By: John Danjuma Omachonu
The embattled Nigerian banking industry, typified by lacklustre supervision and alleged attendant insider related activities that assumed worrisome dimension, particularly in the last eight years may be heading for a major crisis if expeditious action is not taking to halt the drift, analyst have warned.
With crude oil production failing from about two million barrels in 2014 to less than one million barrels a day in 2022, revenue plummeted to a historic low starving the economy of the needed foreign exchange (FX) with consequences seen in falling external reserves and depleted excess crude account, (ECA).
Specifically, the Global service firm JP Morgan says the just released CBN’s financial accounts may have opened a can of worms leading to Provision of a shocking estimate of the country’s FX Reserve, stating that it is likely around $3.7 billion at the end of 2022 much lower than reported figures of about $30 billion.
The bank in its latest report on Nigeria titled “Nigeria: Reform Pause Rather Than Fatigue”, stated that the lower-than-reported FX reserve is the result of larger currency swaps and borrowings against the FX reserve.
However, it stated that this was arrived at based on partial information from the audited financial accounts, estimating that CBN’s net FX reserves were around $3.7bn at the end of last year, up from US$14.0bn at the end-2021
The bank, however, clarified it arrived at $3.7 billion by making some assumptions which if incorrect will change the figure in their estimates.
It acknowledged that CBN has remained profitable with a positive net assets (equity) position as of end-2022.
It also alluded to the fact that total assets have recorded significant growth over the past few years, up to NGN57.9tr (US$129.4bn), from NGN15.5bn (US$78.7bn) in 2015.
This was largely driven by significant fiscal financing of the government for which total claims on government rose to NGN30.1tr as at March 2023, from just NGN2.7tr in 2015.
However, the CBN’s short-term FX liabilities and obligations were the most talked about post the release and the main catalyst for the market sell-off.
The report summarized the bad aspect thus:
“Net FX reserves are significantly lower than previously estimated. Based on partial information from the audited financial accounts, we estimate that CBN’s net FX reserves were around US$3.7bn at the end of last year, from US$14.0bn at end-2021.
In arriving at said estimate we make a few assumptions which if incorrect would substantially
change the picture.
They include: (i) an addition of US$5.0bn in IMF Special Drawing Rights (SDR) to external reserves in order to arrive at total gross FX reserves of US$37.8bn, broadly
in line with the 30-day moving average of US$37.08bn previously published on the central bank’s website; (ii) adjusting the gross external reserves with three key FX liability lines that
include FX forwards (US$6.84bn), securities lending (US$5.5bn) and currency swaps (US
$21.3bn); and (iii) estimating currency swaps by backing out FX forwards and outstanding
OTC Futures balances from an overall aggregate published in the financial accounts.”
According to Chika Mbonu, financial analyst, the revelation would require CBN to come out and clarify the issue or what must have happened between late last year and now.
Mbonu, Arise Television analyst, who appeared on the Global Business program on Tuesday said, JP Morgan’s Interpretation has to be invalidated by CBN.
According to him, this is because the amount of a country’s reserves give confidence or otherwise to her currency
Explaining on the alleged liabilities or claims on CBN that may have depleted the country’s reserves, he said that, on currency swap, for instance, Banks have FX and CBN needs them urgently and the banks give it to CBN. What the bank has done is to subtract the obligations from FX assets.
On security lending, he says Diaspora Nigerians buy naira treasury bills for their dollars to CBN, to allow the bank ease the squeeze, which will be redeemed later at maturity.
Some other analysts say Nigeria is in a precarious situation as oil production quota of about 2. 0 million, but the country is battling with less than one million due to crude theft and pipeline vandalization.
Although, the development may have crippled availability of foreign exchange, monetary policy inconsistency and lack of coordination with fiscal policy measures have not helped matters, either.
Rising inflationary pressures with the attendant hikes in monetary policy rate, MPR, has continued to serve as disincentives to bank customers due to low interest rates on deposits.
It is also alleged that supervisory laxity and lack of effective monitoring on the part of regulators may have provided opportunities for insider related lending and other sharp practices within deposit money banks.
These have encouraged round tripping, a development that has brought about belated action by CBN of introducing new measures to stabilize the Naira against the Dollar.
