HomeAfrica EconomyExplaining inflationary trends in light of CBN’s N15trn Overdraft...

Explaining inflationary trends in light of CBN’s N15trn Overdraft to FG; Fitch Ratings warns against repeated recourse to “Ways and Means’’

Godwin Emefiele, governor of Nigeria’s central bank

Fitch Ratings, warned the Federal Government of Nigeria against repeated recourse to the Ways and Means facility from the Central Bank of Nigeria. In a January report, Fitch warned that “sustained use of direct monetary financing could raise risks to macroeconomic stability.”

Kingsley Moghalu, a former aspirant to the office of Nigeria’s presidency and  former deputy governor at the Central Bank of Nigeria (CBN), recently revealed that the federal government borrowed N15 trillion from the CBN. If true, and there is nothing to suggest that it is not, this would not be the first time the federal government’s indebtedness to the CBN would be made public.

The Governor of Edo State of Nigeria, Godwin Obaseki, told his state transition committee members some months ago that the CBN’s total loan to the federal government would stand at between N15 and N16 trillion by the end of 2021, as reported in the Daily Trust newspaper.

“By the end of this year, our total borrowing is going to be between N15 and N16 trillion. Imagine a family that is just borrowing without any means to pay back and nobody is looking at that, everybody is looking at 2023, everybody is blaming Mr. President as if he is a magician,” Obaseki said.

Moghalu and Obaseki referred to government’s Ways and Means Advances (WMA) from the CBN, which becomes overdrafts if not paid on time.

The WMA is the temporary loan facility given to the federal and state governments by the CBN to meet budget deficits. Usually, it is repaid within the same year that it was taken, after which it is considered as an overdraft to be repaid with an interest.

In September 2020, the CBN’s Monetary, Credit, Foreign Trade, and Exchange Policy set of guidelines indicated, in section 3.2.15, that WMA shall continue to be available to the FGN to finance deficits to a maximum of 5.0 per cent of the previous year’s actual collected revenue.

Checks show that CBN lending to the Federal Government of Nigeria has a legal backing. Section 38 of the CBN Act, 2007 provides that the CBN 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 law states.

CBN’s data show that as of June 2015, the total government borrowing from CBN stood at N648.26 billion. It jumped from N856.33 billion in December 2015 to N2.23 trillion in December 2016. 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 CBN, in its Frequently Asked Questions published on its website, said when the Federal government exceeds its revenue, the CBN finances the government deficit through Ways and Means Advances, subject (in some cases) to the limits set by existing regulations, “which are sometimes disregarded by the Federal Government.”

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

Early this year, global rating agency, Fitch Ratings, warned the federal government against repeated recourse to the Ways and Means facility from the apex bank. In a January report, Fitch warned that “sustained use of direct monetary financing could raise risks to macroeconomic stability.”

The rating agency said given the current weak institutional safeguards, it expects the Federal Government of Nigeria to reduce its use of the facility in 2021.

The agency stated: “The FGN directly borrowed 1.9% of GDP from the CBN to fund its fiscal deficit in 2020, estimated by Fitch at 3.6% of GDP.”

Some months ago, the Director-General of the Debt Management Office (DMO), Patience Oniha, told a virtual meeting with investors and analysts that federal governments loans from CBN would be converted into bonds, payable in 30 years,

Minister for Finance, Budget and National Planning, Zainab Ahmed, said at the meeting that the federal government was working on securitizing its indebtedness to the CBN to be able to fund it.

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