Editorial
The Nigerian Money Machine
By Dr. Gary K. Busch 23/4/10
Apr 23, 2010 - 11:25:52 AM

This may sound logical but it is, at heart, preposterous. Nigeria has been selling oil into the international markets for years. Recently the price for this oil has been well over $100 a barrel. Even now it is at around $84 a barrel. Nigeria is producing almost 1.9 million barrels a day. It has several liquefied natural gas ‘trains’ which are delivering LNG in massive amounts to the world. How is it possible for Nigeria to be poor? Where has the money gone?

There is a simple answer to that question but it involves some strange activities. In the early days of the Nigerian oil industry the NNPC (the national oil company) received the revenues from the sale of its oil and deposited this with the Central Bank of Nigeria (‘CBN’). This was accompanied by additional payments for leases, drilling rights, production-sharing agreements and joint ventures. This pot of cash was the central holding of the government which proposed to the Legislature a Budget which divided this revenue to various ministries and to the constituent states. The revenue forecast was made on the basis of the expected price of crude oil in the world market. Under Obasanjo the notional price of crude was around £26 to £28 a barrel. The budget was based on that price. The fact that the actual price of the crude was, at some times $140 a barrel, left a windfall profit for the Government. In theory the Government should have built up a cushion of savings from the excess profitability of the crude oil. However, for the last nine years at least, the Government has found it could not complete its budget allocations.

When the banking crisis of 2009 was exposed to public scrutiny the reasons for the cash shortage became clearer. This involved the willing diversion of the national revenue away from the Central Bank and towards commercial banks. There had been a crisis in the banking industry in which many commercial banks were found to have too little reserves to fund their activities. Some were closed and others scrambled around to increase their cash balances. At this point the NNPC and its leadership stepped in to assist. They took the massive cash flows coming to the NNPC for the sale of oil and, instead of depositing them in the Central Bank, deposited them in NNPC accounts in fourteen chosen commercial banks. These banks were now solvent.

Moreover, the commercial banks are allowed to use a multiplier of their cash reserves to make loans. So, for every dollar which was deposited in their banks they could lend eight or ten dollars in collateralised loans to industrial corporations, stock brokers, oil service companies or even ‘marginal oil leases’ with local ownership. The Nigerian economy boomed and the Nigerian Stock Exchange took off. Technically, the deposit money was still the property of the NNPC, but the multiplied cash deriving from this was the banks. Easy credit was available so rich customers could borrow money from the banks at a favourable rates and invest in stock and bonds which were rising because of the easy credit. Bank owners, like Cecilia Ibru, could use the bank’s cash to buy commercial properties which she could lease back to her bank at high rates for use as branches. Other bankers, like Jim Ovia of Zenith, played fast and loose with the free cash.

On 18 August 2009 the CBN, pressed by a report by auditors Price Waterhouse Coopers, unleashed a bombshell. Many of Nigeria’s super-rich were also shown to be super debtors,

When the CBN released a list of big time debtors whose failure to service their debts put five Nigerian banks in trouble, men like Alhaji Aliko Dangote and Femi Otedola featured prominently as did other Nigerian billionaires like the self-styled whizz kid, Mr. Jimoh Ibrahim, Mr. Joseph Arumemi-Johnson, former Delta Governor, James Ibori, Azeez Arisekola Alao and Peter Ololo, among others. Sixty of the debtors were arrested by the Economic and Financial Crimes Commission, EFCC, while some were ordered to report to the commission’s office to explain themselves. (a full report can be found at Pointblank News. 30/10/09 by Babatunde Kolade-Otitpju)

These rich Nigerians borrowed the NNPC money and the notional money generated by the bank’s multiplier without any real intention of paying the money back. As long as the money machine kept running they could continue. They bought properties abroad; they set up overseas bank accounts in currencies other than Naira; they created unprofitable companies (like airlines) which were subsidised by the phantom cash. Many governors were involved. They used their derivation allocation money to buy shares in banks. Then they used these shares as collateral to borrow huge sums from other banks. James Ibori used Delta State’s N820 million units of shares in Oceanic Bank to secure N44.6 billion loan for Ascot, a private enterprise, from Intercontinental Bank. He, and Mike Orugbo, his associate, borrowed about $200 million from Oceanic Bank to finance their take-over of the National Fertilizer Company of Nigeria. He borrowed another $200 million to finance the purchase of Wilbross Nigeria Limited, an oil servicing firm. He did it through Ascot Offshore. Technically the shares in Oceanic Bank were the property of Delta State but their hypothecation was done without any specific budget allocation from the state.

While this flurry of money was being passed from rich men to banks and back the Nigerian Government was missing the cash for its budget. Notionally it had been paid to NNPC and, notionally, it was still in NNPC accounts at the banks. Unfortunately it was not available for use in programs budgeted for by the National Assembly. This is why Nigeria is broke and why yesterday (22 April 2010) the Minister of Finance, Olusegun Aganga was forced to borrow $915 million dollars from the World Bank to finance the Government's shortfall. Aganga also announced that the new 2010 budget, which was agreed yesterday as well, would be funded, in addition to the World Bank loan, by a bond issue of $500 million from the international market. Just who in the international market right now will be willing to lend Nigeria half a billion dollars at anything but a penal rate has yet to announce himself.

Just as the concentration of political power in the hands of a narrow political elite has perverted the course of justice and democracy in Nigeria, the concentration of unearned wealth in the hands of the Nigerian super-rich has perverted Nigeria’s economic development. Unfortunately there is a great overlap between the lists of the political elite and that of the super-rich; which will not be a surprise. Perhaps, with the awareness of the structure of Nigeria’s money machine the regulators will be more wary. Díẹ̀ díẹ̀ nimú ẹlẹ́dẹ̀ẹ́ fi ń wọgbà (Little by little is how the pig’s nose enters the yard)