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Growing stress points on the sovereign balance sheet

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“Some got hopes and dreams, we got ways and means,” boastedPras, one trio of the famous rap group The Fugees in his smash hit “Ghetto Supastar” released in 1988.

While there is no way to verify Pras’ claims the catchy phrase could certainly be a soundtrack to the Central Bank of Nigeria (CBN) which is increasingly lending directly to the Federal Government through overdrafts largely funded by Ways and Means Advances or money printing.

The CBN as banker to the FG sometimes finances government in period of temporary budget shortfalls through Ways and Means Advances, however what should be a temporary and small effort has become increasingly permanent and growing fast.

Large expansions of central bank balance sheets have implications both for the real and financial sectors of the economy.

This is because any accumulation of assets implies an increase in corresponding liabilities, also expanding the CBN balance sheet in order to finance government spending often leads to inflationary outcomes.

The CBN overdraft to the FG was close to N3trillion as at June, 2017, according to CBN and International Monetary Fund (IMF), data (see chart).

The CBN has since discontinued publishing data on overdrafts to the FG, but we suspect it has grown worse since then, following the overall trend of growing FG revenue shortfalls and rising debt.

Source: IMF

Higher-than-historical fiscal deficits and a challenging macroeconomic environment pushed up Nigeria’s public debt from 12 percent to 19.6 percent of gross domestic product (GDP)between 2014 and 2016.

The Federal Government interest payments on its outstanding debts as a percentage of expected revenue almost tripled from 27 percent in 2014 to an estimated 71.9 percent of actual revenues received in 2017.

The IMF projects that this will reach 81.7 percent of Federal Government (FG) revenue in 2022, up from 61.7 percent in 2016.

An interest rate shock, would further increase it to 104 percent of FG revenue by 2022, according to IMF forecasts.

In 2018,N2.2 trillion was budgeted for debt servicing and creation of a sinking fund to retire debt, while the nation’s debt keeps growing, moving from N15 trillion in 2015 to N22.4 trillion as at September 2018, according to data from the Debt Management Office (DMO).

Another area of growing strain on the sovereign balance sheet is the asset management corporation of Nigeria AMCON liabilities which are currently being warehoused on the CBN’s balance sheet all backstopped by the Federal Government.

AMCON has liabilities (debt) to the tune of over N5 trillion(4 percent of GDP).
This is a debt pile it continues to pay interest on (albeit to the CBN), even as it has yet to return to profitability.

The Corporation recorded total loss for 2017 of N14.37 billion down from the N64.82 billion loss recorded in 2016.

AMCON is set to sunset by 2022, just 3 years from now and it is still a mystery how these liabilities will be unwound.

More strains are also showing up in the form of wage pressures for the Federal Government and states.

Partly as a result of the new minimum wage demands the FG has budgeted N4trillion for non-debt recurrent expenditure in 2019, about the same as what was spent on the capital and recurrent budget in 2014 combined.

The last time the minimum wage was increased (in 2010), the Federal Governments recurrent expenditure spiked by 19 percent to N2.5 trillion in 2011 from N2.1 trillion in 2010.

Meanwhile many subnational states cannot afford to pay the previous N18, 000 minimum wage, calling into question how they will manage with the new adjustments.

As is the trend in Nigeria, recurrent expenditure has always exceeded capital expenditure, and an increase in minimum wage across board will further stretch state governments’ debt burden already estimated to be over 150 per cent of their revenue on average, and approximately one fifth of the total government debt.

A good majority of the states are effectively bankrupt and have already been bailed out twice by the current Government, meaning their liabilities are effectively again being backstopped by the FGs sovereign balance sheet.

Throw in the numerous opaque swap arrangements the CBN has signed, its (CBN) numerous development financing interventions, contractor liabilities to the tune of N2 trillion, expenditure on petrol subsidy of over N1 trillion per annum currently borne solely by the sovereign through NNPC, the liquidity crisis/shortfall in the electricity market estimated at over N1 trillion, and a full blown fiscal crises may soon emerge.

In the end these stress points are surely causing damage to the real economy today through numerous channels.

The distortions they are bringing are set to permeate the Nigerian economy, with the negative after effects lasting much longer than Pras’ short-lived career.

 

PATRICK ATUANYA

1 Comment
  1. LRNZH says

    I suspect that devaluation of the Naira is their planned way out of this mess they’re creating, assuming they’re even thinking about a way out and not leaving it to “tomorrow” to take care of itself.
    What to do?

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