CBN: From Debt Headaches to Reserve Migraines

The 2022 financial statements of the Central Bank of Nigeria (CBN) have whipped up emotions ranging from the fast and fierce beer parlour conversations full of sound and fury, signifying nothing, to sober and reflective discussions of corporate boardrooms and public offices. The numbers have been dissected, reviewed, and masticated, with little or no source of comfort except for the fact that matters could have been infinitely worse. According to an analyst, ‘we had always suspected that the CBN’s accounts would be misty blue, with shadows of grey clouds, but what we have seen appears to be signs of darker weather, maybe not a thunderstorm but certainly a windy drizzle, as net reserves are roughly 55% of total foreign reserves, meaning that 45% of the country’s foreign reserves cannot be touched. The reserve tightness is far from looking like a disaster but close to looking like a bad headache.’ 

The CBN numbers threw a few other curve balls, including the actual size of the nation’s foreign reserve. While the audited account by the end of December 2022 reported external reserves at US$32.4bn (including Gold Bullion of US$1.3bn), CBN’s website indicated a reserve of US$37bn on December 31, 2022, thereby appearing to overstate the reserves by a possible US$4.7bn. The discrepancy may have stemmed from factors like the US$7.5bn in external reserves pledged to Goldman Sachs and JP Morgan in exchange for an accumulated $15bn loan; when added to the foreign currency forward payable of US$6.8bn, the actual reserves were effectively lowered to US$18bn. Analysts question the decision of the Federal Government (FG) and the CBN to undertake foreign loans without legislative assent or an appropriate update by the Debt Management Office (DMO).

The report also confirmed that CBN’s overdraft to the Federal Government amounted to N23.18trn. The overdraft size exceeded the statutory limit of Ways & Means by N22.9trn, or above the legally permissible 5% of FG’s previous year 2021 revenue. The CBN reported a nominal income of N1.9trn on this overdraft, raising questions about the FG’s borrowing cost (MPR +3%) under the arrangement. Also, from the report, Credit losses by the banking sector regulator rose by 76% to N875bn; though the specific assets facing impairment were not outlined, the N1.09trn Anchor Borrowers Programme (ABP) was fingered as a prime suspect. Another gnawing problem was the significant rise in staff loans, which saw a 200% leap from N13.7bn in 2014 to N41 bn in 2022. The loan figures did not include a breakdown of beneficiaries. Analysts have raised heckles at the lack of transparency of internal loans given to staff, insisting that a schedule of the category and amount of loans given should have been made public. The earlier analyst noted that ‘the CBN’s overdraft to the federal government was understandable considering a COVID-19 and post-COVID-19 period of preventing the economy from spiralling into a recession, but the size of the un-ceilinged overdraft suggests that fiscal authorities saw the CBN’s Ways & Means accommodation as a busted Las Vegas gaming machine gone wacko, all a gambler needed to do was pull the handle, and cash would come tumbling out like water from a broken faucet, it was perhaps the next best thing to having an oil pipeline passing through your backyard!’

He pointed out that while non-state actors in the Niger Delta were engaged in oil piracy, ‘the FGN was taking joy from cash hijacking, with the CBN as an obliging and unprotected piggy bank.’

The CBN’s 2022 results may have allayed fears of the regulator’s insolvency; however, analysts question the Bank’s refusal to publish its results annually in violation of Section 51 of the CBN Act. The section states that after the audit of the annual accounts, the CBN should submit copies of the statements and the auditor’s report to the President, who would lay them before the National Assembly.

