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How Nigeria’s central bank lent $53bn to government and may crash the financial system
By Eniola Akinkuotu, Africa Report, 13 January 2023
Jan 16, 2023 - 12:15:27 PM

Because of high inflation, many had not predicted that the Nigerian central bank, led by Godwin Emefiele, would lower interest rates in March.

Just over a month before national elections, a mega financial scandal has emerged. Nigeria's central bank stands accused of making up to $53bn of illegal loans to the federal government, racking up unpayable debts and driving down the value of the naira.

At the end of last year, Nigeria’s public debt was over $172bn and the West African country was spending over 80% of state revenues on servicing its financial obligations, says the respected Debt Management Office.

It may get even worse, according to Adetilewa Adebajo, managing director of the Corporate Finance Group, who accuses the central bank of breaking the law and reckons Nigeria’s debt stock could total $200bn if the bank’s balance sheet is investigated further.

Nigeria’s debt service to revenue ratio, one of the worst in the world, could hit 116% in 2023, according to the IMF.

Former central bank governor Lamido Sanusi warned in October that the government has been borrowing to repay the interest on its existing debt pile and has done so by printing money – driving up inflation and crashing the value of the naira.

    These policies have been tried again and again in different parts of the world and they have failed

Under its current governor, Godwin Emefiele, the central bank has lent over $53bn (N23.72trn) to the federal government since 2015.

The policy is leading to financial meltdown, said Sanusi.

“You have seen Idi Amin’s Uganda, Mugabe’s Zimbabwe and Chavez in Venezuela. These policies have been tried again and again in different parts of the world and they have failed and for the last seven years Nigeria has continued to pursue them.”

Illegal business

The loans were made under a facility known as ‘Ways and Means advances’, but the constitution stipulates they should not exceed 5% of the previous year’s state revenues.

The government is now paying the central bank 19.5% a year interest on the $53bn (N23.72trn) loan.

However, Nigeria’s annual revenue in the last seven years has not exceeded N5trn: this means legal advances under ‘Ways and Means’ should have been capped at N250bn a year. All central bank lending in excess of that cap would have been unlawful.

    There has been a fundamental lack of understanding of how economies work

“Where are we today – N21trn? The central bank has lent this government 100 times what the limit is,” said Sanusi.

Complicating the picture is that Emefiele – the man at the centre of this drama – is missing in action. After reports that the Department of State Services (DSS) was planning to arrest Emefiele on charges of financing terrorism and economic crime, Emefiele left the country.

READ MORE Nigeria: CBN governor Emefiele changes cashless policy after escaping arrest

The Federal Court in Abuja threw out the DSS’s application for a warrant to arrest Emefiele for lack of accurate information. For now, the whereabouts of the bank governor, who is due to chair a monetary policy meeting in Abuja on 23 January, remain a mystery.

Legitimate loan?

On 28 December, President Muhammadu Buhari asked the national assembly to legitimise the central bank’s $53bn loan by converting it into a 40-year bond with a 9% interest rate. According to Buhari, that would save the government $4bn a year in interest charges.

However, tempers flared over the jumbo loan and how it has been spent. George Sekibo, an opposition senator, argued that the central bank loans were illegal and Buhari’s request would breach the Central Bank Act.

Senators rejected the president’s plan despite plaintive appeals from Senate President Ahmad Lawan, an uber loyalist of Buhari.

It was the Governor of Edo State, Godwin Obaseki, a member of the opposition Peoples Democratic Party (PDP), who sounded the alarm almost two years ago, stating that the central bank had printed about N60bn to top up the federation account.

At the time, the central bank, the finance ministry and the ruling All Progressives Congress (APC) all rubbished Obaseki’s claims. Nevertheless, they are coming back to haunt the Buhari government.

Falling currency

The fight over the central bank lending is no academic argument – it is an existential threat to Nigeria’s financial system.

Should the government default on its repayment on the $53bn loan, it could trigger a meltdown, according to the central bank.

    You cannot increase the supply of naira relative to dollars, relative to production and expect prices and exchange rates to remain stable.

“The direct consequence of the central bank’s financing of deficits are distortions or surges in [the] monetary base leading to adverse effect[s] on domestic prices and exchange rates,” say officials on the bank’s website.

Those risks include hyper-inflation and the naira going into free-fall.

Sanusi explained that the ways and means mechanism implies that the central bank is printing money without a corresponding increase in production or foreign reserves.

“One thing about the central bank is that it is the only institution that has power to create money ex nihilo, out of nothing, the way God created the world. You don’t need to tax, you just sit and create. The central bank can just create N2trn and put it into your account and that is N2trn into the economy,” he said.

“If you create N2trn and your dollar reserves are not increasing, your naira is devalued; but the problem we have had is that at the time we were expanding the balance sheet of the CBN, we were also saying we wanted a stronger currency, but it is not possible.

“You cannot increase the supply of naira relative to dollars, relative to production and expect prices and exchange rates to remain stable. There has been a fundamental lack of understanding of how economies work,” said Sanusi.

Cart, meet horse

Dr. Muda Yusuf, chief executive of the Centre for the Promotion of Private Enterprise, tells The Africa Report that the $53bn central bank loans were illegal and inimical to economic development.

“The printing of excess naira has affected the exchange rate and inflation,” says Yusuf.  “There was no disclosure to the National Assembly, [which was] supposed to [happen]. Now the government is admitting to have spent N22trn without appropriation.

“They are now coming back to meet the National Assembly for approval. This is putting the cart before the horse. It is a breach of the constitution by the central bank and the government,” says Yusuf.

The National Assembly is due to resume on 17 January, but with the ruling APC with substantial majorities in both chambers, the assembly is unlikely to sanction the president.

Even so, with elections approaching, opposition parties will try to exploit the scandal. They will be putting some tough questions to Buhari and the elusive central bank governor, Emefiele.

The scandal is likely to get heavily politicised. It’s logical that Bola Tinubu, the ruling party’s presidential candidate, has been distancing himself from Emefiele. Some of his advisors have told journalists that Emefiele would be an early casualty of a Tinubu government.



Source: Ocnus.net 2022