Today is D-Day, and we are not referring to the anniversary of the invasion Normandy, Northern France by the Americans and their allies on the 6th of June, 1944 which began an operation leading to the liberation of German-occupied north-western Europe and the beginning of the end of World War II.
Our D-Day is the effective start of the implementation of the Treasury Single Account which requires all MDA’s to transfer balances from their accounts into a single dedicated Treasury Account with the Central Bank of Nigeria (CBN). What does this portend for the economy, the Banking Industry and the lives of we the “common men”? Let’s go into a few details, shall we?
For those of us who wrote our professional exams (or attempted in some cases) in the late 90’s and early 2000’s, there was a course in the Professional Level named “Public Sector Accounting”. In this course, some of us encountered for the first time the terminology “Consolidated Revenue Fund”. Basically, this is the Fund where all Government earnings were accrued into before it was shared across the 3 Tiers of Government. The CRF is of course still in operation but it’s pertinent to not that not “all” government earnings currently accrue into this account.
Before we start a legal debate on whether the use of this fund is supported by the constitution, let’s have a look at the provisions of Section 80 (1) as amended which states that “All revenues, or other moneys raised or received by the Federation (not being revenues or other moneys payable under this Constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and form one Consolidated Revenue Fund of the Federation”. In essence, all monies and I mean all monies without exception earned by the Federal Government, be it VAT, Customs, Immigration, OML sales, Omo-Onile charges etc must be paid into this account.
So, if this is guided by the constitution of the Federal Republic of Nigeria, why are we at this point? Isn’t this supposed to be the status quo? It seems to be that someone in a prior government acted “ultra vires” and outside the constitution by allowing the various MDAs to maintain accounts outside the provisions of the constitution and manage them the way they deem fit. Little wonder, a particular parastatal is now required to refund $1.48b worth of missing monies. The exact point of deviation from the statutory requirements is another topic for research.
Now that we know that the use of a CRF or TSA is backed by the constitution, we can further delve into its importance and why it’s a great fiscal management tool encouraged by both the World Bank and the IMF. According to a paper released by the IMF in 2010, a treasury single account (TSA) is an essential tool for consolidating and managing governments’ cash resources, thus minimizing borrowing costs. In countries with fragmented government banking arrangements, the establishment of a TSA should receive priority in the public financial management reform agenda.
The paper also opined that many emerging market and low-income countries have fragmented systems for handling government receipts and payments and in these countries, the ministry of finance/treasury lacks a unified view and centralized control over government’s cash resources. As a result, this cash lies idle for extended periods in numerous bank accounts held by spending agencies while the government continues to borrow to execute its budget. The deficiencies that arise from the lack of a TSA can manifest in the following ways
i) Idle cash balances in bank accounts often fail to earn market-related interest.
ii) The Government, being unaware or unsure of the volume resources available to them incurs unnecessary borrowing costs on raising funds to cover a perceived cash or revenue shortages.
iii) Idle government cash balances in the banking sector are not idle for the banks themselves, and can be used to extend credit. Draining this extra liquidity through open market operations and other liquidity tightening measures also imposes costs on the central bank.
iv) Banks in essence are using Government liquidity to make free profits. Part of liquidity requirements (currently 30%) are met through the use monies deposited by MDA’s. In short, banks are using Government monies to make money for themselves. A classical case of turning the Government into its “Maga”.
Establishing a unified structure of government bank accounts via a treasury single account (TSA) will solve these problems, improving cash management and improve the fungibility of cash in Government coffers and of course reduce (if possible) corruption. It should also lead to a reduction in debt service costs.
The Government can easily have a view of its Cash requirements and therefore the CBN can empirically define what the appropriate Cash Reserve Requirement should be me. It’s expected that liquidity pressure following the withdrawal of Government deposits from Banks (currently estimated at 25% of total bank deposits) should encourage the regulators to bring down the current Cash Reserve ratio. I foresee at least a 10% drop in the current CRR at the next MPC.
The modalities of operation are still unclear at this juncture as various operating models exist. We have nothing to fear, its standard practice in the USA and a couple of Eurozone countries.
Change is here (although GEJ deserves a mention to kick-starting these discussions a couple of years back).
P.S. If you want know about the original D-day, Google is your friend, or better still, you can watch Steven Speilberg’s 1998 epic war drama, Saving Private Ryan. I am sure you’ll enjoy it.
This post was written by Adefemi Ogundele FCA. Head, Financial Markets Finance, Nigeria at Standard Chartered Bank. It first appeared on LinkedIn.
Photo credits: Spark.ng
