08 April 2013, Lagos – The International Monetary Fund (IMF) recently concluded its 2012 ‘Article IV Consultation’ on Nigeria. The IMF, as part of its recommendations, suggested the winding down of the operation of the Assets Management Corporation of Nigeria (AMCON). This recommendation was apparently predicated on the need to curb what it described as ‘moral hazards and fiscal risks’.
We recall that Central Bank created AMCON to soak up non-performing loans (toxic debts), and stem instability and threat of collapse of the banking sub-sector with loss of depositors’ funds. The banks were consequently expected to become better positioned to offer improved services and boost employment by providing cheaper funds to the real sector, particularly the Small and Medium Enterprises, which are traditional drivers of economic growth.
Conversely, IMF supports the funding of critical areas of the economies of member countries and also serves as a ‘quasi headmaster’ of their fiscal policies and financial institutions, for example, “under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
A staff team visits the country, collects economic and financial information, and discusses with officials, the country’s economic developments and policies. A summary of the appraised report of findings is ultimately transmitted to the country’s authorities”.
In response to IMF’s recommendations, Mustapha Chike-Obi, Managing Director of AMCON did not deny the challenge of moral hazard or fiscal risk but noted as follows: “they commended Nigeria for fixing the banking sector and said it should wind down AMCON; but, I find it very surprising that an institution as serious as IMF would make such recommendation like that without telling us how to do it, and in what time frame, and what assistance they can offer to us to wind down.”
Furthermore, Chike-Obi sarcastically noted, “we are aware that IMF has its hands full on banking crisis all over the Euro zone that they have been struggling to resolve. Therefore, it is strange to hear such a comment about a country where the crisis has been resolved. It is part of our plans to slow down AMCON’s activities, but the comment they made is baffling”!
Fortunately, we do not require an extensive search for an appropriate arbiter between the IMF’s observation and AMCON’S criticism; fortuitously, the head of our current Economic Management Team is a renowned former IMF Vice President, who was also Finance Minister when AMCON was established!
Nonetheless, in the rest of this piece we will briefly examine the validity of IMF’s fears that the operations of AMCON may inadvertently become subject to abuse, and also ultimately deepen our debt burden with destabilising impact on fiscal stability. Incidentally, we had earlier echoed IMF’s apprehensions in our article titled “AMCON as Time Bomb” in October 2012. The following is an excerpt from that article….
”It is worrisome that AMCON appeared to have been stampeded to pay for those toxic debts before it even considered the need for proper valuation of the acquired assets; curiously, according to media reports, AMCON has only lately begun ascertaining the real values of the assets it acquired almost three years ago!
”Considering the widespread corruption and level of impunity and insider trading in the banking subsector, Nigerians will not be surprised if it is later revealed that AMCON may have grossly overpaid (rather than underpaid) for the redemption of some of these ‘toxic’ debts.
”In a related development, the House of Representatives also recently faulted the N140.9bn debt settlement deal between Femi Otedola, the Chairman of Zenon Oil, and AMCON, noting that the procedure adopted was suspicious and unacceptable.
”Indeed, the House Committee also questioned the rationale for the different methods adopted for loan valuation and expressed its disappointment that AMCON CEO, Mustapha Chike-Obi, could not satisfactorily defend the agency’s modalities! “The Legislature equally observed that the source of AMCON’s funding was far from transparent!”
Presumably, the Legislature never exercised any oversight on AMCON’s substantial loans! The preceding excerpts seem to corroborate the expressed fears in IMF’s Article IV report of the need to curb moral hazards and fiscal risk in the operations of AMCON.
In the same article under reference, we also noted, “Nigerians do not seem to recognize that the net product of AMCON’s redemption efforts is the deepening of our national debt and the perennial scourge of systemic cash surplus with the destabilizing outcome of double-digit inflation and interest rates and a prostrate economy.
Curiously, despite Chike-Obi’s caustic response to IMF’s observation, the banking sector has lately declared humongous after tax profits, while AMCON on the other hand, reported a N2370bn trading loss in 2012, and may require to borrow about $11bn from offshore creditors to refinance the N2000bn the agency had borrowed domestically to fund its acquisition of the banking sector’s toxic debts. Consequently, the AMCON Boss projected about 10 years to completely free the financial system of bad loans, and confirmed that AMCON would no longer serve as a lifeline to banks with bad loans.
Coincidentally, last week, the international ratings agency, Standard & Poor’s, reported that their studies portend increased losses between 2014 and 2016 in the Nigerian banking sector, even with the current wave of stupendous profits being posted. If this ‘prophecy’ becomes manifest, despite the readily canvassed ‘success’ of banking reforms, toxic debts will once more become problematic, and one wonders, whether AMCON would rescind its decision not to purchase more toxic debts!
Nonetheless, even if the promise of quality banking services and access to single digit cost of borrowing to the real sector remain unfulfilled, Nigerians would, regrettably, still have to bear the burden of servicing AMCON’s estimated N5tn debt portfolio for many years to come.
*Les Leba, Vanguard