Nigeria’s central bank is printing money to keep the government afloat and alarms are ringing

For a while now, economists and finance types who follow the Central Bank of Nigeria (CBN) have been sounding a low intensity alarm about the CBN’s direct funding of the Nigerian government.
Between December 2013 and April 2017 for instance, the CBN’s “claims on the federal government” went from 678 billion naira to 6.5 trillion naira ($1.8 billion to $17.3 billion)—an almost 10-fold rise. These “claims” are made up of overdrafts, treasury bills, converted bonds and other such lending. For the most part, the issue has remained an obscure one that receives hardly any attention from local media.

But then, a couple of weeks ago, the CBN finally published the personal statements of the Monetary Policy Committee (MPC) members from the July meeting [PDF] and suddenly the alarm bells started ringing. The personal statement of Dr. Doyin Salami, a well-regarded member of the MPC noted for his straight talking, said the CBN was providing a “piggy-bank” service to the federal government. Specifically, he said [page 38]:

Perhaps the most challenging of the present characteristics of the economy in Nigeria is the adoption of a quantitative easing stance by the management of the Central Bank. Monetary data shows a sharp rise in the extent of CBN financing of the government deficit.

 Nigeria’s Central Bank has been printing money to fund the government’s spending. He quoted statistics that showed much of the rise in the CBN’s financing of the federal government have come since last December with its purchases of government bonds being the worst culprit with a 20-fold rise in 2017 alone. In effect, the CBN has been printing money to fund the government’s spending. The reason for this is, of course, clear—Nigeria’s government has not been able to recover in any meaningful way from the collapse in oil prices that has now entered its fourth year.

Salami goes on to explain a second order effect of increased government lending. To keep a lid on inflation, the CBN has to balance out the increased government lending with a tightening of the amount of cash banks could lend. It does this by raising the cash reserve ratio (CRR) of banks—effectively taking money out of circulation. Thus, the private sector is “crowded out” for the sake of the government.

That is, the government itself is making it practically impossible for the private sector to pay it the taxes it desperately needs by starving it of the credit it needs to grow. Completing the vicious cycle, the government must then borrow more to fund its spending. A few days ago, it announced plans to raise another $5.5 billion in Eurobonds which will inevitably raise its debt servicing costs.
A bigger problem with all of this is that it could very well be illegal. The CBN Act of 2007 in section 38(2) says [pdf]:

The total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the Federal Government.

One can thus do a quick check to see if the CBN’s lending has broken the law. In the prospectus to the government’s $300 million Diaspora Bond sold in June, it disclosed to the London Stock Exchange that its revenues for 2016 were 5.3 trillion naira [pdf, page 158]. In other words, the CBN could only have legally advanced the government 265 billion naira. The CBN’s figures clearly show it has blown through this limit multiples times over.

But this last week, the CBN governor Godwin Emefiele felt obliged to respond to the controversy, stating “categorically” that the central bank has not over-funded Nigeria’s government. “The government had, on its own, decided that all its funds in banks, both local and foreign currencies, should be moved into the TSA at the CBN,” he said.

Emefiele added: “If a customer of a bank has fixed deposits in an account and needs some spontaneous financing to meet his obligations, his commercial bank can allow him overdraw his account temporarily. That is what is happening.”

 Nigeria’s government has just not been able to come to terms with the adjustments it needs to make in the face of stubbornly low oil prices. Effectively, according to the governor, CBN was lending against the federal government’s deposits in its Treasury Single Account (TSA) with the CBN which currently stand at 5.2 trillion naira. The TSA is a mechanism whereby all cash resources of government ministries, departments and agencies (MDAs) are consolidated in a single account with the CBN. The policy had been half-heartedly implemented for several years but president Buhari finally expanded it to cover the entire government in 2015.

While it will be hard to legally question the CBN Governor’s explanation, it is worth understanding how the TSA works in practice using a personal example.

I recently had to donate to a government owned school in Nigeria for the purchase of some equipment for the students. I asked the school head to send me the school’s bank account details and they replied with a bank account that was clearly the personal bank account of the school’s head. I thought this was a red flag but they then explained why it had to be done that way.

Given that I wanted to make a charitable donation and the school desperately needed the funds, the school head explained that paying it into the school’s official bank account would mean the money was swept by the TSA mechanism to the CBN. The school would then need to go through the considerable bureaucracy of getting the funds back with no guarantee of success. Thus, to avoid this “problem”, they asked that I trust them with the funds by paying it into a private bank account.

This story illustrates the problem with the CBN Governor’s explanation—not all the funds in the TSA belong to the federal government but the CBN has effectively lent against all of it. If I had sent the donation to the school’s official bank account, it would have been counted as part of the balance of funds in the TSA and perhaps the CBN would have increased its funding to the government by a corresponding amount. But the money was only there till the school would have gotten it back for the original purpose for which it was donated.

This is not a distinction that is trivial–many government departments receive foreign funding to carry out projects, for example. The money is swept up into the TSA once received and then drawn down as costs are incurred often several months later. The large TSA balance is thus often subject to sizeable timing differences.

The TSA’s very survival is also threatened by political wrangling every other day. One of the demands by the Academic Staff Union of Universities (ASUU) before calling off their recent strike was for Universities to be excluded from the TSA regime. It was also the main reason they went on a warning strike last year. ASUU are by no means the only ones who are sworn enemies of the TSA. So far, the government has admirably stood its ground and refused to trade away TSA compliance. But as elections approach and various groups begin to make louder demands from a desperate government, it is not inconceivable that the TSA will be the sacrificial lamb that buys the government favors from one of its numerous clients.

These illustrate just how precarious Nigeria’s finances have become. The CBN is lending the federal government huge sums of money based on a suspicious interpretation of its banking mandate all constructed on ephemeral deposits.

Unlike Quantitative Easing by Federal Reserve and Bank of England that came with built-in mechanisms for their eventual unwinding, there is no clear-cut mechanism by which the CBN can roll back the expansion of its balance sheet.

Nigeria’s economy is by no means out of the woods. The government has just not been able to come to terms with the adjustments it needs to make in the face of stubbornly low oil prices. It has tried to soldier on, perhaps hoping that oil prices will rebound soon.

With growth in government revenues that can match the scale of the gap the CBN is currently funding all but impossible, it is time to end this CBN financing of the federal government before it drags the whole economy down with it.