Many Nigerians find it difficult to understand the process that led to the naira dropping as much as 89 percent in less than a decade. In this article, I will aim to explain the process that led us here and why a simple provision that was added to the 2007 CBN Act by the former Governor of the Central Bank who is now the sitting Governor of Anambra, as part of his series of reforms post recapitalization of the Nigerian Banking system, renegotiation of Nigeria’s External Debt with the Paris & London group of Creditors, has turned out to be a curse more than a blessing that it was meant to be.
Prior to 2015, Nigeria had operated a fixed peg in its exchange rate mechanism that restricted movement in its currency to +/- 3 naira intra-day (within a particular trading day). Nigeria had an abundance of Excess Crude Earnings (that the leadership of the Nigerian Governors Forum refused to collapse into the just established sovereign wealth fund, and preferred to share across the federating units like small children eager to devour the chocolate their daddy got for them on his way back from work), the state national oil corporation was remitting about $3bn per month from oil receipts with the daily production volumes at between 2.2-2.5m barrels. NNPC as a holder of Nigeria’s 49 percent in the Joint Venture it formed to liquefy and export methane gas, and propane to Europe, returned about $3bn per annum in dividends and taxes to the government.
Post-2015, the new President decided that he was going to diversify the economy from Oil and gas and make non-oil and Gas exports the fulcrum of FX earnings. He also decided that he was going to change the mechanism for paying subsidy on petroleum products that was consuming around $3bn per annum on an estimated 33m litres of PMS consumed per day. Rather than continue the system of paying subsidies to independent marketers, he asked the state national oil corporation to adopt an oil swap program, where about 20 licensed companies were given the authority to lift crude oil and bring back PMS, as a system that achieved 3 things:
1. Ensured the estimated amount of PMS consumed was increased without empirical evidence to back the demand, from 33m litres to 66m litres per day
2. Ensured that only 43 percent of the derivatives gotten from refining crude oil were returned back to the country with little emphasis on the grade of octane and Sulphur and that the petrol was in contravention of international best practices for quality control and environmental care (carbon control)
3. Ensured that the monthly Oil receipts NNPC got as payments for exports to its account managed by the Central Bank with six (6) approved external asset managers, went from $3bn per month to nearly zero.
What happened in the coming years was that in a bid to meet up with its balance of payments for imports and exports, the CBN started drawing down the foreign reserves with the Central Bank taking loans structured as security lending from two of its external asset managers without a formal request to the National Assembly, the Central Bank doing FX swaps with deposit money banks on the foreign currency deposits held across banks as a temporary measure for liquidity. As revenues shrank for the government on dwindling Oil receipts from organized crude oil theft, the government raised debt financing for deficits that constituted 16.8 percent pre-2015, and that rose to 43.8 percent in 2022, the implication was that the debt servicing and finance costs rose significantly to 32.5 percent of the budget, external rating agencies downgraded Nigeria’s Local & Foreign Currency Issuer rating from Ba3 to Caa1 on rising Country Risk Premium and high Credit Default Swap Rates. The bill on the Central Bank honouring FX forwards for everything from Form A to Dividend and Capital Remittances to Commercial Letters of Credit (that negatively impacted the ability of commercial banks to maintain their clean line of credit with their correspondent banks) rose to $6.8bn.
The Government switched from using revenues generated through taxes and government-owned enterprises that was around 6.9 percent of GDP, to raising quick money from the Central Bank classified as ‘’Ways and Means’’. A provision contained in section 38 of the CBN Act of 2007. The challenge though is that this provision only allows the government to borrow 5 percent equivalent of the real revenues of its previous accounting year (even though this was hastily amended without proper consultations in 2022). The Government went from a limit of $500m to up to $53bn. In order to achieve this, the former Central Bank Governor raised the non-discretionary cash reserve ratio from 15 percent (which is the globally recommended average for Central Banks) to 32.5 percent, he raised the discretionary cash reserve ratio to 41 percent, mopped up public sector CRR that was collapsed from DMBs in 2015 when the government adopted the Treasury Single Account (TSA). The balances he could not complete from Public and Private Sector CRR, he relied on Quantitative Easing that enabled him to print cash the CBN didn’t have reserves to back, and this led to a sharp drop in the value of the naira, especially considering the sources for FX was dwindling on the expansionary monetary policy strategy that the government adopted. These monies were spent on budgetary support and direct intervention program that had impairments above 50 percent; for example, the Anchor Borrowers’ Program which was supposed to raise the output for food production in Nigeria recorded impairments of 74.6 percent on 1.4 trillion naira, in contrast to the 4.8-5.6 percent non-performing loan ratio book that the CBN recommends for the banks it regulates.
The issue here is this: Central Bank overdrafts bear a recurrent theme across economies that have failed in recent times: the Banque de Liban extended $43bn of the $143bn in public debt that the Government of Lebanon owes that represents 160 percent of its GDP in comparison to the $180bn that represents 36 percent of the GDP of Nigeria, and that is 4 percent below the 40 percent fiscal responsibility crises level.
Even though the Nigerian Government cannot account for how the Ways and Means were spent, the securitization was not market-based but involved the Government securitizing through a 40-Year Govt bond at 9 percent, which is at least 11 percent below risk-free rate (RFR), with a three-year moratorium, the government continues the indiscriminate violation of the new 15 percent limit without recourse to the law. It is also worth mentioning that the Central Bank of Nigeria being the entity that is owed money cannot act as a guarantor on a facility for which it’s the creditor and an interested party.
In Ghana for example, a violation of section 20 of 612 of the Act that establishes the Bank of Ghana, and saw the BoG lend $3.5bn that represents 523 percent of the previous year’s government revenues, saw the cedis drop by about 70 percent, leading to increases in the government debt obligations, that led to a technical default on interest payment to Eurobond Holders and consequent debt restructuring.
The interesting thing is that Nigeria’s current Chairman of the Senate Committee on Banking, Insurance & Financial Services was once the MD of a regulated Tier II Bank before his foray into politics. It is difficult to imagine that the 10th Senate with him as this Chief Oversight Head and the New leadership of the Central Bank has done little to amend the 2007 CBN Act with particular emphasis on section 38.
If the Central Bank was to follow the recommendation of the IMF to move its accounting framework from IPSAS to IFRS as a tool to ensure that expected credit losses for 12 months are covered in its capital losses that appear in the valuation column of its balance sheet until its realized P&L and switches to the current column, the CBN will be forced to provision for its exposure and have its net reserves in negative.
One of the reasons the Central Bank is struggling to attract fresh capital in USD which is desperately needed to clear outstanding forwards and stabilize the FX markets, is that Investors are not pleased with the blatant disregard for extant laws, and fear that it might prove difficult to get their monies out than it will be to bring it in. It is time to amend the CBN Act!