Last week the acting Governor Folashodun Shonubi, stated during a chat with the State House correspondents on Monday, August 14, 2023, after a meeting with President Bola Tinubu at the presidential villa, Abuja, that CBN is poised to reverse the slide of the naira as it has lined up intervention measures that will be unveiled in the next few days.
He warned that the government will come down hard on those involved in underhand undertaking in the foreign exchange market, including the parallel market.
Shonubi affirmed that the president is concerned about the development in the market and its effect on the people, saying that he discussed what could be done to stabilize the naira with the president.
The acting CBN boss, though did not fusvkose measures to be taken, noted that the changes going on in the parallel market are not dictated by demands but by speculative attitude.
The meeting with President Tinubu may be due to the fact that he was rattled by the volatility in the foreign exchange market, which saw N950 exchanging for $1 on the parallel market.
In June, the CBN directed Deposit Money Banks to remove the rate cap on the Naira at the Investors and Exporters’ (I&E) Window of the foreign exchange market, to allow for a free float of the national currency against the dollar and other global currencies.
The development came barely two weeks after Tinubu promised to unify the nation’s multiple exchange rates.
Tinubu said after he was sworn on May 29, that his objective in adopting a floating exchange rate system was two-fold: first, to enable the naira to determine its actual value, and second, to narrow the gap between the official and parallel market rates, as well as curb profiteering by foreign exchange speculators.
But the consequences have been devastating and the terrible impact the falling rate of the naira is having on the living conditions of most Nigerians is excruciating.
Late July, the Economic Intelligence Unit (EIU) predicted a return to a managed control exchange rate system.
The analytical firm predicted a return to CBN controlled exchange rate due to the intense pressure the Naira has faced since the president announced a switch to a floating exchange rate.
The firm also based its prediction on the CBN’s seeming lack of experience in managing a floating exchange rate system.
Though Tinubu insisted that the decision to float the Naira was one he was ready to stick to, indications emerged last week that he may have a rethink.
MetroBusinessNews (MBN) gathered that a return to a managed control exchange rate system may be the only option to stem the free fall of the Naira.
The situation was precarious so much that the NNPCL had to borrow $3 billion from the Afrexim bank to shore up the nation’s FX Reserve, which is expected to ease liquidity in the exchange market.
As of June 2023, the country’s FX reserve stood at $34.1 billion hence JP Morgan’s estimate comes as a shock to many.
However, the report also noted it remained cautiously optimistic despite the recent stall in reform momentum.
The short comings, according to the analysts, are not peculiar to CBN, as other regulators, both in money and capital market are not completely exonerated, with Nigerians calling on the president to beam the searchlight on them as well.
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Recently, the Nigeria Deposit Insurance Corporation, NDIC, which like the Asset Management Corporation of Nigeria, AMCON, has also become so inefficient as most depositors of liquidated banks have been waiting for years before dividends are paid under excruciating environment.
For instance, the Corporation announced recently that it will begin investigating directors of the 183 banks that recently had their licenses revoked by CBN.
The Managing Director of the NDIC, Bello Hassan at a one-day capacity-building workshop for law enforcement agencies in Lagos said NDIC was planning to work with the Economic and Financial Crimes Commission (EFCC) and the Nigerian police, to investigate sharp practices by the directors of these defunct banks.
Hassan, represented by Henry Fomah, Head of the Legal Department of NDIC, revealed that through the collaborative efforts of agencies, many prosecution cases were currently ongoing at various courts, adding:
“As you are all aware, the Central Bank of Nigeria recently revoked the banking licenses of 183 MicroFinance Banks (MFBs) and Primary Mortgage Banks (PMBs) which may require you to be called upon to investigate some of the directors and officers of these institutions with a view to bring to book those found culpable in the collapse of these institutions.
“There are 25 ongoing investigations at the Nigeria Financial Intelligence Unit (NFIU), 11 with the EFCC and five concluded investigations with the Federal Ministry of Justice for advice and prosecution,”
The NDIC boss says this shows the corporation, as well as other government agencies, are on the right course through collaboration, adding it would bring to book errant directors, officers, and managers of these banks that led to their collapse.
But the questions on the lips of most Nigerians are, what happen to monthly, quarterly reports submitted to the regulators, how effective are the on and off-site examinations and how effective are the auditing firms and to what extent are the reports implemented?