• Thursday, March 28, 2024
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CBN financing of FG’s budget deficit threatens economic stability- Fitch

CBN financing of FG’s budget deficit threatens economic stability- Fitch

At a time when Nigeria can ill afford needless threats to an economy in recession, the repeated financing of the Federal Government’s budget deficit by the Central Bank through Ways and Means, is a risk to macroeconomic stability, according to the global rating agency, Fitch.

The practice hinders the ability of the CBN to control soaring inflation and keep the naira stable, Fitch said.

“The federal government of Nigeria’s repeated recourse to its Ways and Means facility with the Central Bank highlights weaknesses in public finance management,” Fitch said in a report released yesterday.

According to Fitch, the government has opted to use this source of financing, despite ample liquidity on its domestic debt markets, as illustrated by negative real yields. “Our understanding is that its ability to borrow from domestic debt markets is constrained by the authorisation granted by parliament in the budget law. The repeated resort to CBN thus reflects higher-than-expected deficits, pointing to entrenched weaknesses in public finance management,” it noted.

BusinessDay had exclusively reported last week that discrepancies between actual and budgeted revenues, has made the government continually depend on the Central Bank for financing widening deficits.

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Data from the Budget office of the federation shows that the CBN financed the federal government’s deficit to the tune of N2.8 trillion last year, after the pandemic caused a wider than expected revenue shortfall, and widened the deficits from the budgeted N4 trillion to an actual amount of N6 trillion.

Fitch noted that although a number of emerging markets resorted to central bank deficit financing in 2020 against a background of urgent spending needs and temporary market dislocations associated with the coronavirus pandemic. However, the use of central bank financing in Nigeria predates the pandemic shock.

That’s also in line with BusinessDay analysis of the government budget report, which showed that the Central Bank deficit financing rose to N1.9 trillion from N300 billion in 2014 and N1.2 trillion in 2015, and by 2019, the CBN was a net financer of the shortfall in the budget to the tune of N3.3 trillion.

The CBN’s guidelines limit the amount available to the government under its Ways Means Facilities to 5 percent 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 percent of the FGN’s 2019 revenues in 2020, Fitch noted

The CBN’s guidelines also require borrowing under Ways and Means to be repaid in the year in which it was granted. Fitch noted that although the government has stated its intention to securitise balances borrowed under the facility, published statistics indicate that the amounts borrowed have been rolled over repeatedly in recent years.

Unlike data from FG, Fitch says it estimates that the balance of the government’s Ways and Mean Facilities with the CBN was around N9.8 trillion, about 6.7 percent of GDP at end-2019, up from N5.4 trillion 4.2 percent of GDP) at end-2018. And after including the balance in its metrics for Nigeria’s government debt, borrowing from the facility accounted for 30 percent of the FGN’s debt at end-2019.

Meanwhile, the government indicated that the treasury paid N912.6 billion on the facility in 2020, equivalent to 9 percent only of the outstanding balance at end-2019, Fitch said

“Monetary financing of the fiscal deficit raises challenges to monetary policy implementation, as tight 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,”

High inflation in Nigeria is a credit weakness. Nigeria’s consumer prices rose by 15.7 percent year-on-year in December 2020. However, at present, “we view inflation as being driven primarily by cost-push factors – including restrictions on access to foreign exchange for imports, the impact of border closures on trade, hikes in minimum wages and VAT, and the removal of the fuel subsidy – rather than overly loose monetary policy,” the rating agency said.

Fitch views the Nigerian government’s fiscal revenue and expenditure projections for 2021 as broadly realistic, which should preclude further significant borrowing by the sovereign from the CBN facility this year. The government may nonetheless use the facility more extensively if the deficit proves wider than forecast or if external financing falls short of planned amounts.