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CBN and the missed blessing of federal allocations

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CBN building

CBN building

The Central Bank of Nigeria the other day denied the charge by its immediate past governor that the Buhari administration owed the apex bank sums that exceeded the permissible limit. That denial read in part thus, “In line with practices that even the Emir Sanusi presided over, the FG has overdrawn another account at the CBN by about N1.47 trillion (debt) as at 2nd December 2016… the net balance of the FG at the CBN is over N1.19 trillion (credit).”

Two matters arise. Firstly, the CBN acted in breach of the principle of maintaining the Treasury Single Account by sidestepping the credit balance in the TSA to open another account which the Federal Government has overdrawn. The overdrawn account, as stipulated in the CBN Act, would attract interest charge of the monetary policy rate plus one per cent that would be additionally debited to the TSA credit balance. Consequently, the CBN risks the culpable charge of shortchanging and extorting the Nigerian people, owners of the TSA. It is wrong and unacceptable. The essence of the TSA is to show at a glance the cash at hand to enable government to settle its matured obligations as they fall due. If and only if matured debts outstrip funds in the TSA should the CBN lend just the shortfall to the Federal Government. Secondly, practices carried out in the past should not necessarily be repeated: they should be discarded whenever they are adjudged to be inappropriate. Hence the retort of “practices that even the Emir presided over” is not a valid defence.

Also at about the same time, the CBN, in fulfillment of its promise to float N200 billion treasury bills this year, swelled the national domestic debt (NDD) by mopping N8.3 billion to be sterilised purportedly in order to combat inflation. Notwithstanding the deepening recession, the NDD is neither invested to restore infrastructure that has become largely dilapidated nor utilised to defray personnel costs that have run into heavy arrears but merely sterilised. Since they began to be accumulated in 2003, a portion of excess liquidity funds is mopped initially for 91 days. The moppings are rolled over serially or restructured into 180-day treasury bills, which are then extended to 360-day bonds before they finally transform into FGN Bonds with maturity spanning several years. As at 9/8/2010, the 36 FGN Bonds (created from excess liquidity moppings since 2003) bore coupon (interest) rates ranging from 4.00 to 16.00 per cent and maturities of up to year 2030. Many FGN Bonds have since been added.

The raging excess liquidity originated following the demise of the Bretton Woods system of fixed exchange rates in 1971 when at the instance of the erstwhile regime (the practice under the democratic dispensation has been openly defended by the Revenue Mobilisation, Allocation and Fiscal Commission) the CBN has been withholding the Federation Account dollar allocations only to print fresh purported naira equivalent for disbursement to the tiers of government to finance their budget. It should have been self-evident abinitio to the top brass of the CBN and the erstwhile highly visible National Planning Office that the inherent proportionate apex bank deficit financing would unleash the excess liquidity which has persisted over the years. But after kowtowing to wrong political fiscal dictates, the CBN curiously failed to deploy sufficiently high cash reserve and liquidity ratios together with the traditional nominal interest charge as the principal tools to combat the inevitable deluge of excess liquidity in the system.

Despite the political source of the excess liquidity, there was/is no economic basis to pile up a fake national domestic debt for the federal treasury to redeem at unusually high-interest rates. But the erstwhile London and Paris Clubs of creditor nations saw a loophole for further subverting the national economy and got their alter ego, the World Bank/IMF, to second Ngozi Okonjo-Iweala to the Federal Ministry of Finance under the Obasanjo administration to midwife the Debt Management Office that focuses on expanding the NDD. In the 13 years of the existence of the NDD, deposit money banks prefer investing in the risk-free NDD to financing the real sector. And no thanks to economic recession, the NDD which accounts for over 90 per cent of federal debt service costs, eats up 40 kobo of every N1.00 revenue that the Federal Government makes. The NDD is a scam and not one kobo should go into redeeming and servicing that fake debt any longer. The NDD should be scrapped.

Now, far from giving rise to excess naira liquidity fraught with debilitating economic manifestations, Federation Account dollar allocations, upon proper conversion to naira revenue via DMBs, should produce low fiscal deficits, low inflation, a stable scarce naira value, robust inclusive economic growth and rapid development. For instance, the Federation Allocation in mid-November under the age-long wrong procedure resulted, among other adverse outcomes, in an increase of 8.3 billion in the NDD as earlier noted. From that allocation, it can be deduced from the 13 per cent Derivation Fund of N32 billion that in place of the withheld oil proceeds, the CBN used the so-called flexible exchange rate to print for disbursement to all tiers of government the sum of N246 billion to swell money supply and liquidity excessively.

By contrast, suppose the CBN proceeded appropriately in tune with the CBN Naira Reform Agenda announced in 2007, that would lead the CBN to disburse to the tiers of government their respective share of the withheld oil proceeds in the form of CBN dollar account balance statements for conversion to naira revenue via the forex market at, let us assume, the same exchange rate used to print N246 billion taken from the money supply volume before mid-November. Consequently, the scourge of excess liquidity along with accumulation of fake NDD will vanish.

That is the painless road to the long-elusive low inflation, stable/realistic naira exchange rate and production-friendly low lending rates. And behold the vista of the blessing of Federation Account dollar allocations as well as beneficial management of the economy. The Buhari administration should end the self-imposed four decades-long mismanagement of the economy now.



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