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.
Hereafter, is an excerpt from an article titled ‘Does the CBN mastermind the brazen rape of the treasury’, published in the Punch and Vanguard Newspapers on the 07/12/2015 or visit www.lesleba.com. It reads as follows:
“However, the marginal impact of TSA on banks’ liquidity was revealingly underscored recently by the reaction of Nnamdi Okonkwo, Chairman of the Bankers Committee, on the effect of TSA and CBN’s reduction and harmonisation of Cash Reserve Requirement, for public and private sector bank deposits to 25% in October 2015; Okonkwo happily declared that, instead of liquidity squeeze.
“CBN (actually) made Nigerian banks richer as it returned N740bn to sector, and in the process made liquidity available to the banking system”, consequently, he concluded that “we can say that there is no alarm on account of moving TSA funds, and ‘I am (therefore) pleased to inform you that after the review and after compliance, industry liquidity remained strong”.
“Curiously, however, despite the confidence of the chairman of the Banker’s Committee’s that the harmonized 25% CRR had provided adequate market liquidity, on 24/11/2015, the CBN, inexplicably still set out, to create even more liquidity with further reduction of the harmonised CRR to 20%, down from the previous 25% rate that was adjudged by Okonkwo to have provided adequate liquidity cover for the banking sector!”
“Nevertheless, the CBN may contend that the further reduction in Cash Reserve Requirement in November 2015, was intended to ‘fully guarantee’ that banks will not be starved of liquidity, despite the earlier assurances by the Banker’s Committee chairman, of already subsisting ‘strong’ market liquidity.
However, it is inexplicable and worrisome that soon after the latest reduction of CRR to 20% and the additional market liquidity induced, the CBN again without compulsion forayed briskly into the market on 02/12/2015, to once more provide banks with the usual ‘awoof’ income, ironically, recently decried by the same Emefiele, of borrowing N129bn from banks via Treasury bills, under the guise of removing some excess funds from a market that is presumably burdened with a debilitating fever of surplus cash.”
What a cruel joke! You might say; but fast forward to August 2016 and compare the reportedly minimal liquidity impact of withdrawing of about N1Tn (now $3bn) with the introduction of TSA in August 2015 and the possible liquidity impact of withdrawing just $2bn NNPC funds from the banks in August 2016.
Instructively, as in the earlier case, the CBN could also turn around to boost any liquidity shortfall with another significant reduction of the current 22.5% mandatory cash reserve requirement (CRR) for banks, to below 10%, for example, if necessary, in order to once more restore adequate liquidity to fluidly drive the operations of the banking sector.
From the foregoing, it may be discerned that CBN’s capacity to modulate CRR can be exercised to avert or reduce market liquidity; however, this facility is usually at the awkward cost of inflation which could if mismanaged, spiral out of control beyond 30% to ultimately constrain growth and deepen poverty. The CBN will certainly not deny that the current almost 20% inflation rate is a clear symptom of the Apex bank’s failure to manage the poison of ever surplus Naira which invariably drives inflation and continuously threatens CBN’s mandate to enshrine a stable general price level.
*Henry Boyo – Vanguard