The CBN Files: What happened in 2020?

This week on 1914 reader, we are continuing our series of posts on the recently released financial statements of Nigeria’s Central Bank. They will continue to be a mixture of analysis, opinion and guest posts. There is a lot of information in the accounts and we don’t believe that a single post can do justice to them.

A Quick Recap

In our previous post, we analysed the sources of income that allowed the CBN to cover the N2 trillion spending and accounting charges in its 2022 income statement. What emerged was the extent of the CBN’s relationship with the Nigerian government and how they both relied on each other for their needs.

The sheer amount of lending that the CBN advanced to the government led us to wonder where exactly the CBN got so much money to lend to the government. The conclusion was straightforward enough — it was a combination of the CBN seizing large chunks of money from the banking system via CRR, issuing a very soapy amount of OMO bills and, most incredibly, recycling the government’s own deposits back to it in the form of eye-wateringly expensive loans.

Before 2022

But we only looked at the 2022 accounts in those posts and as we saw, while the overall size of the ‘overdraft’ to the government was more than N23 trillion, only N4 trillion of that was added to the balance in 2022. So we probably need to go back in time a bit to see how this has built up and maybe find other interesting things to note.

For this post, I want to focus on 2 aspects of the liability side of the balance sheet i.e. the items we previously identified as being the sources through which the CBN funded its lending to the government. For now we will ignore the OMO funding and concentrate on the CRR and Government deposits lines.

When we pull out the numbers from 2013 to 2022, here’s what they look like:

CBN files

I apologise if you have to squint to read those numbers as I’m unable to make the photo any bigger.

First, the Special Bills line. As mentioned previously, the CBN was taking the CRR from the banks and paying ZERO interest on them. As the CRR amounts got bigger and bigger, banks started to complain at how much of their deposits were lying unproductive with the CBN. As was Emefiele’s way of doing things, he came up with a patch solution by giving banks these ‘special bills’ which paid a small amount of interest as a ‘palliative’ for their CRR pain. As you can see, this practice only began in 2020 and so we really should include it as part of CRR.

Here are the numbers in chart form (available in the same link above):

It’s pretty clear to see how things changed dramatically in 2020. CBN’s ‘capacity’ to fund the government doubled in that year from N11.6 trillion in 2019 to N22.7 trillion by the end of 2020. This is an astonishing rise and one that is difficult to understand. The government’s ‘cash’ went up by 50% and the amount of cash ‘sterilised’ from the banks more than doubled. Of course, with all that firepower newly available, the amount of lending to the government dramatically increased from N8 trillion to N13 trillion.

CRR had been growing over the last decade but not in a way that could not be explained by anything other than normal economic growth (it actually fell in 2015 and did not exceed the 2014 level again until 2018 in nominal terms).

The overdraft lending to the government tells a similar story. While the total amount grew quite quickly between after 2013 (this is mostly a Buhari effect), it was nowhere near what you might call the ‘funding capacity’. That is to say, in 2013 for example, while the CBN advanced a N384 billion overdraft to the government, this was only about 10% of the CRR and government deposits it had available to fund the loans. In fairness, oil prices had not yet crashed in 2013 (that happened in August 2014) so the government’s finances had not completely cratered yet.

By 2022, this ‘funding capacity’ had been maxed out to 92%. The Buhari government carried on spending as if oil prices were still at $100 per barrel and the CBN found increasingly reckless and ‘innovative’ ways to fund this spending. Does it really make sense that government deposits increased by 50% in 2020 at the same time as its overdraft borrowing spiked?

Tracking CRR

Given the dramatic jump in the amount of CRR collected by the CBN, we can do one more sense check of the announced CRR rates by the Monetary Policy Committee (MPC).

The final MPC meeting of 2019 was held in November of that year and the CRR rate was retained at 22.5%.

The first meeting of 2020 was held in late January and there the CRR rate went up to 27.5% (500 basis points)

The next meeting came in March 2020 where the CRR rate was retained at 27.5%

In the May 2020 meeting, the CRR rate was once again retained at 27.5%

In the July 2020 meeting, the CRR rate was retained at 27.5%

In the September 2020 meeting, there was still no change. The CRR remained at 27.5%

And in the final meeting of 2020 held in November of that year, the CRR was once again retained at 27.5%

Now to be clear, the growth in the amount of CRR rates may not necessarily track the actual amounts sterilised for a number of reasons. One of them is that Emefiele applied the CRR in a very capricious and discretionary manner. Some smaller banks actually had 100% of their deposits sterilised by CRR while some banks who were friendly with the CBN Governor had a lower rate than the official one applied to their deposits. The other reason is somewhat obvious. If the amount of money deposited into banks somehow grew dramatically, then a small increase in the rate could have a dramatic effect in the actual amounts sterilised.

But all told, in a situation where we’ve seen a big jump in CRR from N5.2 trillion to N9 trillion in a year, we should expect to see an increase in CRR rates driving that growth. By the way, in the final meeting of 2018 in November of that year, the CRR was also retained at 22.5% meaning that it did not change at all in 2019 and only increased by 5% in 2 years.

So what happened in 2020?

To what, then, can we attribute the dramatic growth in CRR funds and government deposits that happened in 2020 which allowed the CBN to dramatically increase lending to the government?

Here, I can only speculate and offer my own theory. It was in 2020 that the CBN ramped up money printing for the government. The method by which it was done (how I think it was done) pushes this theory far out to levels for which I will need evidence that I don’t have.

So I shall leave it at that.

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