A paper delivered by His Highness Muhammad Sanusi II, Emir of Kano titled “Nigeria A Plan to Restore Confidence, Direction & Growth” at the Savannah Centre for Diplomacy, Democracy & Development in Abuja stirred the hornet next drawing flank from the Presidency and the Central Bank of Nigeria. A participant at the event said that the discuss at the meeting was under reported accusing the media of unfairness to the emir.

The former Governor of the Central Bank of Nigeria (CBN) and now Emir of Kano, had asserted that the account of the Federal Government, domiciled at the Central Bank of Nigeria, is overdrawn to the tune of N4.7 trillion by the Buhari administration. According to the traditional ruler, “CBN claims on the FGN is now top N4.7 trillion — equal to almost 50 per cent of the FGN’s total domestic debt. This he said is a clear violation of the Central Bank Act of 2007 (Section 38.2), which caps advances to the FGN at 5 percent of last year’s revenues.”

He had said “The CBN-FGN relationship is no longer independent. In fact, one could argue their relationship has become unhealthy,” he said. CBN claims on the FGN now top N4.7 trillion — equal to almost 50% of the FGN’s total domestic debt. This is a clear violation of the Central Bank Act of 2007 (Section 38.2) which caps advances to the FGN at 5% of last year’s revenues. Has CBN become the government’s lender of last or first resort?”

But the Presidency was quick to respond saying that the CBN advanced the federal government the sum of N1.193 trillion as Ways and Means as at 2^nd December 2016. A fact sheet of the account of the federal government with the CBN obtained from Presidency sources disclosed that the federal government did not borrow above its limit from the Central Bank of Nigeria CBN. Presidency fact sheet showed that the inflow into the federal government Treasury Single Account TSA as at the second of December stood at N4.4trillion. The figure also indicated that foreign exchange transfer into the account was N101.7 billion giving a grand total of N4.574trillion. The government the fact sheet showed spent N1.913trillion. As a result the credit balance in the TSA as at December 2, 2016 was N2.66trillon. According to the fact sheet money lent to the federal government by the CBN through Ways and Means was N1.467trillion far less than what Sanusi said the apex bank claim on the federal government was.

The participant, who would not want his name in print because of the controversy the issue has generated said Sanusi recognised the serious challenges facing the Buhari administration when he said “no one can deny that the Buhari administration inherited serious problems, but are its current policies the right ones to fix these problems? If we accept the conclusion that government’s balance sheet is stretched; and investment is the key to growth…why has the Federal Government pinned its hope of a recovery on a strategy of massive fiscal expansion and foreign exchange policy that deters investment?”

According to him Sanusi in his prersentation said “Federal Government spending accounts for just 5.7 per cent of GDP, adding that one quarter of this is for debt service alone. The role of government spending in the broader economy is minor. This is particularly true of public capital expenditure. While the economy has quadrupled in nominal terms since 2005, and the population has grown by over 40 million, capital expenditure has barely changed.” This is not Buhari’s making it has been happening since the return to democracy the man who was at the lecture told Vanguard.

”There is much talk about raising non-oil revenues, but tough measures as tax increases, are not being taken. The best ever out-turn for non-oil revenues was N779bn in 2014. This would be enough to fund 13 per cent of the 2016 budget. Even if the government managed to increase revenue significantly, it would still need to re-prioritise spending towards capital expenditure, capex. Across all the three levels of government, Nigeria collected just $117 per capita in 2015, and invested $17. Kenya, with half of Nigeria’s level of wealth on paper, collected almost twice as much in taxes and invested over 7x as much. If Nigeria is going to adopt an investment-driven model, it cannot rely on the public sector alone.

In the presentation Sanusi further said “Nigeria introduced bold foreign exchange reforms in the summer of 2016, and then completely failed to implement them. The gap between design and implementation has ruined credibility. ”After announcing a, managed, flotation of the naira in June, the CBN, instead implemented a hard peg, at a lower level.

“The foreign exchange market is now split into four different segments: the CBN rate (N305/$), FMDQ (N315/$, but not printed since 28 November, NIFEX (N315/$) and the black market rate (N480/$). The black market rate is the only segment with any real price discovery, and hence perceptions of “fair value” are high-jacked by where this market trades.”

