CBN loans to FG hit N18trn, raise worries

The Federal Government has increased its total borrowing from the Central Bank of Nigeria (CBN) to N18.16 trillion, more than 40 percent of the money supply in the economy, according to official data collated by BusinessDay.

The Debt Management Office (DMO) disclosed last Thursday that the country’s public debt stock increased by N6.64 trillion last year to N39.55 trillion in December.

The N18.16 trillion owed by the Federal Government to the CBN is currently not included in the data on public debt stock, which comprises the debts of the Federal Government, the 36 state governments and the Federal Capital Territory.

Its inclusion, which the debt office said it was working on last year, would increase the country’s total debt to over N57 trillion as of December.

CBN loans to the Federal Government through the Ways and Means Advances surged by N4.34 trillion last year to N17.45 trillion in December. The government borrowed N704 billion in January this year, the latest data from the apex bank showed.

Ways and Means Advances is a loan facility used by the central bank to finance government in periods of temporary budget shortfalls subject to limits imposed by law.

“If the central bank keeps financing the government deficit through ways and means advances, it is not healthy for the economy. It is worrying because it adds to the debt stock, which is rising,” Akpan Ekpo, an ex-member of the CBN Monetary Policy Committee (MPC), told BusinessDay.

“We have to be very careful. At some point some years ago, the CBN stopped ways and means advances. It is very difficult at times for CBN to tell the government ‘no’ because it is a banker to the government. But there are times when they need to say, ‘Let us have some rethink as to the rising ways and means advances.’”

According to the professor of economics, the country already has what is called ‘fiscal dominance,’ which is affecting inflation.

The CBN data revealed that net claims on the central government jumped to N10.03 trillion in January 2022 from N8.56 trillion in December 2020.

Claims on the central government soared to N20.96 trillion in January 2022 from N16.47 trillion in December 2020, while liabilities to the central government surged to N10.93 trillion from N7.92 trillion.

In May 2015, when President Muhammadu Buhari came to power, the total borrowing from the CBN was N789.67 billion, claims on the central bank were N1.48 trillion and liabilities to the central government were N2.01 trillion.

“Our economy is in a stagflation phase; we have a high unemployment rate of over 30 percent, we have inflation at double-digit and rising again, and we have sluggish GDP growth. So, ways and means advances will compound the problem,” Ekpo said.

According to Section 38 of the CBN Act, 2007, the total amount of such advances outstanding shall not at any time exceed five percent 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,” it says.

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The last time the Federal Government made a repayment was in May 2017, and its debt to the CBN has been growing steadily since then, the bank’s data showed.

The World Bank, in a report in November last year, noted that the Federal Government’s recourse to CBN’s overdraft facility had repeatedly exceeded the limit of five percent of the previous year’s fiscal revenues.

It said the government continued to draw on the facility in 2020, with borrowing from the central bank amounting to around 80 percent of the previous year’s fiscal revenues.

In 2020, the government turned to the apex bank for a record N4.9 trillion to plug its fiscal financing gap amid the economic fallout of the COVID-19 pandemic, bringing its total borrowing from the CBN to N13.11 trillion at the end of that year.

“N18 trillion is significant. It is about 40 percent of the money supply,” Bismarck Rewane, MD/CEO of Financial Derivatives Company Ltd, said.

Money supply (M2) rose to N44.46 trillion as of January 2022 from N37.74 trillion a year earlier, according to the CBN.

“If the Federal Government was to say it cannot borrow from the central bank today, and therefore put N18 trillion worth of securities into the market, interest rates will spike,” Rewane, a member of the Presidential Economic Advisory Council, told BusinessDay.

He said the reason for the high level of ways and means advances was that the government was issuing Treasury bills at what he described as “artificially depressed interest rates.”

The financial expert said, “When you have interest rates that are so far below the rate of inflation, it results in distortion. Rational investors are saying that it doesn’t make sense for us to buy government paper, and it’s because they didn’t buy government paper that we are having high ways and means advances.

“The interest rate structure is not efficient. Move your interest rate as close as possible, not immediately – but just start moving it, towards the level of the inflation rate.”

Money supply expands, heightens inflation risk

Nigeria saw its money stock rise by more than 13 percent last year, caused partly by the increased borrowing by the Federal Government from the central bank.

The broad money supply (M3) in the country stood at N43.82 trillion in December 2021, up from N38.63 trillion a year earlier, according to the CBN. It rose to N44.56 trillion in January this year.

