FG borrows N19.3trn from CBN in 7 years

President Buhari

The Federal Government’s borrowing from the Central Bank of Nigeria has in recent years exceeded the limits stipulated by the CBN Act, with attendant implications on the economy. CHIMA NWOKOJI in this piece examines the magnitude and impact on monetary and fiscal environments in the country.

Fresh findings have shown that the Federal Government’s total borrowing from the Central Bank of Nigeria (CBN) through Ways and Means (W&M) Advances ballooned by N19.26 trillion in seven years, over 25 times higher than what it was in 2015.

This according to a herd of economic and finance experts may hit N22.6 trillion by the end of the year, with the biggest risks being inflation and currency depreciation.

Analysis of the data obtained from CBN website showed that total W&M liabilities have increased by more than twenty five-fold over the last seven years, from barely N648.26 billion in 2015.

According to the CBN, claims on the FG through W&M rose to a new milestone, up 28.4per cent when compared year on year (y/y) to ₦19.9 trillion at the end of June 2022 from ₦15.5 trillion recorded in June 2021. Thus representing 82.1per cent of the CBN’s total claims on the FG. It showed that in six months of 2022 alone, about ₦2.5 trillion has been disbursed to the FG, an indication that total annualised disbursement might spike to ₦5.1 trillion (2021: ₦4.3 trillion).

Ways and Means Advances is a loan facility used by the central bank to finance the government in periods of temporary budget shortfalls subject to limits imposed by law.

According to Section 38 of the CBN Act, 2007, the bank may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate of interest as the bank may determine.

Nigerian Tribune findings show that as of June 2015, a month after President Muhammadu Buhari came into power, the total government borrowing from the apex bank stood at N648.26 billion.

It jumped from N856.33 billion in December 2015 to N2.23 trillion in December 2016, the CBN data showed.

The total borrowing from the bank grew by N1.08 trillion in 2017 to N3.31 trillion. It rose further by N2.1 trillion in 2018 to N5.41 trillion.

The Federal Government’s borrowing from the CBN surged by 61.18 per cent (N3.31 trillion) to N8.72 trillion at the end of 2019.

The government turned again to the apex bank for a record N4.9 trillion to plug its fiscal financing gap, bringing its total borrowing to N13.11 trillion as of December 2020.

More recently, FG’s loan from CBN through Ways and Means Advances rose from N17.46 trillion in December 2021 to N19.91 trillion in June 2022.

The FGN’s new borrowing from the CBN has repeatedly exceeded the five per cent limit in recent years.

For instance, it reached about 80 per cent of the FGN’s 2019 revenues in 2020 and has continued in that trend, which is a violation of the CBN Act, that the outstanding amount should not exceed five per cent of prior years’ actual revenue.

A top executive at the CBN who prefers not to be quoted because he was not authorised to speak for the bank said that central banks across the world lend to their governments for various purposes as a government’s bank, whether it is called quantitative easing or ways and means and Nigeria is not an exception.

Commenting on the development, the Chief Executive Officer of the Centre for the Promotion of Public Enterprises (CPPE) Dr Muda Yusuf said the risks associated with over lending to the federal government are the inflation and currency depreciation risks.

According to him, it is a contributory factor to the current uptick in inflationary pressures in the economy.

Yusuf stated further “There are also implications for the currency.” Mounting ways and means financing increases money supply and invariably weakens and depreciates the currency.

“All of these are taking a huge toll on production costs, operating costs and the welfare of citizens.”

Also, Bismarck Rewane, Managing Director Financial Derivatives Company (FDC) Limited in an earlier interview, said that apart from the above, taming the growth in money supply is extremely important to curb inflationary pressures, and the first step is for the CBN to stick to its own rule of lending to the FGN (ways and means advances) at five per cent of the previous year’s revenue.

Fitch, a global rating agency had repeatedly warned that central bank financing of government budgets could raise risks to macro-stability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation.

Similarly, the Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu, said the central bank lending put pressure on the exchange rate and the inflation rate, with “liquidity that has no productivity attached to it coming into the system.”

For a Lagos-based investment banking and financial advisory firm, Afrinvest (West) Africa Limited, the consistent spike in W&M financing could be traced to the burgeoning FG’s fiscal deficits as a result of the rising expenditure plan amid muted improvement in revenue generation.

It noted that while one may 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 coffers of the apex bank incentivises FG’s fiscal expansion – which has contributed to budget deficit growth by more than 300.0 per cent since 2015 – amid poor revenue generation.

In addition, the sustained expansion of W&M Liabilities has contributed to the spike in currency in circulation with the monetary base rising by 18.2 per cent y/y in the 12 months to June 2022 – a development “we believe contributed to the surging inflationary trend,” Afrinvest stated in an e-mailed note.

Furthermore, despite the estimated cheap price of the W&M funding (c.7.0 per cent p.a.), its interest payment accounted for a 20.9 per cent share of the total debt service cost over four months (Jan–Apr 2022). This underscores the large-scale nature of W&M in the FG’s loan book.

“Unfortunately, we do not expect Nigeria’s fiscal vulnerability to improve materially in the near term given the weak political will to trim recurrent expenditure despite static revenue performance.

“As such we estimate that W&M advanced to the FG could reach ₦22.6 trillion by year-end, increasing the ratio of annual W&M disbursement to FG’s last fiscal year (LFY) actual revenue to 116.1 per cent,” the firm emphasised.

While the CBN has defied several calls by global financial authorities and agencies (such as IMF, World Bank, Fitch and Moody’s Ratings) to halt deficit financing which has continued to undermine its independent status, Afrinvest canvasses that a timely secularisation of the liability would be a win-win for the FG and the CBN.

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