Nine of Nigeria’s money Deposit Banks were directed, last week to immediately remit about $2.12bn NNPC funds currently domiciled with them into the oil Corporation’s Treasury Single Account with the Central Bank of Nigeria.
The latest directive, dated August 23, 2016, however seems to be a reversal of an earlier approval dated 14th September, 2015, from the office of the Accountant General of the Federation, for CBN to exempt some government departments and Agencies from domiciling their income and transactions in 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; notwithstanding, the banks maintain that there was already an existing timeline for the remittance of such funds to the TSA. Nevertheless, in late August 2016, the CBN suspended 9 banks from further participating in the lucrative foreign exchange market 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’s 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 on the banking sector if they did? Instructively, we must recognize that idle funds in bank vaults are clearly anathema to professional best banking practice. Nonetheless, if unexpectedly, these NNPC deposits were simply kept sterile, the funds should be readily available for immediate transfer to CBN. 

Conversely, a forced instant withdrawal of over $2bn from the nine banks may create a dangerous liquidity ripple on the entire domestic banking system and significantly spike interest rates to make domestic borrowing a risky option. 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 liquidity stress in the banking sector, with a collateral contraction of the wider economy, the Apex bank may ultimately become inclined to again review the procedure and timeline for withdrawing such NNPC’s funds from these banks.

Nevertheless, there are indications that the CBN conversely also owes the banking consortium about $3bn, being funds they had committed to CBN’s 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 committed to the forex future’s market in place of the $2.12bn NNPC deposits in their custody. However, the resultant liquidity squeeze in the money market may induce distress in the sector and further spike the already disenabling domestic cost of funds well beyond 30percent. Unfortunately, such outcome could eliminate any hope of economic prosperity.

In retrospect, however, when the implementation of the TSA commenced in earnest in August 2015, there were also 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; the excerpt is 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 25percent in October 2015; curiously instead of the dreaded liquidity, Okonkwo had unexpectedly elatedly declared that:

"CBN (actually) made Nigerian banks richer as it returned N740bn to the sector, and in the process made liquidity available to the banking system", consequently, the Banker’s Chairman 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".

“Sadly, however, there is still no assurance that the strong liquidity adequacy, reported by Okonkwo would reach the real sector, as the CBN, inexplicably, re-entered the money market soon after the TSA enforcement and CRR harmonisation, to once more crowd out the real sector by borrowing and sterlising hundreds of billions of some of the evidently still troublesome systemic Naira surplus.”

“Ironically, however, despite the confidence of the Bankers Chairman that CRR harmonized at 25percent had provided adequate market liquidity, the CBN, inexplicably still set out, on November 24th, 2015, to make even more liquidity available with further reduction of harmonised CRR to 20percent, down from the previous 25percent rate that was adjudged by Okonkwo to have already provided adequate liquidity cover for the banking sector!”

“Nevertheless, the CBN may contend that this further reduction in Cash Reserve Requirement, was intended to 'fully guarantee' that banks will not be starved of liquidity, despite the earlier assurance of already ‘strong’ market liquidity by the Banker’s Committee chairman. However, it is ironical and worrisome that soon after the latest reduction of CRR to 20percent and the additional market liquidity it induced, the CBN without compulsion again forayed briskly into the market on 2nd December 2015, to once more provide banks with the usual 'awoof' income, by borrowing N129bn from banks via Treasury bills, with the same objective of removing perceived excess funds from a market that is presumably already burdened with a debilitating fever of surplus cash.” 

“Ironically, the CBN Governor, Godwin Emefiele recently had cause to decry this same voracious appetite of banks for the rich easy pickings from such government debts rather than active support the real sector as expected.”
What a cruel joke! You might say; but fast forward to August 2016 and compare Okonkwo’s report of the minimal liquidity impact of withdrawing, about N1Tn (now $3bn) with the implementation of TSA in August 2015 and the potential 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 perceived liquidity shortfall with another significant reduction of the current 22.5percent mandatory cash reserve requirement, if necessary, to for example, below 10percent, in order to once more restore adequate liquidity to fluidly drive the operations of the banking sector, even though as in the past, the cash injection may be followed by more Treasury bill auctions by the CBN.

From the foregoing, it should be evident that CBN has capacity to modulate CRR to boost or reduce market liquidity; however, apart from obnoxiously increasing government debt and crowding out the real sector, if mismanaged, this facility usually comes also with an awkward cost of inflation which could further spiral out of control, even beyond 30percent to ultimately constrain growth and deepen poverty. The CBN will certainly not deny that the current near 20percent 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 threatens CBN’s mandate to enshrine a stable best practice general price level, on which real economic growth and industrial competitiveness can be founded.