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Last week, the Central Bank of Nigeria scrambled to respond to a leaked tape that alleged a huge fraud had occurred at the apex bank. In the tape, the Governor of the Central Bank of Nigeria, Godwin Emefiele can be heard discussing the problem with his line reports and colleagues how to wrangle out of a balance sheet problem.

From the excerpts of the conversation, the Governor and his colleagues were faced with a financial loss that threatened to wipe out the CBN’s shareholders funds effectively rendering it insolvent. The CBN quickly issued a press release explaining what the conversation was about and claiming no monies were missing.

The N650 billion problem: According to the CBN, the discussion was about a N150 billion provision its auditors had asked it to take, which if acceded to would effectively wipe out its shareholders’ funds. The provision was part of the N650 billion loan which the CBN lent to State Governments as bailouts that had now gone bad (states are not servicing the loan as expected).

Just as commercial banks are forced by the CBN to take provisions on non-performing loans, the CBN was also asked to do the same by its auditors. Loan provisions is a financial requirement for banks to expense all or part of loans that have or likely to go bad thus reducing its profits. High loan provisioning can effectively kill off a bank.

CBN’s response: Despite the timorous tone observed from the phone conversation, the folks at CBN maintain in their press release that this was not a major issue. The bank claims its auditors “erroneously classified about N150 billion of these loans as bad, which negatively affected the Bank’s Balance Sheet and shareholders fund.” This, therefore, forced the CBN to provide evidence to its auditors that the loans will not go bad. The tone of their press release is construed to give the impression that phone conversations eventually led to a solution.


“It soon became clear that a State Government loan cannot be classified as “bad” or irrecoverable” when the State still exists and getting FAAC allocations. The Bank then reached out to the Federal Ministry of Finance and they jointly gave comfort to the auditors who accepted in writing that these monies would be repaid. On this basis, the auditors reversed the negative entry and the certified that the CBN’s 2018 accounts were a true reflection of the State of Affairs.”

In a nutshell: CBN is claiming that the loans that the auditors had asked it to provide for cannot be classified as bad because the Federal Ministry of Finance has confirmed that it will repay the loans on behalf of the states by deducting the money from the monthly Federal Allocations paid to the states. Whether this will happen in reality is up to the politics of the day and how the government decides to repay the CBN.

But……If this were the case, how does one explain the tense tone of the conversation? An obviously flustered CBN Governor, Godwin Emefiele could be heard on the phone faced with very limited options on how to get out of the situation. They were facing a balance sheet crisis and the option that they eventually chose as mention in the press release (getting the Ministry of Finance to guarantee the loans) seemed implausible as it would have required Federal Executive Council approval.

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CBN’s buffer: Despite the imminent threat of an eroded shareholders fund, the CBN does have one major act it could pull. By simply devaluing the naira it will revalue its shareholder’s funds by as much as a trillion. It probably did this already as can be heard somewhere in the tape, so there is limited room to go that route again except it wishes to devalue the naira.

The optics: The last 4 years of the management of the Nigerian economy by the CBN has largely been characterized by bailouts, interventions, and economic subsidies. A cursory look at the CBN balance sheet of 2017 shows it has spent over a trillion naira artificially supporting parts of the economy that may have been better served with more market-driven policies. Each of these expensive actions exposes the CBN’s balance sheet to losses that cost more than it attempts to save.

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  • AMCON – The country’s bad bank still owes the CBN over N3.8 trillion in debts (check page 32 of the link) that it may never ever repay. If the CBN decides to start taking provisions on this debt then it could face a grave balance sheet crisis larger than loans to states.
  • OMO Sales: The CBN has sold about $36 billion (up 150%) to defend the naira in 2018, according to its activity report of 2018. This was followed by another N22 trillion (up from N11.3 trillion in 2017) in Open Market Operations Sales to banks and investors at an astonishing cost of N2 trillion to the economy. In other words, the CBN mopped up Naira from the economy at a cost of N2 trillion. Economic theory suggests the less naira chasing the dollar the lower the pressure on the exchange rate.
  • More bailout: As we approach swearing-in of state governors, the recent minimum wage bill signed into law by the government will be expected to be implemented. This could mean more bailout by the CBN.

Future trouble: Where does this take the CBN and the economy? A devaluation could be on the cards if the revenue profile of the country does not improve. The CBN surely cannot afford to continue to burn its balance sheet to keep the exchange rate stable and keep states afloat (except it wants to print money).




  1. Ever heard of the Mundell-Flemming Trilemma. Well, that’s what we’re in thanks to the CBN. Devaluation of the naira may hurt us in the short term but in the long term, it’ll do the economy a lot of good.

    It’s best certain things are subjected to market forces rather than interfering… Interference that artificially adjusts what should be subject to the law of supply and demand.

    • Yes, who cares about the loss of value anybody forced to have naira interests at the time of the devaluation, who cares about people’s life savings? I guess they are stupid for saving in their own currency, let them follow supply and demand!


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