Inflation targeting: Investment banker commends CBN, gives fresh advice

A trained financial economist and investment banker, Mr. Sonnie Babatunde Ayere has called on Nigerians to support the Godwin Emefiele-led Central Bank of Nigeria in its decision to face head-on, a regime of high interest rates and its impeding effects on the growth of the country.

While literally describing it as a monster, Ayere recalled that historically in Nigeria, interest rates have always been high, due to the monetary system in vogue since 2009, which sought to use federal government bonds/T-bills and Open Market Operatio (OMO) bills as a means of attracting US dollars  (US$) into Nigeria to help stabilize the Naira.

In an advisory note made available to Newsmen on Friday, Mr Ayere who currently runs the investment banking outfit of DLM Capital Group said that  no economy can expect sustainable real growth when long term rates are above single digit, which is why people  clamour for low interest rates.

According to him, in order to attack inflation in Nigeria, “we need to combat the high cost of the factors of production i.e. power, infrastructure (hard & soft), logistics, transportation, and a host of others.

“Long-term funding therefore becomes critical, most importantly the cost of financing at the risk-free rates that make our commercial banks, pension funds, among others happy.”

He added that financing these critical components of economic development for the country become utterly impossible, “leaving us in the rot we have become accustomed to.”

However, with Emefiele’s silver bullet, projects that will reduce the cost of production in Nigeria and enable citizens morph into a country that can produce competitively rather than continuously import, begins to actualize.

His words: “Nigerians, lets support this crucial initiative from the CBN for a brighter tomorrow and let’s help ourselves breakout from our history of round tripping banking.”

Most recently, the CBN, decided to take on the challenge of addressing high interest rate regime, that has become a deterrent to domestic economic growth in Nigeria.

He observed that following this long unnecessary spell of extremely high interest rates in Nigeria from 2009 to 2019, it is gratifying to see that once again, it is possible to experience the rebirth of a sustainable credit economy in Nigeria; one that can support ordinary citizens as well as infrastructure growth.

Although many commercial bankers, pension fund managers, asset managers, and traditional buy-side investors according to Where, do not like these lower rates  as some use old archaic economic theories that question how inflation (at 11%) can be higher than the treasury risk-free rate (at 3%).

But he suggested that  “even when you look at inflation against yields on fixed income securities, it would be inflationary expectations that an economist will analyze and not the spot inflation per se.”

Describing CBN’s latest policies as silver bullet, the former International Finance Corporation’s (IFC’s) executive noted that the lower interest rates Nigerians see today is a matter of basic economic supply & demand, induced by removing domestic investors from CBN’s Open Market Operations (OMO). Henceforth, domestic investors have been directed by the CBN to buy domestic securities issued by the Federal Republic of Nigeria, namely Treasury Bills and FGN Bonds. “The result is that the demand for treasury bills and FGN bonds now far exceeds its supply and as such the yields have been adjusted to their normal economic equilibrium, dictated by investor appetite.

“OMO securities are now the preserve of a bilateral financing agreement between the CBN and foreign portfolio investors,” Where statedIn other words, Foreign Portfolio Investors (FPIs) will be willing to buy Nigerian OMO bills at a negotiated yield that does not distort the Nigerian domestic yield curve, fostering a credit market in the country and allowing Nigeria fund its infrastructure with long term economically viable Naira.