By Jeph Ajobaju, Chief Copy Editor
Abuja’s borrowing from the Central Bank of Nigeria (CBN) through Ways and Means Advances has risen to N15.51 trillion, up 2,286 per cent in six years, besides local and foreign loans which jumped by N20.8 trillion to N32.92 trillion in 2020.
Public debt amounted to N33.11 trillion in the first quarter of 2021 (Q1 2021), according to Debt Management Office (DMO) figures published by The PUNCH.
Servicing the debt cost N1.8 trillion between January and May this year, creating concern for Nigerians who agonise that national debt has skyrocketed under the watch of Muhammadu Buhari with little to show for it
The public debt comprises loans by federal and 36 state governments and the Federal Capital Territory (FCT).
The PUNCH clarifies that Ways and Means Advances are loan facilities the CBN uses to finance the government during temporary budget shortfalls subject to limits imposed by law.
Section 38 of the CBN Act says 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.
“The total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the Federal Government.
“All advances 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 year shall not be exercisable, unless the outstanding advances have been repaid,” the Act says.
Breaking the law
CBN data shows that in the first six months of 2021, the federal government borrowed N2.4 trillion from the CBN, more than half of what it borrowed in 2020.
The N2.4 trillion is also violates the CBN Act by being much higher than 5 per cent of government’s retained revenue of N3.9 trillion in 2020.
As of June 2015, a month after Buhari came to power, total government borrowing from the CBN was N648.26 billion, CBN data shows, as quoted by The PUNCH.
It then continued an upward climb:
· 2015 – N856.33 billion
· 2016 –N2.23 trillion
· 2017 – N3.31 trillion
· 2018 – N5.41 trillion
· 2019 – N8.72 trillion
· 2020 – N13.11 trillion
Fitch Ratings, a global credit ratings agency, raised concerns in January over the government’s repeated recourse to its Ways and Means facility with the CBN.
It said CBN financing the government, which predates the pandemic, could raise risks to macro-stability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the CBN to control inflation.
“The CBN’s guidelines limit the amount available to the government under its WMF to five per cent of the previous year’s fiscal revenues.
“However, the FGN’s new borrowing from the CBN has repeatedly exceeded that limit in recent years, and reached around 80 per cent of the FGN’s 2019 revenues in 2020,” Fitch Ratings noted.
In February, the International Monetary Fund (IMF) said Nigeria’s monetary policy framework should be reformed in the medium term, and the CBN financing budget deficit phased out to reduce inflation.
“The increasing reliance on CBN overdrafts has come with negative consequences.
“The financing is costly for the Federal Government at interest rates of MPR plus 300 basis points, and for the CBN, with sterilisation done through issuance of OMO bills,” the IMF said.
It added that complete removal of CBN financing of fiscal deficits would require higher domestic revenue mobilisation.
The IMF had on April 28, 2020 approved Nigeria’s request for emergency financial assistance of $3.4 billion to help address the severe economic impact of COVID-19 shock and the fall in oil prices.
Finance Minister Zainab Ahmed and CBN Governor Godwin Emefiele explained in a joint letter to the IMF that recourse to CBN financing would be eliminated by 2025.
They said the existing stock of overdrafts held at the CBN would also be securitised.
Below are the views of other experts on the rising debt:
Bismarck Rewane (Financial Derivatives MD/CEO)
“N15 trillion is about 45 per cent of total money supply. So, if, for example, those ways and means advances were securitised today, people will have to invest in government securities and it will reduce money supply by 45-50 per cent.
“What we need to do is actually securitised this formally. But I think that, right now, the Federal Ministry of Finance or DMO is paying interest on the ways and means advances.
“So, the effect is that there is a cost to the borrowing, and the Central Bank is receiving the interest on it.
“The quantum is quite large but to the extent that interest is being charged on it, it may not be as destabilising as the number may make it appear.
“Two, the amount that has been taken out of liquidity with CRR (cash reserve ratio) compensates mainly for the extra liquidity that is created by these ways and means advances.”
Akpan Ekpo (professor, former CBN Monetary Policy Committee (MPC) member
“The government should minimise its usage of Central Bank financing. I hope they are borrowing to finance capital projects, not for recurrent expenditure.
“The ideal thing is to avoid the ways and means facility, and most countries avoid that.
“Government’s dependence on WMF creates inflation, crowds out private investment and limits the way the CBN can carry out monetary policy.
“Assuming that they are printing money to do this, then it will be too much money chasing few goods, which will be inflationary. That is why it is good to minimise it; the jump is quite much.
“There is a need for transparency. If they are doing all of this, and they are also borrowing externally, they need to be transparent – telling us what the monies are being used for.
“They are also borrowing a lot from IDA (World Bank), ADB, etc; they are issuing Eurobonds and Sukuk bonds. When it is becoming too many, there is a problem. I hope it is well managed, otherwise it is not good for the economy.”
Godwin Obaseki (Edo State Governor)
Obaseki said in April that the federal government printed N60 billion to augment what the three tiers of government shared in March.
But the claim was faulted by both Ahmed and Emefiele.
Johnson Chukwu (Cowry Asset Management MD/CEO)
“Central Bank borrowing is putting pressure on the exchange rate and the inflation rate, with liquidity that has no productivity attached to it coming into the system.
“What that means is that the Central Bank has been struggling with mopping up excess liquidity as a result of injection of liquidity not coming from productive activities but rather from Federal Government’s W&M borrowing.
“In the first five months of this year, total Federal Government revenue was N1.8 trillion, while expenditure was N4.8 trillion, leaving a gap of about N3 trillion, which is the reason why you saw that over N2 trillion borrowed from the central bank.
“The securitisation of the ways and means advances will further increase the interest obligations of the federal government.
“It might be difficult for the federal government to securitise those borrowings. The key thing for me is that we need to restructure the fiscal framework of the country so that we take out this dependence by the federal government on CBN funding.”
Conversion of CBN overdrafts into notes
Bloomberg reported on February 16 that Abuja had set the terms for the conversion of its stock of CBN overdrafts into long term notes to create transparency around its dependence on that source of funding.
DMO Director General Patience Oniha was quoted as saying that the N10 trillion debt would be exchanged for 30-year notes issued to the CBN.
She added that the agreement on timing for the conversion needed to be finalised to get the approval of the Federal Executive Council (FEC) at the earliest in the second quarter of 2021.
In June, Capital Economics based in Lagos noted in a report in June titled, “The perils of deficit monetisation in Nigeria”, that over the past six years, on average around 55 per cent of annual budget shortfalls had been financed by the CBN.
“Many of the problems plaguing Nigeria’s economy – from high inflation to a persistently overvalued currency – are tied to the government’s sustained reliance on the central bank to cover fiscal financing gaps,” it said.
