FG grappling with huge fiscal responsibilities
Overleveraged on CBN’s Ways & Means
N16.1trn credit to FG as of August 2021
IMF, World Bank, analysts raise concerns
Inflation, interest, exchange rate challenges
Threatens macro-economic stability
The federal government’s sustained recourse to its Ways and Means facility (WMF) with the Central Bank of Nigeria (CBN) is exposing a serious weakness in Nigeria’s public finance management as the government grapples with its fiscal responsibilities, challenged by instability in its oil revenues over the years.
The sustained borrowing spree continues to keep government deficits above its revenue and separate from the country’s already mounting debt stock. But it also means the central bank has continued to be the sole financier of the federal government’s revenue deficit over the years, a position that has seen it violating its own extant law relating to the government’s access to the overdraft window.
An analysis of a CBN database shows that total credit advanced to the federal government through the Ways & Means facility had risen to N16.1 trillion as of August 2021, representing an increase of about N3 trillion in eight months, and translating to an average of N377.8 billion on a monthly basis, higher than the monthly average of N365.8 billion during the pandemic-ravaged year of 2020, when many analysts think this was understandable.
Analysts have drawn attention to the fact that this action contravenes the CBN Act 2007, section 38(2), which stipulates that the total amount of advancement to the federal government from the CBN shall not at any time exceed five percent of the previous year’s actual revenue of the government.
In spite of this legal provision, however, the CBN, as a banker to the federal government, has continued to finance the government’s budget shortfalls through the Ways and Means Advances (W&M), without recourse to limits imposed by law, the analysed data show.
The government’s new borrowings from the apex bank have continually exceeded that limit, and it reached around 80 percent of the government’s 2019 revenues in 2020. The law also stipulates that borrowing under the facility be repaid in the same year it was borrowed.
According to CBN data, in the period between 2014 and 2020, the highest increase of 197 percent in the stock of the apex bank’s lending to the federal government, from N0.59 trillion to N1.75 trillion, was recorded in 2015 when GDP growth was 2.65 percent year-on year. This was followed by 2019, which saw a 67 percent increase from N5.40 trillion to N9.04 trillion, as the economy grew by 2.27 percent.
At the close of 2020, data show that the historical stock of accumulated CBN overdrafts, or its ways & means lending to the federal government, stood at N11.9 trillion, which is equivalent to 7.81 percent of 2020’s total nominal GDP, while the total domestic debt servicing for 2020 (apart from CBN Ways and Means lending) was N1.85 trillion. Yet, the accumulated ‘ways and means’ borrowing is not added up in the stock of government total debt reported by the Debt Management Office (DMO).
Although the federal government has agreed to securitise its overdrafts with the apex bank into long-term debts of 30-year notes out of the N13.1 trillion ways and means liabilities, concerns have been raised by the International Monetary Fund (IMF) and the World Bank about the risks this form of lending poses to macro-economic stability. But eight months down the line, nothing significant has been done in this regard.
Analysts knowledgeable on the issue at Afrinvest Research have noted that if this pace is sustained in the remaining four months to the end of 2021 (September inclusive), total Ways & Means support to the federal government would reach N17.6 trillion as against the N13.1 trillion recorded in 2020, culminating in an annual increase of N4.5 trillion, up from N4.4 trillion in 2020.
Analysts at Coronation Merchant Bank, in a research note also observed that, “the increasing reliance on CBN overdrafts has come with negative consequences, in our view. The financing is costly for the FGN at interest rates of Monetary Policy Rate (MPR) plus 300 basis points. In addition, this form of lending has several macroeconomic implications.
“Another risk is the impact on prices, as this accelerates the growth of money supply and aggravates inflation. With the rate of inflation currently at 17.01 percent year-on-year (August 2021), we believe this form has played a role in inflation trending above the CBN’s inflation target range of between 6 percent and 9 percent year-on-year,” CMB analysts stated.
As estimated by Fitch earlier in the year, the federal government borrowed 3.6 percent of its GDP from the apex bank to fund its deficits. This came about after the government directly borrowed 1.9 percent of its gross domestic products from the CBN to fund its fiscal deficit in 2020, which was estimated at 3.6 percent by the rating agency.
“Fiscal financing of the deficit hoists challenges to monetary policy implementation as rigid management of domestic liquidity is a key tool under the CBN’s policy of prioritising the stability of the naira. It could also complicate official efforts to bring inflation back under control.
“However, the use of central bank financing in Nigeria predates the pandemic shock. We estimate that the balance of the government’s WMF with the CBN was around N9.8 trillion (6.7% of GDP) at end-2019, up from N5.4 trillion (4.2% of GDP) at end-2018. Unlike the government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30 percent of the FGN’s debt at end-2019, on our estimates,” Fitch wrote.
Analysts at Afrinvest Research pointed out that 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 previous year’s revenue were also above 30 percent in 2017, 2018 and 2019 when the economy enjoyed relative stability.
In particular, they are surprised that the CBN continued with large-scale Ways and Means financing despite the provision in section 38(3a) of the CBN’s Act, stipulating 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’s financial year in which they are granted and that if such advances remain unpaid at the end of the year, the power of the apex bank to grant such further advances in any subsequent years shall not be exercisable, unless the outstanding advances have been repaid.
On the basis of this, the Afrinvest analysts recommended that:
“The CBN provides enough convincing reasons to the FG to timely securitize the large exposure. This will help improve the CBN’s asset quality (to the benefit of its shareholders); as well as support its liquidity management objective as investors begin to buy the liabilities. Also, that the FG scale down cost of governance, expand tax base, and instill efficiency in revenue generating agencies of the government to reduce recourse to CBN Ways & Means support.”