THE N1.55TRN INTEREST ON T-BILLS

DAVID SAMSON contends that the CBN will continue to use control tools at its disposal to rein in inflation and strengthen the naira

A few days ago, a news report shared some information about the N1.5trn interest incurred following the sales of Treasury Bills worth N8.4trn by the Central Bank of Nigeria in the first half of 2024. Of course, any story where trillions of Naira are mentioned deserves a second, third and even fourth look, especially when one considers the current state of the Nigerian economy.

Is this in alignment with what the CBN (and the federal government) envisaged? How does this tie-in with other efforts to redirect Nigeria’s economy to a prosperous path?

The first thing I would point out is that Treasury Bills (T-Bills) do play a role in managing liquidity and inflation so occasionally central banks add them to the mix of tools deployed to control pressures.

How do they do this? By selling T-Bills, the CBN absorbs excess money from the economy and reduces the money supply. This helps control inflation by lowering demand-driven price pressures. Additionally, offering high yields on T-Bills attracts investors, which can stabilize the naira by reducing demand for foreign currencies. Over the course of the period, the sales were oversubscribed, indicating very high demand for the securities. Essentially, T-Bills act as a tool for monetary tightening and influencing interest rates in the economy.

Who buys Treasury Bills? Is it something you or I can purchase? T-Bills offer a risk-free return, making them appealing to investors with low-risk appetite. Those who buy Treasury Bills include Commercial Banks who invest in T-Bills for liquidity management and as a low-risk investment option; institutional investors including pension funds administrators, insurance companies, and mutual funds seeking safe, short-term returns; individual investors like high-net-worth individuals and retail investors who can purchase T-Bills through banks or investment platforms for secure income; and foreign investors who buy T-Bills to take advantage of attractive yields, especially in emerging markets like Nigeria.

That is all good and fine but the question that jumps to the fore is whether the N1.5trn interest incurred by the CBN can be classified in fully positive terms and how this affects you and I in the short, medium and long terms.

It is easy to start out by saying that N1.5 trillion in interest payments on Treasury Bills by the Central Bank of Nigeria may not be favourable for the economy. Why? High interest payments like these can strain government finances and negatively affect debt sustainability. Also, they are a signal that economic challenges, such as high inflation or risk, are the reasons behind such higher yields to attract investors. While T-Bills can help control inflation, excessively high interest rates can have long-term negative impacts. Similarly, financing these payments through borrowing or printing more money could fuel inflation, counteracting efforts to stabilize prices. High interests on T-Bill yields crowd out private investment as investors prefer risk-free returns from secured government securities like T-Bills, making borrowing costlier for businesses. Finally, investor confidence may be shaken if the market perceives the debt as unsustainable, potentially leading to higher future borrowing costs.

In our recent case, to finance the N1.55 trillion in interest payments from T-Bills sold the CBN might use any or a mix of the following: Government revenues, including taxes and oil exports, new borrowing through issuance of new debt instruments or borrowing from domestic and international markets, utilising foreign exchange reserves, which will impact the naira and monetary policy adjustments.

These are all probabilities, but Central Bank’s worldwide consistently use T-Bills because, strategically deployed, they yield positive results.

The sale of Treasury Bills in 2024 had some impacts on the Nigerian economy such as in the area of moderating inflationary pressures by absorbing excess liquidity. Used in tandem with other tools such as the recently raised MPR, a pattern of clear, positive efforts to deal with inflation which had been a major burden on Nigerians in the past one year becomes more visible.

The attractive yields on T-Bills would certainly also have drawn investor interest and attracted foreign capital or hot money even though this may have crowded out private sector borrowing due to higher interest rates.

It is also likely to have been used to help provide some stability to the naira by reducing demand for foreign currency.

No doubt, the CBN is also combining the usage of T-Bills with other strategies to make it more effectively, such as diversifying funding sources to include other types of government securities, such as bonds with longer maturities or instruments that offer lower interest rates; enhancing debt management practices to better align issuance with funding needs and optimize the timing and structure of debt issuance; coordinating with the government to align monetary and fiscal policies to help manage inflation and stabilize interest rates, such as would reduce the cost of borrowing and developing financial markets to offer a broader range of investment options and improve liquidity because a more developed market can potentially reduce borrowing costs and offer more favourable terms for government securities.

The federal government can also play a role to support the CBN in this by implementing fiscal consolidation measures to reduce budget deficits. This could involve cutting non-essential expenditures, improving efficiency in public spending, and adopting policies that boost economic growth and revenue.

These are important to consider because such high interest payments can be a burden that add to fiscal pressure that reduce funds available for other government spending and counteract efforts to stabilise prices.

The Central Bank has so far kept up its hawkish stance as a response towards curbing the inflation in the economy which has been accompanied by sharp rises in the prices of goods and services across all sectors and would most likely continue to utilise control tools at its disposal to rein in inflation and strengthen the naira. The increase in T-Bills sales, and the attendant interest rates incurred, all fit into that strategy.

Samson writes from Abuja