BusinessDay
NigeriaDecides2023

Yield on CBN’s N19trn overdraft to 100-year bond unattractive — analysts

Analysts have expressed concern over the suggestion by governors that the debt owed by the federal government to the Central Bank of Nigeria should be converted to a 100-year bond at a 1 percent interest rate.

In a meeting with President Muhammadu Buhari in July, Nigerian governors urged the federal government to turn the N19.01 trillion in outstanding Ways and Means Advances from the Central Bank of Nigeria (CBN) into a 100-year bond at an interest rate of one percent, according to a report by Premium Times.

One of the governors raised concern over how the CBN provided N19 trillion for federal government spending in apparent violation of the law, saying trillions of naira chasing a few billion dollars would put pressure on the foreign reserves and the exchange rate.

The governor also added that CBN’s ‘fixed exchange’ stance discouraged foreign investment (peak of $90bn investment commitments in 2018 to $20bn in 2021), and diaspora inflows ($20 billion), just as petrol subsidy has wiped out all accruals to reserves.

The apex bank is permitted to make short-term advances to the government under the Ways and Means clause included in Section 38 of the CBN Act of 2007, but the total amount of such advances outstanding must never go above 5 percent of the Federal Government’s previous year’s actual revenue.

However, since the government started experiencing a significant shortfall in revenue, it has relied heavily on the central bank to finance its expenditure programmes via Ways and Means Advances.

“The idea to convert N19 trillion ways and means to bond at 1 percent is not feasible,” said Oluwasesan Adeyeye, an analyst at CSL Stockbrokers Limited.

Read also: Nigeria moving towards high debt distress risk – Rewane

According to Adeyeye, the rate is not reflective of what is obtainable in the market.

“Also, it’s a 100-year bond, which means the rate the government should give should be more than the rate of a 10- to 30-year bond, considering the amount borrowed is huge also; the 1 percent proposed is not reflective of the market realities and does not consider the maturity of the bond,” he added.

Olaolu Boboye, an economist analyst at CardinalStone, said: “Long-dated instruments are supposed to attract higher yields, and the longer your hold, the more likely it is for you to default; hence, the 1 percent isn’t reasonable.”

He described the N19 trillion as huge, saying allocating it to the market would be difficult. “Liquidity is relatively tight to absorb the money at once,” he added.

According to Boboye, if the federal government were to heed the advice of the governors, there needs to be a clear stance on the government borrowings from CBN.

“How will the government treat subsequent borrowings from the CBN after this transaction? Will it be brought into the market or it will keep piling up? Who are the people that will have access to this, the entire market or a selected few?” he asked.

Data obtained from the CBN show that the Nigerian government’s total borrowing from the CBN through Ways and Means Advances rose from N17.46 trillion as of December 2021 to N19.01 trillion as of April 2022.

The N19.01 trillion is not part of the country’s total public debt stock, which stood at N41.60 trillion as of March 2022, according to the Debt Management Office.

The debt stock only captures the debts of the Federal Government of Nigeria, the 36 state governments, and the Federal Capital Territory.

Zainab Ahmed, minister of finance, budget and national planning, reported N1.63 trillion in revenue for January to April 2022. According to CSL Stockbrokers analysis, this figure, when annualised, comes to N4.89 trillion, which is 41 percent less than the N6.91 trillion budgeted for non-debt recurrent expenditure.

“The revised government expenditure for 2022 was estimated at an all-time high of N17.31 trillion. The revenue projection of N9.96 trillion will likely underperform the estimate. We forecast that the budget deficit will come in at N9.7 trillion, above the government’s deficit target of N7.35 trillion,” the analysis said.

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