The pertinent question is not so much, then, why we are offering these many backhanders to foreign portfolio investors. It is rather “Who will bear the costs arising from this policy?” And what are these costs? As we speak, a large part of the balance on our gross external reserves comprises portfolio investors’ dollars – waiting to leave.


The easiest way to understand the decision, last week, by the Central Bank of Nigeria (CBN) to introduce long-dated foreign exchange futures into the local money market is to follow the trail of an imaginary non-resident investor in the domestic space. A couple of assumptions would help the walk down this path. First, is that our investor would be borrowing the funds off-shore. With the yield on five-year U.S. Treasury Bills closing Thursday, February 20 at 1.37 per cent, it makes sense for fund managers seeking better returns on their portfolios to look to stash some of the money there.

Second, the ideal domestic investment vehicles will comprise almost entirely money market instruments. This is not just because the CBN has created fixed-income investment windows that return double digit rates for foreigners bringing their money here. It is also because of our failure to properly address the huge costs of doing business locally. This has made the foreign direct investment component of capital imported into the country a rarity despite the economy’s huge need for such private sector responses.

Now, with those assumptions safely tucked away, we may return to the mechanics of portfolio investment here. Our investor comes into the country. Obtains her certificate of capital importation. Buys treasury bills. Gets a custodian to warehouse these. And finds a bank through which to buy those foreign exchange futures. The whole point of this final manoeuvre is to hedge her bet against exchange risk. Upon departure, your standard investor wants a clear path out: She’d want to be able to sell the instruments – so there must be a liquid market for it; and wants to be able to convert the naira from selling the money into dollars, which may then be repatriated.

Now, in order for funds flow into our economy to be profitable at the point of redemption and repatriation, two conditions must hold. First, the return on the investment must leave a margin after such factors as domestic price changes over the tenor of the investment and country risk have been factored in (or out, if you will). Second, the exchange rate should not have moved against the investment during the tenor.

…the CBN is again subsidising the flow of hot money into the country, in three ways. By ensuring that portfolio investors’ treasury bills holdings return yields far higher than the natives may aspire to…by offering a huge discount on the exchange rate at which these investors will exit on maturity of their investment; and guaranteeing to make the dollars available…


What the CBN has done, therefore, in pricing its first five-year futures settlement contract at N379.81 (it used to be available only as a 13-month futures contract before) is to check all these boxes. An investment in treasury bills today will expect on its way out of the country in the next five years, to depart at an exchange rate of US$1:N379.81. A decent markup on the prevailing US$1:N360, you’d argue? Apparently. But look closer at the details, and the story that emerges is less salubrious. For starters, the differential between interest rates on treasury bills in the U.S. and in Nigeria is currently about 10 percentage points.

What would happen were this differential to hold over the next five years (there’s no reason why it should not; and indeed, our policy wallahs have designed current policy on this supposition)? In other words, were we to factor this ten percentage point difference into any calculation of the exchange rate over this tenor – taking current exchange rates as the base – what should be the rate at which the foreign exchange futures cash out in five years time? “Principal” equals N360. “Rate” equals 10 per cent. And “time” is five years. The basic compound interest computation results in an exchange rate well north of US$1:N500. Thus, the CBN is again subsidising the flow of hot money into the country, in three ways. By ensuring that portfolio investors’ treasury bills holdings return yields far higher than the natives may aspire to (indeed the difference between the return on savings for the average Nigerian and for the portfolio investor increasingly mirrors the differential between the U.S. and local treasury bills); by offering a huge discount on the exchange rate at which these investors will exit on maturity of their investment; and guaranteeing to make the dollars available with which they may repatriate these funds.

The pertinent question is not so much, then, why we are offering these many backhanders to foreign portfolio investors. It is rather “Who will bear the costs arising from this policy?” And what are these costs? As we speak, a large part of the balance on our gross external reserves comprises portfolio investors’ dollars – waiting to leave. By offering additional incentives for these fly-by-night money to come in, we are simply building up the economy’s vulnerabilities.

Those who argue the corner on behalf of our current monetary policy pivot are wont to dismiss objections to it as a self-evident case of giving a dog a bad name in order, eventually, to hang it. Yet, this reluctance to call out the pooch for fear that it might be hanged is scant reason to allow our economy go to the dogs.


Add to this, one fact, one possibility, and a major failing, and the nature of the medium-term threat posed by our current policy direction is as real as it is present. The fact that the CME Group quotes Brent Crude Futures for 2025 delivery at a little over US$57 per barrel, the possibility that our population may continue to grow at its current pace, and our failure to implement the reforms necessary to break the economy’s dependence on hydrocarbon exports, all mean that we are headed down Shit Creek, in a leaky boat, without paddles.

Still, it helps to understand the “Why?” of current policies. Foreign portfolio investment helps beef up our gross external reserves. So, they are welcome in this narrow sense. The problem is what we then do with the balance on the reserves. At one remove, it appears that we spend the reserves to help maintain the naira’s exchange rate at levels that will not frighten foreign portfolio investors away.

Dog, viciously chasing its own tail? Great sport if you’re but an onlooker. At which point it is easy to forget that the effort expended by the often mangy pooch must be replenished if it is to provide this spectacle some other day. Those who argue the corner on behalf of our current monetary policy pivot are wont to dismiss objections to it as a self-evident case of giving a dog a bad name in order, eventually, to hang it. Yet, this reluctance to call out the pooch for fear that it might be hanged is scant reason to allow our economy go to the dogs.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.