• Saturday, July 20, 2024
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Credit to government drops to 1-yr low despite higher interest rates

Senate warns FG against excessive borrowing, okays N4.28trn loan

Commercial banks’ credit to the government dipped to a one-year low in the first quarter of 2024 despite higher interest rates on government securities.

Data obtained from the CBN showed that credit to the government declined by 28.8 percent to N19.59 trillion in March 2024, down from N27.53 trillion recorded in the corresponding period of March 2023.

“The decline in credit to the government is in line with the decline in credit to the whole economy by banks during the period under review. The decline is largely on account of the contractionary stance of the CBN as reflected in the increase in the cash Reserve Ratio (CRR) and the Monetary Policy Rate (MPR),” Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said.

Loans granted by commercial banks to the private sector also declined by 11.93 percent to N71.21 trillion at the end of March 2024 compared to the level of N80.86 trillion in February 2024.

On a month-on-month basis, credit to the government grew by 42.25 percent to N19.59 trillion in March 2024 compared to N33.92 trillion in February 2024, according to CBN data.

As part of its tightening measures to rein in inflation, the CBN, in the space of one month, raised its benchmark interest rate, known as the Monetary Policy Rate (MPR), by 600 basis points to 24.75 percent in March 2024.

Nigeria’s inflation rate increased to 33.2 percent in the month of March, according to the latest data from the National Bureau of Statistics (NBS).

The CBN also increased the Cash Reserve Ratio (CRR) from 32.5 percent to 45 percent, adjusting the asymmetric corridor around the MPR to +100/-700 from +100/-300 basis points, and retained the liquidity ratio (LR) at 30 percent.

Olubunmi said the prevailing macroeconomic headwinds that have adversely impacted the purchasing power of Nigerians and tax payment also impacted the lending of banks.

“In addition, given the attractive yields on government securities, some banks are also allocating more funds to treasury securities instead of direct lending,” he said.

Abiodun Keripe, managing director, Afrinvest Research and Consulting, said, “given the concerns over debt sustainability, we expect the CBN to be increasingly prudent in borrowing from the government.”

In February 2024, Olayemi Cardoso, governor of the CBN, announced that the apex bank will cease providing Ways and Means advances to the federal government until the outstanding balance is resolved.

Ways and Means serves as a loan mechanism enabling the Central Bank of Nigeria to cover the federal government’s budget deficits. In December 2023, the National Assembly endorsed the securitisation of the remaining debit balance of N7.3 trillion from the Ways and Means Advance, channelling it into the Consolidated Revenue Fund (CRF) of the Federal Government.

In March 2022, the Debt Management Office (DMO) disclosed that the federal government had borrowed a cumulative sum of N18.16 trillion from the Central Bank, sparking public apprehension.

The CBN data showed that credit to the government declined by 37.27 percent from N31.23 million in June 2023, when the current administration commenced operation.

In its recent assessment report on Nigeria, the International Monetary Fund (IMF) advised the Central Bank to consider increasing Open Market Operations (OMO) bills by as much as N2 trillion within the next year. The recommendation aims to address the issue of excess liquidity in the economy.

In December 2023, the national assembly granted President Bola Tinubu’s proposal to securitize the remaining N7.3 trillion balance of Ways and Means debt. Ways and Means functions as a temporary financing mechanism where the CBN offers short-term funding to bridge governmental budget gaps. Securitization involves consolidating diverse debt instruments and marketing them as bonds to investors.

Previously, both chambers had ratified the 2024 appropriation bill, elevating its scale from Tinubu’s initial proposal of N27.5 trillion to N28.7 trillion.