According to the source, Sanusi in his presentation said further: “The current crisis of confidence in NGN/$ comes from a lack of transparency and functionality. On a trade and inflation weighted basis, the naira has gone from one of the most over-valued currencies in the world to one that is now undervalued. This suggests that Nigeria is comparatively cheap – and, indeed, much cheaper than many countries with a long history of attracting capital from abroad.”

In defending Sanusi position he said “Sanusi did not talk about TSA balances the figures he quoted revolved around treasury bills and rediscount, converted bonds and overdraft.

Brandishing a copy of the 23-page power point presentation with graphs and data made at the forum, he said the traditional ruler made a case for the way forward during his presentation which was not reflected the story carried by the media.

The source quoted Sanusi as saying in the presentation:  “Nigeria should gear its policies towards attracting investment by implementing the June 2016 foreign exchange reforms, which were designed to unite the market in a single, transparent rate, not to create four new ones and that Nigeria should “focus on reducing federal government’s debt service through greater concessional borrowing, rather than increasing its spending through CBN financing.”

He said in the presentation “Until Nigeria signals a clear change in policy, it will be difficult for it to restore credibility; and until credibility is restored, it will be difficult for it to attract investment, both at home and abroad, and until investment picks up, it will be difficult for Nigeria to return to growth. Nigeria’s power sector reforms have stalled, and the sector is in danger of collapse unless urgent action is taken. What can the federal and state governments do? “Undertake specific debt raising programme to address unpaid arrears and until this happens, no new investment can take place. Government should raise public awareness about the necessity of cost-reflective tariffs, including the hike in 2016; ensure that DISCO owners make the stipulated investment in metering.

”Without greater power generation, Nigeria’s import-substitution initiatives are meaningless as exporters like China offer cheap credit but in return, demand access to local goods markets. Developing local manufacturing capacity is counter to their interests.  Emir Sanusi Presentation had said that the current foreign exchange problem solution is not foreign exchange swaps with China which, in practice, is just a subsidy for Chinese exporters – but direct investment into local manufacturing capacity.

“The years of Africa Rising where one tide could lift all boats are behind us. The commodity cycle has turned, and government balance sheets are stretched.  As a result, sustainable, inclusive growth now depends on investment and in Nigeria’s case, policy credibility will be needed first.

”The role that government can play in this process is defined by implementing the foreign exchange policy it already has and creating the conditions for local manufacturing to develop. More specifically, it can allow price discovery to occur in the foreign exchange market; close the gap between foreign exchange policy design and implementation; shift the focus of fiscal policy towards reducing debt-servicing costs; firmly and unequivocally eliminate fuel subsidies; raise more concessional funding from abroad; capitalise NBET, so that arrears can be cleared; protect infant industry, specifically labour-intensive manufacturing.”

Other issues raised in the presentation include:

• Interest rates are not the issue. In tandem with its currency reforms, the CBN has restored positive real interest rates. The changes have been dramatic. As recently as January, real interest rates were deeply negative in Nigeria.

However, local currency returns are now among the most attractive in Africa, as well as the wider frontier universe.  Under a more credible policy environment, this would help draw in capital from abroad, and incentivise locals with savings to keep their money onshore.

• Asset prices are not the issue. If anything, they are exceeding attractive. Both P/B and P/E ratios are trading near record lows relative to their own five-year range.

At a time when Global (and many EM) stocks have rarely been more expensive, Nigerian stocks have never been so cheap. The picture looks particularly out of sync for banks, where the sector is trading on a 1-year forward P/B ratio 0.5x while sector-wide ROEs for H1 2016 were 16.5%.

• The CBN-FGN relationship is no longer independent. In fact, one could argue their relationship has become unhealthy. CBN claims on the FGN now top N4.7trn – equal to almost 50 per cent of FGN’s total domestic debts.

This is a clear violation of Central Bank Act of 2007 (Section 38.2) which caps advances to the FGN at 5 per cent of last year’s revenues.

The overdrafts alone are equal to more than 10x that prescribed limit, and are growing every month. Has the CBN become the government’s lender of last – or first – resort?”