Key Financial Highlights

• Net interest income rose by +74.86% from N1.04trn in 2021 to N1.83trn in 2022 due to increased interest income against interest expenses.
• Total operating income rose by +28.94% to N2.15trn in 2022 from N1.67trn in 2021 despite the -50.17% decline in other operating income. 
• Total operating expenses rose by +7.56% from N1.13trn in 2021 to N1.22trn in 2022 due to the rise in currency issue expenses and personnel expenses.
• The institution’s profit before tax rose by +39.21% to N105.1bn in 2022 from N75.47bn realised in 2021.
• The profit after tax also increased by +38.24% N75.13bn in 2021 to N103.9bn in 2022.
• The external reserves fell by -2.84% to N14.94trn in 2022 from N15.38trn in 2021, attributable to the decline in the total convertible currencies, especially in the form of time deposits and money placements.
• Total equity in 2022 increased by +30.78% to N1.60trn from N1.23trn in 2021.
• Retained earnings increased by +10.57% from N651.97bn in 2021 to N720.9bn in 2022 because of the 38.24% rise in the profit for the year.
• The total loans and receivables increased by +15.32% from N27.28trn to N31.46trn primarily due to the 35.33% increase in overdraft balances and short-term advances.
• The deposits collected skipped up slightly by +7.66% to N24.29 in 2022 from N22.56 in 2021.
• Credit loss expense leapt forward by +75.66% from N498.2bn in 2021 to N875.2bn in 2022, primarily due to increased impairment of loans, receivables, and external reserves.
• Staff loans glided up by +120.3% from N18.46bn in 2021 to N40.67bn in 2022.
• Currency issue expenses climbed by +94.66% from N15.23bn in 2021 to N29.65bn in 2022.

Income Sources-Whence the Mullah Cometh, and Where It Went

The Bank generated N2.36trn in interest income on loans and receivables in 2022, up from N1.53trn received in 2021. This was mainly due to the N1.9trn in interest income on the overdraft facility granted to the federal government at MPR+3%, constituting 58% of total interest and other incomes. The balance of interest income on loans and receivables was made from interest income on financial accommodation facilities of the CBN to banks, amounting to roughly N46bn in 2022. The loans and receivables of the Bank grew by +15.32% from N27.28trn in 2021 to N31.46trn in 2022. The Ways and Means advance to the FGN dominated this. The financial statements showed that overdraft balances and short-term advances to the FGN amounted to N23.3trn, up from 17.1trn in December 2021, and financial accommodation to retail and wholesale banks amounted to N56bn. CBN, therefore, earned 8.15% of its income from its advances to the FGN and 82.14% from its financial accommodation of deposit money banks (DMBs). An uncertain item of the statement was earlier analysts’ speculation about the size of the Ways & Means accommodation of the FGN, put at N23trn. The CBN’s recent financial statement suggests that the financial accommodation was funded through low-cost bank deposits, which rose from N22.56trn in 2021 to N24.29trn in 2022.   

The CBN also earned an additional N247bn in 2022 (down from N252bn in 2021) from AMCON notes and N156.73bn (up from N145.96bn in 2021) from Federal Government securities, underscoring the Bank’s ability to generate income from diverse sources beyond its core operations. The N422.7bn income from other foreign securities measured at fair value through profit and loss (FVTPL) further highlighted the slow growth of the Bank’s investment portfolio. The foreign securities instruments rose +24.59% year-on-year (Y-o-Y) from an earlier N339.34bn in 2021. By valuing investments at their current market price, the bank showed transparency and ensured that its financial statements accurately reflect the actual value of assets.  

Foreign exchange earnings grew by +259.57% to N104.6bn in 2022 from N29.09bn in 2021. This includes commission income from the sale of foreign currency and other related transactions. Other income within the category includes N11.95bn from the commission and N4.07bn from fees, covering income from processing currency, Bureau de Change application and registration, commission on fund transfers and other banks and financial institutions application and licensing fees. Analysts say CBN’s active participation as operator and regulator of the foreign exchange market contributed to the instability of the FX market over the period.   

Operating Expenses –Bullets to the head

The Bank’s total operating expenses rose by a marginal +7.96% to N1.22trn in 2022, including expenses on core activities like personnel expenses, currency issue expenses and other operating expenses. Notably, the apex bank incurred a notable N888.3bn in other operating expenses, a slight decline from the N884.2bn in 2021. Further analysis shows that aside from the general and administrative expenses, other operating expenses covered the extension of a moratorium on the Bank’s intervention loans as a furtherance to the COVID-19 stimulus programmes, leading to a modification loss of N7.87bn (down from N25.94bn in 2021), which was the difference between the gross carrying amount of the loans at modification date and the present value of the loan. The operating expenses also include FX revaluation losses and rebate expenses. CBN incurred N155.5bn on rebate expenses associated with the RT200 (incurred N137bn) and Naira4Dollar policies to attract forex inflows. 

