Understanding CBN’s Signal as Lending to FG Hits N16trn

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Godwin Emefiele, Governor at the Central Bank, Nigeria’s lender of last resort, has remained unfazed financing government to the tune of N16.1 trillion as of August 2021, the development which is against provision set in the 2007 Act according to experts at Afrinvest, a leading investment banking firm in Lagos.

The sum, a non-Debt Management Office facilitated borrowings, was accessed from the apex bank’s vault directly by fiscal authority, and this has continued to increase year on year casting doubt on ballooning debt sustainability amidst revenue slippage.

The CBN Act has set a 5% benchmark for advances made to the government anchored on the previous year revenue. CBN Act expects the sum advanced to be repaid as soon as possible. It further added that the amount advanced is due for repayment by the end of the Federal Government financial year in which they are granted.

“If such advances remain unpaid at the end of the year, the power of the Bank to grant such further advances in any subsequent years shall not be exercisable, unless the outstanding advances have been repaid” .

Despite the provision, the CBN has continued to cement its relationship with the government, worsening Nigeria’s monetary policy independence in a manner never seen before now.

Analysts said the sum advanced appears to be growing as total public debts expand hits N35.5 trillion in June 2021 amidst Federal Government increasing spending plan while revenue performance remains unimpressive.

“It is obviously a new era of relationship between the CBN and political drivers”, sources told MarketForces Africa.

Nigeria’s total public debt is more likely to cross N40 trillion by year-end if Federal Government raises lawmakers-approved foreign currency loans to support the 2021 budget deficit. The sum accounted for currency also excludes direct borrowings from the CBN.

If securitise in 2021, Nigeria’s exposure could be ways above N50 trillion despite the fact that the country has remained growth-starved while the population expands. As a result, per capita income data has fallen behind sovereigns countries with similar economic capabilities.

In its macroeconomic commentary, Afrinvest position that obviously, this is a contravention of the CBN Act 2007, section 38(2) which stipulated that the total amount of advancement to the FG from the CBN shall not at any time exceed 5.0% of the previous year’s actual revenue of the FG.

The investment firm which hinted about the development said looking through the CBN database, total credit advanced to the FG through Ways & Means facility has risen to ₦16.1 trillion in August 2021, representing a year-to-date increase of ₦3 trillion.

It said year to date increase in CBN funding translates to a monthly average of N377.8 billion taken by the government.

“For simplicity’s sake, the Ways & Means facility refers to an interest-bearing overdraft granted to the government by the central bank to plug the budget financing gap that may arise due to a temporary shortfall in revenue in a fiscal year.

“Unlike other deficit financing instruments such as Bond and Treasury-bills which are benchmarked against the funding need and/or economic size, Way & Means is capped to a ratio of the immediate year revenue, in the case of Nigeria, 5.0% of the actual revenue of the preceding year”, the firm explained.

Afrinvest stated that the year to date increase of ₦3 trillion translates to a monthly average of ₦377.8 billion, higher than the average of ₦365.8 billion in the pandemic-ravaged year of 2020.

Analysts at the firm added that if this pace is sustained in the remaining four months to the end of 2021, total Ways & Means support to the FG would reach ₦17.6 trillion from ₦13.1 trillion, culminating in an annual increase of ₦4.5 trillion compare to ₦4.4 trillion last year.

“Obviously, this is a contravention of the CBN Act 2007, section 38(2) which stipulated that the total amount of advancement to the FG from the CBN shall not at any time exceed 5.0% of the previous year’s actual revenue of the FG.

“In 2020, the FG retained revenue printed at ₦3.9 trillion. By implication, Ways & Means advancement in the first 8-months of 2021 is 76.9% of FG’s revenue in 2020, and this could increase to 115.4% by year-end if the monthly average trend is sustained”, the firm said.

Analysts said the amount is different from the ₦35.5 trillion debt announced by the Debt Management Office.

Nevertheless, Afrinvest said while a case could be made for the large Ways & Means support in 2020 as the pandemic wreaked havoc, it defies logic to see that Ways & Means provision as a percentage of the previous year’s revenue were also above 30.0% in 2017, 2018 and 2019 when the economy enjoyed relative stability.

“Section 38(3a) of the CBN’s Act stipulated that all advances made pursuant to this section shall be repaid as soon as possible and shall, in any event, be repayable by the end of the Federal Government financial year in which they are granted and,

“…if such advances remain unpaid at the end of the year, the power of the Bank to grant such further advances in any subsequent years shall not be exercisable, unless the outstanding advances have been repaid”.

So, analysts said for the CBN to have continued with large-scale Ways & Means financing despite this provision, Afrinvest presumes that the CBN may have shifted the goal post on this provision without the knowledge of the public.

Quoting the excerpt from the frequently asked question section of the CBN’s website, “Can the Federal Government frustrate the Central Bank from pursuing its monetary policy…?

Afrinvest answered yes, noting that this happened when the Federal government exceeds its revenue, the CBN finance the government deficit through Ways and Means Advances subject to the limits set in THE existing regulations, which are sometimes disregarded by the Federal Government.

“The direct consequence of Central Banks financing of deficits are distortions or surges in monetary base leading to an adverse effect on domestic prices and exchange rates, that is, macroeconomic instability because of excess liquidity that has been injected into the economy.”

Although the FG hinted at the beginning of the year on its intention to securitize ₦10.0 trillion out of the then ₦13.1 trillion Ways & Means liabilities, yet nothing tangible has been done in this respect 8-months down the line.
Afrinvest advised that the CBN need to provide enough convincing reasons to the FG to timely securitize the large exposure. The firm noted that this will help improve the CBN’s asset quality, as well as support its liquidity management objective as investors begin to buy the liabilities.
Also, analysts said there is a need for Nigeria to scale down the cost of governance, expand the tax base, and instil efficiency in revenue-generating agencies of the government to reduced recourse to CBN Ways & Means support.