The money supply growth spiked in November and December, with growth rates of 10.10 percent and 13.77 percent respectively exceeding the provisional annual benchmark of 9.64 percent.

Robert Asogwa, a member of the MPC, highlighted “three worrisome indicators” at their meeting in January, describing the inflationary rise in December, the surge in M3, and the persistent debt build-up as “key issues of policy concern.”

He noted that the M3 jumped from 4.72 percent on a month-on-month basis at the end of September to 7.37 percent in October.

“CBN staff report shows that this growth was largely driven by increases in central bank’s claims on the Federal Government and other sectors,” Asogwa said. “The key concern is that such significant monthly increases in broad money may sooner than later be adding to domestic inflationary pressures and this has to be closely watched.”

World Bank, IMF raise concerns

According to the World Bank, if Ways and Means financing from CBN and AMCON debt are included in the public debt, short-term debt vulnerabilities are enhanced, raising more immediate concerns about debt sustainability.

Debts of the Asset Management Corporation of Nigeria (AMCON) guaranteed by the Federal Government are reported in DMO’s accounts as contingent liabilities. The corporation was set up in 2010 to take on bad debts and rescue the nation’s banking industry from collapse.

The World Bank said, “Nigeria’s debt remains sustainable, albeit vulnerable and costly, especially due to large and growing financing from the Central Bank of Nigeria. While currently the debt stock of 27 percent of GDP is considered sustainable, any macro-fiscal shock can push debt to unsustainable levels.

“From a financial management perspective, using the overdraft facility to finance the government deficit is costly. The CBN charges an interest rate of the MPR plus 300 basis points, considerably exceeding current T-bill and T-bond interest rates.”

The multilateral lender said without appropriate measures to reduce Ways and Means financing and restructure the existing stock of federal arrears to the CBN, the rising cost of debt servicing would continue to constrain the government’s already limited fiscal space, and make government planning and budgeting difficult and unrealistic.

In February this year, the International Monetary Fund (IMF) highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks in Nigeria, calling for significant domestic revenue mobilisation.

The Washington-based fund said last year that central bank financing of budget deficit should be phased out in order to reduce inflation, adding, “The increasing reliance on CBN overdrafts has come with negative consequences.”

Efforts to securitise FG’s debt still underway

In a letter of intent to the IMF regarding Nigeria’s request for emergency financial assistance of $3.4bn in 2020, Zainab Ahmed, minister of finance, budget and national planning, and Godwin Emefiele, CBN governor, said the recourse to central bank financing would be eliminated by 2025.

They added that the existing stock of overdrafts held at the CBN would also be securitised.

“We are not sure that has been done. That could have been a better way of postponing the evil day because when you securitise, it doesn’t mean that you won’t pay later. It is just that in the short and medium term, you minimise the risk,” Ekpo said.

Bloomberg reported on February 16, 2021 that the Federal Government had set the terms for the conversion of its stock of central bank overdrafts into long-term notes in a bid to create transparency around its dependence on that source of funding.

Patience Oniha, director-general of DMO, was quoted as saying at the time that the N10 trillion debt would be exchanged for 30-year notes issued to the central bank, adding that the agreement on timing for the conversion needed to be finalised to get the required approval from the cabinet, at the earliest in the second quarter of 2021.

Oniha said in October last year that the country’s public debt-to-GDP ratio was increased from 25 percent to 40 percent to accommodate other existing debts, including the ways and means advances as well as promissory notes being issued by the government.

“We are about 22 percent in June 2021. But we do recognise that some things are happening that should be part of debt stock. One of them is the ways and means advances. So, you have to create space for it; you don’t have to wait until you securitise it,” she said at the Nigerian Economic Summit in Abuja.

According to her, the ways and means advances have to go through a process for it to be included in the public debt stock.

“So, we are going through that process of restructuring it, and once it is restructured and it passes through the Federal Executive Council and the National Assembly, it will be added to the public debt stock. The CBN Act allows it to lend to the Federal Government; it is just how much it should lend that is the issue,” she said.

Oniha, in an interview with journalists last Thursday, spoke on the process of converting the CBN overdrafts to bonds.

“The process of converting the CBN Ways and Means, which is the government’s overdraft at the Central Bank of Nigeria, into long tenor bonds is still ongoing, and related parties, that is, the monetary and fiscal authorities, are still in discussions,” she said.