BY KELVIN EMMANUEL
The accounting scandal that came from the external audit of the CBN after seven years of the immediate past leadership’s refusal to obey sections 50(1)(3) of the CBN Act has contributed in a way to the refusal of foreign investors to bring in their liquidity into the Nigerian markets, either as short term ‘speculative’ foreign portfolio investors or as long term ‘non-speculative’ foreign direct investments. Amongst the issues on the table that is preventing the free flow of capital into the economy are:
• A gross reserve that currently sits at $34.1bn
• Securities lending to two external asset managers to the Central Bank of Nigeria with liabilities of $7.5bn attracting 9.2% in annual interest payments or $691m.
• $11bn in FX swaps to local banks with revaluation losses of around N3.2 trillion.
• $10bn in FX swaps to foreign financial institutions
• $5.6bn in net reserves
According to the Guidotti-Greenspan rule, which most sensible Central Banks around the World follow, “Your balance of payment outstanding for one year must not exceed your net external reserves.”
For Nigeria we currently have $6.8bn in forwards from: Form A, Capital Remittances, Dividend Remittances, and Matured Letters of Credit, and this has already dropped below outstanding forward obligation.
Nigeria is not exporting enough crude oil to foreign off takers with brent crude at $93 or $18 above the benchmark set by the Nigerian Senate for the 2023 appropriation year, and this is because, perennial crude oil theft from the refusal of the government to implement digital meters with high pressure sensors on pipes that transport crude oil from flow stations to terminals, keeps dogging the ability of the government to raise daily output above OPEC quota and into the 2m barrels per day territory, where crude oil receipts is capable of settling the outstanding forwards from crude oil swaps NNPC did in its Direct Sale, Direct Purchase Agreement, pay for Joint Venture Cash Calls to Operator of the Bloc and at the same time return USD liquidity the market needs while raising the reserves for balance of payment and providing the naira equivalent to the FAAC account of the government as revenue and exchange difference.
The problems Nigeria has with its exchange rate that has led to 16 consecutive month on month increase in inflation numbers, can be traced back to the abuse of Central Bank overdrafts or ‘Ways and Means’ as provided for in sections 38 of the CBN Act of 2007.
The Federal Government turned temporary advances that was not supposed to exceed 5% of real revenues for the previous accounting year and that was supposed to be payable within the same financial year (or provisioned for credit losses, if the government was using IFRS 9 and not IPSAS), into a lifetime liability on the balance sheet of the Central Bank, that was attracting MPR + 3 per annum, and contributed significantly to the nearly 6.5 trillion naira or 29.8% in interest cost the Federal Government had to pay to the Central Bank, before the overdrafts were sterilized into a 40-Year Government Bond.
The problems Nigeria has with its exchange rate that has led to 16 consecutive month on month increase in inflation numbers, can be traced back to the abuse of Central Bank overdrafts
The increase in the Cash Reserve Ratio of Deposit Money Banks from 15% in 2014 to 32.5%, that changed the use of open money market operation (OMO) tool from regulating the flow of cash in the economy to providing debt financing for the Government to fund its budget that led to an expansionary monetary policy and raised debt financing from 16.68% to 43.8%, led to massive depreciation in the value of the naira, attendant devaluation to reduce the black market premium that measures the divergence between the official and parallel market (trading at a 62% black market premium before the last devaluation in June 2023).
During the 10-days within which there was convergence between the official and parallel market rates in Nigeria, the Investor and Exporter Dealer Window attracted a total of $2.55bn in flows, confirming the principle that there’s a net migration of 0.4% in FX flows from the I&E or official window to the parallel markets for every 1% deviation in black market premium between the official and parallel market rates.
Nigerians have seen a surge in the price of petroleum products like Diesel & premium motor spirit not just because of the deregulation of pms according to sections 205(1) and 206(2) of the Petroleum Industry Act (PIA) or the current hike in the price of Brent crude due to supply shocks between OPEC and Non-OPEC members in the declaration of cooperation (DOC) or the inability of Russian refineries to afford catalysts as spares for their facilities, that has compelled President Putin to order for a freeze in exports of Diesel except to countries that are friendly to Russians, but also because the naira has gone on a consistent free-fall, that changes the equation completely on if the government wants to allow pms prices to float based on free market conditions, or if its finances can afford the luxury of providing it the floor to freeze further hikes.
While it’s important to know that the government has now come close to the point where it actually needs to call in the International Monetary Fund to structure a bail-out for its FX situation, I think there are more fundamental reforms that are required at the Central Bank of Nigeria, a regulator whose work as an, adviser to the government, banker to the government, prudential regulator to banks and other financial institutions, issuer of currency, monetary policy watchdog responsible for managing inflation, requires that it maintains the highest levels of respect for the extant laws that guides its own administration, and the regulation of Banks.
It is important that as the new team come in to steer the ship from an impending ship-wreck, all stakeholders can put hands together to:
• Conduct a comprehensive audit of the CBN ACT of 2007
• Reverse the expansionary monetary policy approach that has led to impairments of nearly N7 trillion on the balance sheet of the Central Bank
• Deepen the fiscal strategy approach that ensures the government can raise its tax and non-tax revenues from the current 8.9% to 18% as means to reduce the deficit financing in the budget that comes from Central Bank overdrafts as a first resort, borrowings from the bonds market, multilateral development banks and bilateral partners. And this is because, raising the revenue to GDP ratio by 9.1% will add $40bn annually to the government’s coffers and reduce to the barest minimum the need for the government to violate sections 38 of the CBN ACT in the future.
The Central Bank of Nigeria has to provide forward guidance for Inflation, Interest Rates and Exchange Rate, and a key to doing that, is to ensure it can slow down the hike in inflation, that will necessitate a freeze in hiking MPR, and lead to lower black-market premiums and VIX in the FX markets.
Never in the history of Nigeria since the return to civilian rule in 1999 has there been a need for experience and institutional integrity at the helm of the Central Bank, than now, the clock is ticking.
*Emmanuel is a Public Policy Analyst and Economist
