Planned issuance of N22.7trn bonds to CBN seen as illegal

The government of outgoing President Muhammadu Buhari dealt illegally with the central bank, which was a willing ally in the controversial ways and means borrowing but the plans to securitise the N22.7 trillion loan has also now been caught in a debate over whether the law is being broken.

In a May 4, 2023 note to the public, the Debt Management Office said the securitisation will have a 40-year tenor with a moratorium of three years, attract an interest rate of 9 percent per year and that the “the securities will be issued to the Central Bank of Nigeria by the federal government.”

Experts have cried foul, saying a debtor cannot sell what he is owing to the lender and even more so the Central Bank of Nigeria Act prohibits such a transaction in which the apex bank is a direct party to a transaction involving ways and means securitisation.

What the law says

Section 38, sub-section 3(b) of the CBN Act 2007 states: “…no repayment shall take the form of a promissory note or such other promise to pay at a future date or securitisation by way of issuance of treasury bills, bonds, certificates or other forms of security which are required to be underwritten by the bank.”

One expert said one way out of the legal quagmire will be for the bonds to be sold to Nigerian banks which may ultimately resell to the central bank in several ways. The central bank can do this by reaching an understanding with the banks to fund the bond purchase from what they currently hold as cash reserve ratio with the apex bank and earn up to 9 percent compared to the zero percent they can get for the cash sterilised by the regulator.

Otherwise, the National Assembly must amend the CBN Act for the planned bond sale to happen, one analyst said.

The debt owed by the Federal Government to the CBN ballooned in recent years as the Buhari administration went into a borrowing binge partly to fund an overbloated public service.

The debt owed to the central bank ballooned to N23.77 trillion as of October 2022, more than 30 times what Buhari met in 2015. It was N789.67 billion when President Goodluck Jonathan left office.

One of the provisions of the CBN Act, 2007 mandates that in the event of a revenue shortfall, the CBN must not lend to the Federal Government an amount more than 5 percent of the previous year’s revenue of the government.

That section of the CBN Act aims to prevent the overreliance of the central government on CBN financing, instead of opening up the economy to boost domestic investments as well as attract foreign direct investments.

Section 38 of the CBN Act states: “Notwithstanding the provisions of the section 34(d) of this Act, the Bank (CBN) may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate as the Bank may determine. The total amount of such advances outstanding shall not at any time exceed five (5) 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.”

Analysts’ views

Olaolu Boboye, a fixed-income analyst at Lagos-based CardinalStone Limited, said total government debt would increase and the loan would be subject to market factors such as interest rate risks.

Planned issuance of N22.7trn bonds to CBN seen as illegal

Boboye said the N20 trillion is bigger than the entire pension fund in the market, and the market might not be ready to take the N20 trillion at once, adding that the government would need to spread the amount over a period of time, maybe two to three years.

Gbolahan Ologunro, a senior research analyst at Cordros Securities, said over the years, there has been an increased focus on the government to reduce its reliance on the CBN, “so it is not unexpected that the government has decided to securitise the N20 trillion debt”.

Ologunro said the government has breached the CBN Act several times with ways and means advances exceeding the 5 percent revenue threshold, adding that it would be more precarious if steps are not taken to reduce the overdraft facility with the CBN.

He said: “The conversion would add further uptick in market yields which would not be favourable to debt servicing. We are likely to see further financing for debt servicing, just as the 2023 budget has shown.

“Furthermore, taking that huge debt from the central bank would send signals to international communities on the monetary policy framework. Overall, we shouldn’t see a further increase in the overdraft facility.”