Published On: Tue, Sep 15th, 2015

Nigeria’s single treasury account set to trigger huge bank outflows

A landmark reform intended to improve transparency in Nigeria’s notoriously corrupt government departments is set to worsen a funding squeeze for the country’s banks as the economic woes gripping Africa’s top oil producer deepen.

A directive from President Muhammadu Buhari to be enforced Tuesday will require all federal revenue-generating institutions, including the opaque state-owned oil company, Nigerian National Petroleum Corporation (NNPC) to begin paying their revenues into a single treasury account (STA) instead of a web of largely untracked private bank accounts.

In a significant boost to Buhari’s corruption-fighting credentials, the move, aimed at addressing a decades-long lack of oversight in state revenue, is projected to see more than $6 billion of public funds transferred from banks to the central bank.

But financial analysts warn that such rapid outflows will worsen a looming credit crunch facing Nigeria’s financial sector, one of the chief concerns cited by JPMorgan last week when it yanked Nigeria from its influential emerging bonds index.

“If that happens in one day clearly what you’re going to see is significant shock in the system where there is a serious lack of liquidity and interest rates which are already very high will go even higher,” said an executive at one of Nigeria’s larger commercial banks.

“There is very little lending going on in the system and in this type of interest rate environment the economy is starved of credit and this affects the ability of companies to invest.”

Nigeria’s economy, battered by falling oil prices and emerging market turmoil, is also under stress as uncertainty mounts about the country’s fiscal direction under Buhari, who has yet to name a cabinet nearly four months after taking office.

Nevertheless, the president has directed all state institutions to shut down their accounts in the country’s more than 20 commercial banks. Several bankers in Lagos said the minimum amount that will have to be transferred by the banks holding government funds is more than N1.3 trillion, or roughly $6.5 billion.

Central bank governor, Godwin Emefiele, concurred with that estimate, saying the amount “could be something” like 10 percent of the N12 to N13 trillion in Nigeria’s banking system.

“The amount involved is very substantial and this will further tighten liquidity,” said Phillips Oduoza, chief executive of United Bank for Africa (UBA).

Oduoza added that the total amount banks such as UBA would be required to transfer was not yet clear: “Initially we were told it has to do with the government agencies that actually generate revenue, but now we are hearing it will involve all the accounts maintained by various government entities with the banks — not just revenue accounts.”

JPMorgan’s decision to remove Nigeria from its GBI-EM index last week has already triggered heavy outflows from the $2 billion of local bonds the index tracks as well as a broader stock market sell-off.

With implementation of the presidential order, even less money will be in circulation, adding to the upward pressure on domestic bond yields, said Mohammed Garuba, head of asset management at CardinalStone, an investment bank in Lagos.

Even before the JPMorgan decision, Garuba said yields were rising because of “aggressive selling” by Nigerian banks of government securities in anticipation of this directive taking effect.

In spite of the predicted financial fallout, analysts say the move, if fully implemented, is a significant step for Buhari. The 72-year-old former military ruler has pledged to root out deeply embedded corruption in a state that has failed to translate the country’s vast resource wealth into an improved quality of life for Nigeria’s 170 million people.

Razia Khan, chief Africa economist at Standard Chartered, said the reform would bring longer-term benefits: “This is a reform that should have taken place ages ago and the fact that it’s finally coming into place now is very important.” (FT)

 

 

 

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