On the CBN audio leak

By Jekwu Ozoemene

No banking or finance professional who listened to that leaked audio between the Governor of the Central Bank of Nigeria, Godwin Emefiele, and some officials of the Bank would think money was stolen. What is however clear is that our CBN has a very big hole which it is finding difficult to cover.

I will go with the CBN’s explanation that it created N500bn out of nothing (non-tax ways and means) to lend to distressed states.

The real question is, “What is the impact of this N500bn on the balance sheet and income statement of the CBN?”

The N500bn money created to lend to states that do not have the capacity to repay will require a 100% loan loss provision on the income statement and a commensurate write-down on the risk asset portfolio.

I am not sure the argument that there is no default as the states receive FAAC disbursements is sufficient. This is like arguing that so long as Nigeria sells crude, it will not default on its debt.

The validity of both statements depends on the size of the debt, tenor of repayment, vis-à-vis the revenue profile (FAAC + IGR) of the beneficiary states and their net revenue available for debt service.

With this in mind then, we can agree that there is a “hole’’.

If you availed N500bn to states who are technically insolvent as bailout, first of all, how was it funded?

Was this non-tax ways and means?

If you created cash out of nothing (which is well within the CBN’s mandate) to fund states who lack the capacity to pay back, how will you treat such assets on your balance sheet? (Also, remember that you probably debited the Federal Government’s Ways and Means account with the CBN to create money).

More importantly, what impact does this newly created money have on the real effective exchange rate of your currency?

Is this not devaluation through the backdoor while using a set of Rube Goldberg monetary policy instruments to mop up the excess liquidity?

Having said that, we must give this CBN Governor 100% for creativity.

In the face of our insistence on maintaining the artificial N360/US$1 exchange rate and the reluctance of money deposit banks to lend to certain sectors that the Federal Government of Nigeria believes are crucial to its strategy, he came up with this N500bn to states, various CBN intervention funds in specific sectors, Paris Club refunds etc.

We can now understand why in its April 2019 Article IV report on Nigeria, the International Monetary Fund advised that the CBN should not be the one carrying the risk of all these intervention funds.

The N500bn bailout to distressed state governments is just one of its headaches. The news is awash with reports that farmers have been unable to repay loans from the various CBN and BoI Agric intervention funds.

Add this to default on other sector intervention loans.

Add this to maturing N5.3tn AMCON bond (which the current CBN administration inherited), that the underlying assets are virtually unrecoverable as since inception AMCON has only been able to recover about N1tn.

The Managing Director/CEO of AMCON, Ahmed Kuru, summarised the AMCON situation recently when he admitted that “even if you extend the life of AMCON for 20 years, it will not be able to recover all the loans”.

Based on this admission alone, the worst case scenario is that the CBN should be writing down N5.3tn of its capital. On the other hand, the best case scenario is that the recoverable portion of the N5.3tn is transparently determined while the CBN writes down the balance. This is probably why in its recent Article IV report for Nigeria, the IMF called for a timeline for phasing out AMCON.

So, rather than scramble to paper over the cracks (as these Non-Performing Loan provisions will surely come), the CBN should, as a matter of urgency, approach the Federal Government/Ministry of Finance to recapitalise the Bank.

You can imagine what writing down the AMCON N5.3tn bad debt outstanding obligations will do to the CBN’s capital of about N35tn. Add the N500bn loan to the states and other intervention funds on which obligors have defaulted.

Beyond that, it’s only in Nigeria that the Central Bank Governor is caught out scrambling and discussing in detail how to cover a bad position and we are still issuing a deodorised press release.

But then, these abnormalities are normalised in Nigeria.

Finally, the people who have the capacity to bug the phone of the CBN governor, and chose this time to release these audios, know exactly what they are doing.

My opinion is that the timing of the release means that it was targeted at influencing the re-nomination of the CBN governor.

Those who did this are not patriots.

These are people who are willing to create a crisis of confidence in the CBN and Nigeria, just so that they can get the CBN governor out of the way and create a better chance for their preferred candidate.

To avoid a further occurrence, government can still check them by recapitalising the CBN.

After all, whatever the CBN governor did, rightly or wrongly, was in service to the nation.

Dr. Jekwu Ozoemene, Port Harcourt, Rivers State