Misplaced reactions to Senate approval of N22.7trn ways and means loan

I have been invited to attempt to shed some light on the approval given on Wednesday, May 03, 2023 by the Senate on the Ways and Means Finance which has lingered since last year when it was submitted by the Executive to the National Assembly for approval.

The approval was stood down, we were told then because the Senate wanted some more details. Now often as you listen to reactions since this approval, you are left wondering at the obvious lack of clear understanding of the matter in hand.

As you read reactions including those from organised professional bodies, you are left wondering at the apparent lack of outstanding. Some have complained that this government that should by now be counting its days has gone ahead to take another loan. Questions are asked as to why such requests should not just be passed on to the incoming Administration.

But for goodness sake, this is not a fresh loan request. What this Administration has now tried to do is housekeeping to help clean out the mess; augers stable. The Ways and Means loan is accommodation extended by the Central Bank to the Government to enable it tidy over instances when it was faced with liquidity crisis as a result of shortfalls in revenue flows, such as beefing up allocations to state governments when there was a shortfall on accruals to the Treasury. If that was not the case, salaries will not be paid and we could reap a spate of wild cat strikes which will undermine economic activities.

What should be happening now as we attempt to restructure, is to reduce the debt stock to give more head room in this respect for additional borrowing as the need arises

It is important to observe here and now that this is a legitimate source of funding for the government. The only problem on this occasion is that the law that stipulates how the loan should be extended for control purposes to mitigate its inflationary impacts has been kept in the breach.

This loan is supposed to be of an amount not exceeding 5% of the previous year’s aggregate revenue and no further lending should be made under this heading until the outstanding debts have been retired. Obviously, that has not been the case, otherwise the outstanding will not be 22.7 trillion Naira as it currently stands.

Therefore for shouting out loud, this is not a new loan request and therefore all the clamour that an outgoing Administration should not be borrowing is flouting crass ignorance. Even the request by the Senate last year for details before approval smacks of a lack of adequate grasp of the issues.

The process has been abused and we are on a journey of remediation. Any further delays will exacerbate the already bad situation as we were duly informed that if not securitized there will be further addition of 1.8 trillion Naira to the debt stock by the end of 2023.

I am not sure how the National Debt Management Office has treated this debt. There is the clamour that this approval will bring the debt stock to about 70 trillion. Ideally, Ways and Means are veritable debts which should not be isolated from the total debt stock at any point in time.

And therefore what should be happening now as we attempt to restructure, is to reduce the debt stock to give more head room in this respect for additional borrowing as the need arises. And make the National debt situation not as abysmal as it now looks.

So what do we do as we Securitize? The Government issues instruments; bonds which it takes to the Stock Market for the public to buy and as it were to pay off this debt burden. It is restructuring because the government now has an extended period of time to retire the bonds as they mature.

Usually, the appetite for such debts will be dependent to the extent that the investing public assesses the offer as attractive as gauged by the coupon rate. There are funds out there looking for good investment outlets. One could attest to this fact as often we were informed that such government offerings were oversubscribed. Witness here the Sukuk bonds which have been issued now and again and have been reported to have been oversubscribed.

How to avoid such a situation in the future? Realistically, it is very difficult. Governments facing liquidity crises would always go to the Central Bank that has the tag of lender of last resort to the government. And since the Governor of the Central Bank is aware of the crises and the obvious negative consequences of refusal for macroeconomic stability, he will have no option but to oblige.

Read also: Illegal to issue N22trn ways & means bonds to CBN say experts

But what we can ask for, even if we are ready to acknowledge that it would be difficult, will be to try and observe the law. But more often the problems are such that it will not scratch its surface if you do so.

On the other hand, there is the overarching need to build strong institutions which is the hallmark of developed economies. Strong institutions evolve and will not just happen. We would have to revisit the recruitment process of the officers at the helm.

A situation where the President appoints even though subject to approval leaves the incumbent officer in a relatively weak position vis-a-vis the Executive. It is even more so for institutions dependent on the Executive for funding; he who pays the piper we are told dictates the tune.

We must applaud the Executive that took the trouble to clean up the mess. Supposing it simply walked away leaving the Central Bank to stew in its juice what could have happened? Therefore overall what just happened is a positive development for the economy and must be seen as such. No doubt one problem certain to confront the incoming Administration is that of debt sustainability as the Treasury battles the problems of inadequate revenue inflow.