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Economic mismanagement in retrospect

By Henry Boyo

What you are about to read is a true report of the gross impunity that has largely characterised decision making on those matters which affect our nation’s treasury; ironically, such gross mismanagement has lately been extolled as best practice. Please read on.

”Media reports at the end of July 2007 confirmed that the Presidential Committee which probed the $480 million which the CBN invested in the African Finance Corporation (AFC), has completed its investigations.   After what appeared to be a painstaking audit exercise, over three months, and spanning three continents, the Committee Chairman, Tunde Ogunshakin, disclosed that CBN’s equity contribution was actually $462.923 million.

CBN building
CBN building

However, the Committee noted that a decision for such investment should have required approval of the Federal Executive Council and consequently “frowned at the enormous powers of the CBN Board and recommended that the CBN Act be amended to reduce them”Daily Independent 23/7/08.

The above notwithstanding, the Committee condemned the sourcing and use of funds by the AFC and revealed that the CBN funded the AFC investment with loans from the sale of government treasury bills!  The Committee further noted that all funds were invested in money market instruments in Nigeria but described the style of operation “as round-tripping at best and money laundering if viewed from a criminal perspective”

Instructively, the ubiquitous instruments of treasury bills and federal government bonds are the CBN’s favourite tools for controlling the omnipresent scourge of excess liquidity when distributable dollar revenue are substituted with Naira allocations every month.  Now, it is no more a secret that banks’ profits become bloated by the enormous profits they continue to make from the shenanigans of collecting government’s deposits for free while lending back to government at atrocious interest rates.

This practice of idle loans cost Nigeria close to N400bn in 2007 and indications are that debt service charges may approach N800bn in 2008 (it is almost N1000bn in 2015).  Clearly, banks are the prime beneficiaries of the juicy rewards from such risk-free investments which make no contribution to economic development; no wonder the banks pay little attention to supporting the real sector with credit.

Until the bubble of AFC scam burst, the CBN had always maintained that the funds accumulated from such reckless government borrowings were simply sterilized or in layman’s language stored in CBN vaults as idle funds to restrain the public and the real sector from accessing these funds to fuel inflation.

We now know better, as the Presidential Committee confirmed that part of these ‘idle’ funds was actually diverted into funding the AFC.  However, since the AFC equity was denominated in dollars, the CBN obviously went into the forex market with over N50bn (enough capital base for two banks) to source for the dollar equivalent from banks and Bureau De Change (BDC)!

It is inexplicable that the CBN which currently sits on an idle pile of foreign reserves of almost $60bn would resort to the lowly BDC to source dollars, at higher cost, even when the prime source of BDC’s dollars is also the same CBN  “What is going on here?”  You might ask!  We may wonder also that the CBN against national interest also, sold over $5bn to BDCs from January to June this year!  Has anyone ever heard of the Bank of England or the US Federal Reserve allocating forex directly to BDCs on their high streets?

Nevertheless, what benefits accrued to Nigerians from these CBN’s escapades? Well, in an open letter published in the media, Austin Ometoruwa, the recently suspended Chief Operating Officer of AFC, confirmed that the “AFC … sought to optimize earnings … by investing part of its short term naira instruments, thereby taking advantage of higher naira interest rates versus those for US dollar deposits”.

Polymer naira notes

(Vanguard pg. A3 4/8/2008)!    In simple English, this implies that the AFC dollars found its way back into the Nigeria money market, where it was reconverted to naira, presumably through banks and BDCs so that the resultant naira sums were used to purchase government’s treasury bills which had yields of over 10% compared with less than 1% for such risk-free instruments abroad! Ultimately, the AFC repatriated profits in excess of US$30m from this sleight of hand within its first year of operations.

Thus, the AFC with Soludo, the CBN Governor, as life Chairman became a major beneficiary of the high interest rate regime in Nigeria!  Ironically, the real sector and patriotic Nigerian manufacturers meanwhile continued to decry the excruciating burden of high interest rates and the adverse effects on production and employment.  Ironically, any attempt to reduce the costly burden of excess liquidity would be against the interest of the AFC in which our own CBN Governor is the Life President!

I have maintained that the payment of dollar allocations to the three-tiers of government will tame the rampaging ghost of excess liquidity and strengthen the naira with low rates of interest in tow, but again, such salutary results would not favour the parochial interests of any rentier venture such as the AFC! Some analysts have suggested that the demand for immediate refund of the $460m equity to the Nigerian government probably contributed to the instability that ultimately brought the Nigerian Stock Market to its knees between 2008-9.

Reports already confirm that one of the Nigerian banks involved in this scam had been indicted in the US for money laundering, and made to pay a fine of about US$15m. In a worst-case scenario, the AFC should have equally been made to refund the over $30m profit it made from purchasing CBN Treasury bills with government’s funds as readily implied by the erstwhile AFC CEO.

It would be necessary and revealing for the Presidential Committee to be given a fresh brief to also investigate CBN’s acclaimed largesse of $7billion to 14 Nigerian banks as compensation for beefing up their capital bases, notwithstanding that it has become apparent, lately, that these acclaimed feats were made possible by the insidious opportunities provided by the same CBN for banks to lend their deposits to customers who will invest the funds in the same lending banks!  Instructively, not long after the receipt of the $7bn, the fortunes of banks crashed and nothing has since been reported on the integrity of this loan or how much the banks have so far paid as interest to CBN. If the EFCC finds nothing criminally wrong in all this, it would have done disserve to its image as a serious fighter of economic and financial crimes.

The above is an excerpt of an article first published on /08/2008.

Save the Naira, Save Nigerians

 


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.