Although lower than the N572.87bn unrealized losses in 2021, the N346.2bn foreign exchange revaluation losses suggest the banking sector regulator faced potential vulnerability to currency fluctuations that could have had averse effects on its financial position and potentially influenced its decisions regarding foreign exchange interventions and policy adjustments.

The CBN also reported a significant +75.67% increase in credit losses to the tune of N875.2bn from the N498.2bn reported in 2021. This was an offshoot of its various loan and intervention programmes, which exposed it and the financial system to credit risks. The Bank’s activities include a N125.37bn intervention in national security, the federal government, state securities, and armed forces. 

Despite the currency depreciations and release of intervention funds to different sectors, the CBN grew its balance sheet to N57.9trn in 2022 from N15.46trn in 2015 and N52.94trn in 2021 while profit after tax rose sustainably in the eight years.

Nigeria’s External Reserve-From Gulliver (Giant) to Oliver (Lilliputian); Unmasking the Numbers

While many analysts have mulled over the depletion of the country’s reserves from US$41bn on December 31, 2021, to US$34bn as of August 11, 2023, the figures from the CBN’s 2022 financial statement have put a cloud over the actual size of the country’s reserves. According to the 2022 financial statement, the external reserves stood at N14.94trn, with a breakdown of N14.37trn as convertible currencies, IMF reserve tranche N23m and N578.65bn as gold bullion equivalent to US$32.38bn using N461.50 as the exchange rate quoted in the report 

However, the disclosure of US$7.5bn owed to JP Morgan and Goldman Sachs, a securities lending agreement pledged in return for cash and US$6.84bn foreign currency forward contract payables, has approximately reduced foreign reserves below the exact value quoted. The deduction of the forex obligations brings the total foreign reserves to around US$18.04bn or N8.33trn (see Illustration 2 and 3 below). 

The US$18.04bn net reserves give perspective to the extent of the country’s FX shortage and the plausible effect on import bills, the value of the Naira, and foreign investors’ perception. Although the net reserves should be sufficient to cover the country’s import bills over 2 quarters, with the average quarterly import bill at $5bn, currency intervention might bear the brunt. CBN might pause defending the naira, leading to a further depreciation in the naira that will dissuade foreign investors. Analysts believe boosting foreign exchange inflows should be the major priority of the country currently. New FX streams need to be explored, oil theft tackled effectively and the eradication of the 41 FX item ban to curb the demand pressure in the parallel market. The direction of FX demand to a single source will help soften naira depreciation and CBN intervention simultaneously, putting less pressure on the foreign reserves. 

Efficiency, Liquidity, and Solvency – Keeping the Ship Steady

Return on Equity (RoE)

ROE recovered from the 5-year downtrend in FY 2021 owing to a +144% surge in profit to N75.13bn from N22bn in 2020. In FY 2022, CBN’s return on equity grew marginally by 5.7%, stabilising at 0.065 on account of the +38% rise in net income to N103.85bn. Remarkable profitability figures were on account of higher net interest income worth N1.83bn and the +362% increase in foreign exchange earnings to N104.57bn. Analysts note that the higher interest income recorded was primarily because of interest received on FGNs overdraft facility (see chart 1 below)

Chart 1:

Return on Assets (RoA)

ROA also saw a reversal in FY 2021, with an upward swing sustained in 2022 driven by higher profit despite the +18% increase in total assets to N53.99trn. Analysts note a fall in return on assets (RoA) as the regulator’s asset base grew (see chart 2 below)

Chart 2:

Cost-to-Income Ratio (CIR)

Slightly over the last half decade, the CBN has grappled with the challenge of reducing costs, as seen by persistently high cost-to-income ratio (CIR). The ratio exceeded 1000% in fiscal year 2018, driven by a combination of lower operating income and higher operating costs. However, a notable shift in gears has occurred since the onset of the post-COVID era. Operating income rebounded, leading to a downward trend in the ratio (see chart 3 below).

