The Federal Government’s borrowing from the Central Bank of Nigeria (CBN) is reported to have increased from N17.46 trillion in December 2021 to N19.01 trillion in April 2022. This article contributes to the ongoing conversations about this development by not focusing on the macroeconomic implications but rather providing an explanation that the scale of the lending may be linked to the preferences being exhibited by the leadership of the CBN.
Indeed, it is no longer news that the CBN governor, Godwin Emefiele, experimented with partisan politics by expressing an implicit intention to contest the presidential election primaries of the ruling All Progressives Congress (APC).
The aspiration was however short-lived due to the public uproar and Emefiele’s withdrawal of a court case meant to pursue his rights to contest the primaries. Such was the unpopular move by the governor that even the Independent National Electoral Commission (INEC) declared that sensitive election materials will no longer be kept at the CBN.
Most analysts cited provisions of the CBN Act 2007 and morality, as reasons why Emefiele’s attempted presidential ambition, while still in office, is an act of gross misconduct.
There are insinuations that his political affiliation and interest, rather than economic reasoning, is the overriding motive why the size of the CBN’s lending to the government is on the rise.
This write-up provides a scrutiny of the CBN’s holding of Federal Government’s domestic debt under different governors since 1982 and postulates that the reservations about the weakening operational independence under the current management may be genuine.
Between 1982 till date, the CBN has had six governors -Abdulkadir Ahmed (1982 – 1993); Paul Ogwuma (1994 – 1999); Joseph Sanusi (2000 – 2004); Chukwuma Soludo (2005 – 2009); Sanusi L. Sanusi (2010 – 2014), and Godwin Emefiele (2014 – to date).
An analysis of the CBN’s holding of the government’s domestic debt as published by the apex bank in its 2021 Annual Statistical Bulletin, shows that between 1982 and 1993, domestic debt was N902.25 billion.
Of this amount, the Abdulkadir Ahmed-led CBN held N543.24 billion or 60.2%, Deposit Money Banks (DMBs) held N114.79 billion or 12.7% and the Non-Bank Public (NBP) held N244.21 billion or 27.1%.
During the period 1994 to 1999, domestic debt was N3,162.68 billion and the CBN under the leadership of Paul Ogwuma held N2,424.16 billion or 76.7%, while the DMBs held N429.90 billion or 13.6%, and the NBP N308.62 billion or 9.8%.
Between 2000 and 2004, domestic debt was N5,781.24 billion and the CBN controlled by Joseph Sanusi held N2,605.45 billion or 45.1%, while the DMBs held N2,361.07 billion or 40.8%, and the NBP N814.71 billion or 14.1%.
The period 2005 and 2009 saw the government’s domestic debt increasing to N10, 997.13 billion and the CBN, with Chukwuma Soludo as governor, held N1,650.09 billion or 15%, while the DMBs held N5,775.86 billion or 52.5%, Sinking Fund was N284.29 billion or 40.8%, and the NBP N3,286.46 billion or 29.9%.
Total domestic debt was N31,735.17 billion between 2010 and 2014 and the CBN, led by Sanusi L. Sanusi, held N1,739.32 billion or 5.5%, while the DMBs accounted for N17,252.88 billion or 54.4%, Sinking Fund was N786.54 billion or 2.5%, and NBP held N11,956.44 billion or 37.7%.
The period 2015 to 2020 saw the government’s domestic debt swelling to N75,555.62 billion and Emefiele’s led CBN accounted for N10,765.74 billion or 14.3%, DMBs held N30,075.42 billion or 39.8%, Sinking Fund was N727.18 billion or 0.9% and the NBP held N33,987.29 billion or 44.9%.
From the discussions above, it is obvious that the CBN held a relatively high share of the government’s domestic debt between 1982 and 1999, which was the military era.
But upon the return to civilian rule and between 2000 and 2014, the CBN under the leadership of Joseph Sanusi, Chukwuma Soludo and Sanusi L. Sanusi, was able to rein-in fiscal dominance (defined as central bank’s lending to government above its legal limits) with the consistent decline in its holding of government’s domestic debt.
From 76.6 percent in the era of Paul Ogwuma, the CBN’s holding of government’s local debt dropped to 45.1 percent between 2000 and 2004 in the Joseph Sanusi period, and then declined to 15 percent between 2005 to 2009 under the leadership of Chukwuma Soludo before reducing further to 5.5 percent between 2010 and 2014 in the period of Sanusi L. Sanusi.
However, it increased to 14.3 percent between 2015 and 2020 under the leadership of Godwin Emefiele and could be higher if the analysis is extended to capture the period January 2021 to April 2022.
The surge in the CBN’s financing of the government’s deficit under Emefiele is not surprising given his ideological leaning. He has consistently argued, and rightfully so, that central banks globally do support their governments during difficult economic periods.
Historically, and as explained by Hooley et. al. (2021), the first set of central banks (Riksbank in 1668 and the Bank of England in 1694) were established to meet the fiscal needs of their governments, while most of the central banks set up in the 19th Century initially focused on financing wars.
But excessive borrowing from central banks is linked with severe macroeconomic risks as witnessed in Zaire (1991-92 and 1993-94), Angola (1994-97), Democratic Republic of Congo (1998) and Zimbabwe (2007-08, 2019-20), all of which experienced hyperinflation due to unchecked central bank lending to the government.
Because of the macroeconomic risks associated with excessive government borrowing from the central bank, legal limits became a feature globally. The aim of allowing some limited financing is to provide a lender-of last-resort facility to cover intra-year fluctuations in government revenues.
In most countries, advances and loans cannot exceed 10% of government revenues of the previous fiscal year or an average of the last three fiscal years.
In Nigeria, S.38(2) of the CBN Act 2007 provides that lending to the government should not at any time exceed 5 percent of the previous year’s actual revenue.
Read also: Beneficiaries of CBN’s fund demand more after N5.92bn disbursement
Nonetheless, it appears the CBN is using discretion rather than following the law in its lending to the government. Notable persons, including the former CBN deputy governor, Professor Kingsley Moghalu and former Monetary Policy Committee member and current chief economic adviser to the President, Dr. Doyin Salami, have at different times expressed their worries about the piggy-services being provided to the government by the CBN.
This article ends with the following suggestions: (1) The CBN should adhere to provisions of S.38 of the CBN Act 2007 that explains how it should lend to the government; (2) The National Assembly should make it compulsory for the CBN to periodically present the status of its lending to the government, the terms of such lending and the repayments.
This will not undermine its operational independence but rather ensure accountability, which is one of the hallmarks of a credible central bank; (3) Given the sensitivity of the position of the CBN governor, the National Assembly should consider amending S.9 of the CBN Act 2007 to prohibit principal officers from participating in partisan politics while in office.
Ekor, a lecturer, writes from Abuja
