The Federal Government’s borrowing from the Central Bank of Nigeria has recently exceeded the limits set by the CBN Act, with serious consequences for the economy. CHIMA NWOKOJI examines the magnitude and impact on the country’s monetary and fiscal environments in this piece.
According to new data, the Federal Government’s total borrowing from the Central Bank of Nigeria (CBN) through Ways and Means (W&M) Advances increased by N19.26 trillion in seven years, more than 25 times what it was in 2015.
According to a slew of economic and finance experts, this could reach N22.6 trillion by the end of the year, with inflation and currency depreciation posing the greatest risks.
According to data obtained from the CBN website, total W&M liabilities have increased more than twenty-fivefold over the last seven years, from N648.26 billion in 2015.
According to the CBN, claims on the FG through W&M reached a new high, increasing 28.4% year on year (y/y) to 19.9 trillion at the end of June 2022 from 15.5 trillion in June 2021. This amounts to 82.1 percent of the CBN’s total claims on the FG. It revealed that approximately 2.5 trillion was disbursed to the FG in the first six months of 2022 alone, implying that total annualised disbursement could reach 5.1 trillion (2021: 4.3 trillion).
Ways and Means Advances are loan facilities used by the central bank to finance the government during temporary budget shortfalls, subject to legal limits.
According to Section 38 of the CBN Act of 2007, the bank may grant temporary advances to the Federal Government in the event of a temporary shortfall in budget revenue at the bank’s discretionary interest rate.
According to the Nigerian Tribune, as of June 2015, a month after President Muhammadu Buhari took office, the total government borrowing from the apex bank stood at N648.26 billion.
According to CBN data, it increased from N856.33 billion in December 2015 to N2.23 trillion in December 2016.
In 2017, total bank borrowing increased by N1.08 trillion to N3.31 trillion. In 2018, it increased by N2.1 trillion to N5.41 trillion.
At the end of 2019, the Federal Government’s borrowing from the CBN increased by 61.18 percent (N3.31 trillion) to N8.72 trillion.
The government turned to the apex bank once more for a record N4.9 trillion to bridge the fiscal financing gap, bringing its total borrowing to N13.11 trillion as of December 2020.
Recently, the Federal Government’s loan from the CBN through Ways and Means Advances increased from N17.46 trillion in December 2021 to N19.91 trillion in June 2022.
In recent years, the FGN’s new borrowing from the CBN has repeatedly exceeded the 5% limit.
For example, it reached approximately 80% of the FGN’s 2019 revenues in 2020 and has continued in that trend, which is a violation of the CBN Act, which states that the outstanding amount should not exceed 5% of the prior year’s actual revenue.
According to a top executive at the CBN who prefers not to be quoted because he is not authorized to speak for the bank, central banks around the world lend to their governments for a variety of purposes as a government’s bank, whether it is referred to as quantitative easing or ways and means, and Nigeria is no exception.
Dr Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Public Enterprises (CPPE), commented on the development, stating that the risks associated with excessive lending to the federal government are inflation and currency depreciation.
According to him, it is a factor in the current increase in inflationary pressures in the economy.
Yusuf went on to say “There are also monetary implications.” Increasing the number of ways and means of financing increases the money supply, which in turn weakens and depreciates the currency.
“All of these have a significant impact on production costs, operating costs, and citizen welfare.”
In an earlier interview, Bismarck Rewane, Managing Director Financial Derivatives Company (FDC) Limited, stated that, in addition to the foregoing, taming the growth in money supply is critical to containing inflationary pressures, and the first step is for the CBN to adhere to its own rule of lending to the FGN (ways and means advances) at 5% of the previous year’s revenue.
Fitch, a global rating agency, has repeatedly warned that central bank financing of government budgets could increase macro-stability risks in the context of weak institutional safeguards that preserve policymaking credibility and the central bank’s ability to control inflation.
Similarly, Mr Johnson Chukwu, Managing Director/Chief Executive Officer of Cowry Asset Management Limited, stated that central bank lending put pressure on the exchange rate and inflation rate, with “liquidity with no productivity attached coming into the system.”
According to Afrinvest (West) Africa Limited, a Lagos-based investment banking and financial advisory firm, the consistent increase in W&M financing can be attributed to the FG’s growing fiscal deficits as a result of the rising expenditure plan and muted improvement in revenue generation.
While one could argue that the CBN is acting on its mandate as the lender of last resort, the fact that the FG can always tap into the apex bank’s coffers incentivizes the FG’s fiscal expansion – which has contributed to budget deficit growth of more than 300% since 2015 – despite poor revenue generation.
Furthermore, the sustained expansion of W&M Liabilities has contributed to the increase in currency in circulation, with the monetary base increasing by 18.2 percent year on year in the year to June 2022 – a development “we believe contributed to the surging inflationary trend,” Afrinvest stated in an e-mailed note.
Furthermore, despite the W&M funding’s estimated low cost (c.7.0% p.a. ), its interest payment accounted for a 20.9 percent share of total debt service cost over four months (Jan–Apr 2022). This emphasizes W&M’s large-scale presence in the FG’s loan portfolio.
“Unfortunately, despite static revenue performance, we do not expect Nigeria’s fiscal vulnerability to improve materially in the near term due to a lack of political will to reduce recurrent expenditure.”
“As a result, we estimate that W&M advanced to the FG could reach 22.6 trillion by year’s end, bringing the ratio of annual W&M disbursement to FG’s last fiscal year (LFY) actual revenue to 116.1 percent,” the firm stated.
While the CBN has defied several calls from global financial authorities and agencies (including the IMF, World Bank, Fitch and Moody’s Ratings) to halt deficit financing, which has continued to undermine its independence, Afrinvest believes that a timely secularisation of the liability would be a win-win situation for both the FG and the CBN.