is actually borrowing, IGR (internally generated revenue), trade surpluses and grants.  So, I don’t think depositors especially comes in here at all.

3. He explains that Nigeria’s crude is now 200% more liquid than it was last year. Yes. But given the dislocation of the last year and the big holes we have dug by way of interventions, the federal government could still be constrained with how to fulfill commitments to states. This raises an accounting issue.

4. Is the federal government not supposed to share from ONLY what it gets? If the federal government finds it tough to meet commitments to states, is it that its balance sheet is so messed up such that it has dipped hands into what the states should be entitled to? This is highly likely.

5. He speaks about fiscal deficit management and DMO’s (Debt Management Office) attempt to securitize federal government’s exposure to Central Bank of Nigeria (CBN) worth N10 trillion. This makes sense if this fiscal deficit is what is causing the mismatch in 4 above. However, the issue on ground is N60 billion as against a total outstanding of N10 trillion. I think this point is tangential to the issue on hand. We can pursue the securitization of the larger amount from a different premise.

6. He links the need to securitize federal government exposure to CBN to the interest rate regime of 2 – 3% vis a vis 18.17% inflation rate and calls for a fiscal neutrality or equilibrium whereby interest rates on government bonds equates the inflation rate. But we had something close under Kemi Adeosun. Only made banks much richer. Also Nigeria became a haven for hot money investors. Portfolio guys. The idea sounds elegant. The sort of theory one reads in a fantastic textbook but which could be extremely damaging to a real life developing economy. He is calling for an astronomic rise in interest rates to match a runaway inflation. Mind you, this will have nothing to do with productivity which is what we need to be finding ways to increase right now, not interest rate levels. So, saying Nigeria is artificially keeping interest rates (on bonds) low and that it’s going to have damaging effect on the economy, though technically correct, but it deflects from the issue and pursues a different agenda for portfolio investors and banks.

My small opinion on the N60 billion printing allegations. It is true that the CBN reserves the right to ways and means. We should look for what the laws enable the CBN, through NSPMC (Nigerian Security Printing and Minting Company), to do legitimately. The CBN is in charge of banks and must ensure banks have enough cash plus some to meet cash obligations else you have a financial crisis on your hands … run on banks.

Luckily that process has been fairly mastered now with cash management companies everywhere bridging the gap. The CBN may have a formula for printing a certain percentage of cash every year to cater to growing populations etc. Are they in breach of that law or process?  The banks are the ones who actually create money through the lending process or fractional banking. As Mr Rewane rightly noted, the bulk of money supply resides with the banks. I believe what Obaseki meant was to highlight the pressure that government finance is under. He may have specific information about whatever shortfalls the CBN and/or OAGF (Office of Accountant General of the Federation) had through their FAAC meetings, in meeting obligations to the states.  The FAAC meetings sometimes get very rancorous and rowdy as states have to follow up and ensure they get what is due to them at all times.

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•   Fasua is a Nigerian businessman, economist, writer and founder/CEO of Global Analytics Consulting Limited, an international consulting firm with its headquarters in Abuja, Nigeria