The federal government has made much of its savings from implementing the treasury single account (TSA). Depending on which functionary you listen to, not just has government boosted its revenue by about N1.8tn — the total balance on its ministries, departments, and agencies (MDAs) accounts with commercial banks now returned to the central bank’s vaults — but the greater portion of this monies were “idling” away in banks’ vaults.
This narrative, alas, incorporates a number of misleading assumptions.
The most important need is to correct the impression that the TSA is like some new tax scheme that will, annually, return a prince’s ransom to the federal exchequer. It is, in reality, nought but an accounting entry in which the accounts of the federal government’s MDAs previously held with commercial banks are nulled, and the balances thereon transferred to the government’s accounts with the central bank. Not just was no new money created. But the transaction may only happen once.
The main advantage of the transfer is the bird’s eye view of the government’s finances that it now provides. Previously, cash-rich MDAs squirreled away their surpluses in the commercial banks (with the associated brokerage commissions), while cash-strapped ones laboured. Now, the federal government may better move resources across its different functions. However, to the extent that such resources will pay salaries (recurrent spending) or fund contractors/consultants (capital spend), all of whom keep commercial bank accounts, the TSA “savings” will eventually return to the commercial banks.
And banks do not like “idle funds”.
The Central Bank of Nigeria’s (CBN) response to the TSA’s impact on banks is no less instructive. Persuaded that the TSA funds were not “idle” and that its withdrawal could hurt industry liquidity, and by extension the larger economy, the CBN promptly crashed the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves with it. Suddenly, banks suffered a liquidity surfeit.
With consumer spending and business confidence headed southwards for the winter, banks could neither lend to their preferred corporates nor to riskier retail customers. And although rates crashed as commercial banks had more money than they had vehicles to put them in, the rate crash was indeed an unintended consequence of the CBN’s worry that the TSA withdrawal may have hurt banks.
2015 closed with 30-day treasury bills yielding 5% annually. Only six months earlier, investors in treasuries received returns on their investments between 13% – 14% per annum. Essentially, what this means is that it is no longer attractive to hold naira-denominated assets.
Worse, headline inflation closed November last year at 9.4% (December’s count is expected to be a little bit higher). So, in inflation-adjusted terms, it’s increasingly irrational, and costly, to keep one’s wealth in naira. For every N100 invested in 30-day treasuries, for example, the investor gets 42 kobo upon maturity, while losing 78 kobo to rising prices.
Does this explain why the dollar and other “hard currencies” are in high demand? As the naira no longer is capable of acting as a store of value, other more reliable such vehicles (land, bullion, and hard currencies recommend themselves). Arguably, returns on hard currency asset classes may be low, but the markets understand that the policy response functions in the jurisdictions that back these investment vehicles place a high premium on stability. It is a safe bet then that for every dollar held, today, all things (including the current trajectory of our local central bank policy) being equal, the naira it may buy at any future time will continue to increase.
Any surprise, therefore, that we are unlikely on current policy form to witness appreciable inflows of foreign currency into the economy?
Like the resident economic entity, the non-resident investor prefers positive real returns on his/her investment. After, that is, idiosyncratic risks associated with each specific jurisdiction have been accounted for. The biggest, and newest such risk in our country today, is that after having done business successfully, the chances of repatriating earnings (ask foreign airlines operating in the country, who face an uphill climb securing the dollars needed to repatriate their ticket income) are no worse (or better) than a lit candle’s chance in Hell.