Chart 3:

Chart 3:

Loan-to-Deposit Ratio (LDR)

The CBN saw a sizable growth in its loan-to-deposit ratio (LDR), which rose from 120.92% in 2021 to 129.53% in 2022. The upward movement suggests an increased reliance on loans to finance operations or investments relative to deposits. In 2019 the Bank saw aggressive lending, while its total deposit declined by -6.14% (see chart 4 below).

Net Interest Income-to-Loan Ratio 

The significant increase in the Bank’s Net Interest Income to Loan Ratio from 7.65% in 2021 to 11.60% in 2022 reflects an improvement in the Bank’s ability to create interest incomes relative to interest expenses. The ratio increase could be attributed to a +53.9% rise in loans and receivables, accompanied by an increase in other foreign securities (see chart 5 below).

External Strength Ratio

The external strength ratio is a measure that shows the proportion of a Central Bank’s foreign-exchange reserves compared to the global reserves. On average, the external reserve ratio (ESR) rose to its highest figure of 0.5% in 2018 because of a +12% rise in foreign reserves. However, since then, the ESR has recorded double-digit declines and currently stands at 0.33%. The downtrend indicates that the Central Bank’s ability to protect the value of the naira from speculative activities has shrunk. This is the reason for the wide exchange rate gap and explains the absence of convergence between the official and parallel market rates on FX liberalization by mid-year (see Chart 6 below)

Chart 6:

Liquidity Ratio

The current ratio rose 13% in FY 2022, sustaining the positive trend recorded in FY 2021, driven by the N23.3trn temporary advance to the FGN and the N84.9bn cash inflows recorded during the session. As such, the liquidity ratio increased from 0.65 to 0.73 in 2022 despite the 5.2% rise in short-term liabilities (see Chart 7 below)

Chart 7:

Solvency Ratio

The CBN saw a rebound of 1.028 in FY 2022, indicating a recovery and improvement in its solvency ratio, which had seen sizable fluctuations due to the impact of the COVID-19 pandemic between 2019 and 2020. With an overarching ratio of 1%, it signifies that the CBN’s assets have the capacity to cover liabilities (see chart 8 below).

Chart 8:

Closing Thoughts -Neither a Bandit nor a Saint

After the release of the series of audited financial statements by the CBN, the Nigerian blame-and-shame industry went into overdrive, lampooning the banking regulator for everything wrong in the Nigerian economy, including the troubles experienced by the Niger Republic, from amazing naivety to brazen suspension of logic, beer parlours, hairdressing saloons, and motor parks have had a field day turning the CBN into a sort of modern-day treasury bandit. The arguments are commonly wrong, and the context is liberally strange. According to one observer, ‘I do not understand the doomsday predictions most analysts are running about Nigeria. It seems most guys have been too busy talking and have not paid attention. The net reserve numbers are pretty good. I expected worse.

‘I was expecting a negative FX reserve position. So having FX reserves at about US$20bn after accounting for debt and forward encumbrances was not a catastrophe, given the CBN’s liberal spendings and credit boon to the FGN.’ 

He further notes that ‘our net reserves should increase going forward with the recent devaluation and subsidy removal. The government has already eaten its ‘frogs’ they have taken the most difficult decisions, and they can now take the easier decisions and actions. This would involve limiting money supply growth, constraining government spending, and implementing a convergent exchange rate regime by lifting the prohibition on FX access by certain categories of imports while increasing tariffs on luxury imports.’ 

Other analysts are, however, less charitable. One analyst observed that ‘the liquid portion of the FX reserve is US$15bn (US$20bn would be stretching it!). US$30bn out of the US$32bn reserve represents forward commitments. Therefore, it is financial engineering to represent it as an off-balance sheet (OBS) item. So +US$15BN is as good as -US$15bn if we do not want a ‘pitch deck’ format. We are not in a good place!’

He insisted that ‘At least US$1bn must be added to our external reserves over the next fifteen months to stand a fighting chance. First principles-to thy self be true.’

The jury is still out on the CBN financial statements and the regulator’s alleged negligence, misdirection, or sainthood, but what is clear is that in several months ahead, the CBN will be under analysts’ microscopes, and the policy consequences of its books would determine whether policy bubbles will burst or float.