29 August 2016, Lagos – Nine of Nigeria’s money Deposit Banks were directed, last week to immediately remit NNPC funds of about $2.12bn currently retained by these banks into the oil Corporation’s Treasury Single Account with the Central Bank of Nigeria.
The latest directive, dated 23/08/2016, however seems to be a reversal of an earlier approval dated 14/09/2015, from the office of the Account General of the Federation, for CBN to exempt some Agencies from compliance with a Central Treasury Single Account with the CBN. The AGOF’s circular confirmed that the thirteen exempted agencies are “profit oriented government business entities that pay dividends to the federal government of Nigeria”; according to the Accountant General, in another circular, such companies included NNPC, PHCN, Nigeria Railway Corporation and others.
Consequently, the ‘indicted’ banks insist that the Accountant General’s approval, cited above, absolved them from any wrong doing for domiciling NNPC’s deposits; furthermore, the banks also maintain that there was already an agreed timeline for the remittance of such funds to the TSA. Nevertheless, in August 2016, the CBN suspended 9 banks from further dealing in foreign exchange transactions until they remit the public funds in their custody into the TSA. The suspended banks included UBA (with $530m), FBN ($469m) and Diamond Bank ($287m) of NNPC and affiliate funds.
It is uncertain how this issue will be resolved, but the obvious questions must be, whether or not these banks can readily return the cash, and what would be the impact if they did? Instructively, however, we must recognize that idle funds in bank vaults are clearly anathema to professional banking practice. Nonetheless, if unexpectedly, these NNPC deposits were simply kept sterile, the funds should be readily available for immediate transfer to CBN.
Nonetheless, a forced instant withdrawal of over $2bn from the nine banks may create a dangerous ripple impact on the entire domestic banking system’s liquidity. Worse still, the parlous state of Nigeria’s economy may make it an expensive and daunting challenge for these banks to expeditiously raise the required funds from the international money market.
However, the latter realization that CBN’s latest directive may induce systemic distress in the banking sector, with a collateral contraction of the wider economy, the Apex bank may ultimately become inclined to review the procedure and timeline for withdrawing such NNPC’s funds from commercial banks.
Although the banks have not denied custody of over $2bn of public funds, but they however, allege that the CBN conversely also owes the banking consortium; about $3bn, these being funds they had committed to CBN contrived futures forex market.
This may be a tenuous gambit, on the part of the banks, because over N600bn worth of Naira liquidity will be instantly wiped off their books if CBN accepts the current Naira value in place of the $2.12bn NNPC deposits in their custody. However, the resultant liquidity squeeze in the money market could also induce distress in the sector and further spike the already disenabling domestic cost of funds well beyond 30%. Unfortunately, such outcome could eliminate any hope of economic prosperity.
In retrospect, however, when the TSA was fully implemented in August 2015, there were fears, in some quarters, that banks will be drained of liquidity, if all government agencies removed their funds from commercial banks and remitted same into the TSA with CBN.
- Henry Boyo, Vanguard