By Kelvin Ayebaefie Emmanuel
The lack of autonomy is the reason why, across most emerging and frontier markets in the Middle East, South America, North Africa, and Sub-Saharan Africa, countries are battling with record-breaking inflation, a currency devaluation spiral, and excessive debt with servicing levels that have created an additional risk premium for creditors other than the usual secured overnight financing rate (SOFR) used in the international debt capital market circles.
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It’s the reason why, in Ghana, for example, sections 30, sub-sections 2 of Act 612 that establishes the Bank of Ghana, specifying clearly a cap of 10 percent of the current year’s fiscal income, was violated by 528 percent to the tune of $3.5 billion. Central banks typically provide ways and means to advance as a tool to either cover budget deficits or finance direct intervention programmes of the government. In the case of direct intervention programmes, a central bank would typically use either cash reserves from double-digit CRR for the private sector (mostly) and public sector (sparingly) or apply quantitative easing to create money—that would typically cause cost-push inflation; if the amount of revenues in taxes derived from production does not equate to or exceed the liquidity that is pumped into the financial system, it would typically cause devaluation and depreciation of a currency (especially in cases where the central bank does not apply a free or managed float and pegs the rate to a fixed band) without an asset or reserve to back.
This same deficit financing mechanism, while it appeared as genius at the time in 2016, made the fiscal authorities fall asleep—migrating their fiscal strategy paper in the medium term expenditure framework from revenue to debt, not auditing the ‘claim’ on PMS consumption that doubled without data to verify, not fighting crude oil theft and the ensuing loss of associated gas feedstock for on-grid and off-grid power generation, and petrochemical feedstock processing requirements—that led to an expansionary monetary policy with deficit financing that went from 16.8 percent to currently 51 percent of the budget.
Between 2016 and 2023, the Central Bank of Nigeria created $53 billion in ways and means that violated the previous 5 percent of the preceding year’s fiscal revenues by 2,819 percent, the current 15 percent of the preceding year’s fiscal revenues by 939 percent, and the proposed 10 percent of the preceding year’s fiscal revenues by 1,409 percent. It was heartwarming when Mr Tokunbo Abiru (the erstwhile MD of Polaris Bank Limited) now the Senate Committee Chairman on Banking, proposed in the first draft that was presented to the Senate, a hardstop that will link the FG’s share of FAAC revenues with 3-month advance cap for ways and means collected by the Federal Government – that is both not supposed to exceed the proposed 10 percent cap as well as not graduate from advances (attracting 0.5 percent per month) to overdrafts (that is charged at mpr +3), while also keeping up with the IFRS provision in series 9 that compels the apex bank based on sections 50 of the same act to provide for expected credit losses at the end of the financial year, as impairments.
The proposal to mandate the Federal Government as a matter of policy to pledge their share of FAAC revenues that are collated and calculated by the Federal Account Allocation Committee (FAAC, monthly) was a masterstroke in protecting the government from itself as a means to prevent a repeat of the disaster that has seen the inflation rise to a 40-year high, the currency drop by 92 percent within the last decade, the per capita income drop by more than 50 percent, and the GDP growth rate drop below the 3 percent population growth rate. It is difficult to imagine that along with the Senators proposing an MDA oversight in Sections 12, Subsections 6, and 8 for a Joint Committee to monitor and implement recommendations of coordination between the fiscal and monetary policies (that violate the autonomy of the Central Bank), the Senate has also entirely removed from the amendment the sections that required the Federal Government to sign an irrevocable standing payment order (ISPO) on their FAAC account as a collateral to securing overdrafts for the purposes of financing deficits and direct intervention programmes.
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And this is especially considering the fact that the $53 billion apportioned for ‘ways and means’ that had serious impairments was hurriedly securitised as a 40-year government bond by the leadership of the 9th Senate without due probe and investigations to understand why there were such high double-digit impairments. As this bill goes on for public hearing at the second reading to get public opinion, it’s important that stakeholders in the financial community, especially the multilateral development banks (which are mostly creditors to the Nigerian Government), raise their objections to these willful omissions and insertions.
As much as I acknowledge that the management of the Central Bank has remarkably improved within the last 12 months, it’s important to state categorically that the fiscal authorities are not doing the apex bank any favours. And this is especially because, with poor revenue performance arising from high interest rates (that is unavoidably required), multiplicity of taxes (because of the drag in implementation of the proposed fiscal reforms), lack of stability in finding a forward yield curve for the exchange rate, inefficiency, and such poor management of government-owned enterprises (particularly as it concerns oil and gas), the government will most certainly fall back on the easy money of central bank overdrafts that comes with tough consequences whenever the terms as stipulated in the act guiding it are not obeyed. I hope the Senate Committee Chairman of Banking and his colleagues in the red chamber are reading this.
Kelvin Ayebaefie Emmanuel is an Economist.
