Over the June 1st weekend, the Central Bank of Nigeria (CBN), dumped some pretty voluminous data from its most recent Statistical Bulletins about the state of Public Finances, external sector, domestic production, consumption and prices.
Buried among the mountain of data was information on the CBNs monetary financing of fiscal deficits, or claims on the Federal Government (essentially money owed by the FG to the CBN).
As at December 2018, such outstanding claims had hit N8.124 trillion, with overdrafts to the Federal Government (FG) alone at N5.415 trillion.
What is alarming about this is the steep rise in the CBNs claims on the FG in just 3 short years (2015 – 2018).
In the 20 year period between 1994 and 2014 the amount had never exceeded the N1 trillion level, according to CBN data.
In 2012, the amount was N733 billion, it fell slightly to N678 billion in 2013, and rose to N922.3 billion in 2014, just before the slowdown and subsequent recession hit the Nigerian economy.
As oil prices began to fall, with attendant slide in FG fiscal revenues, CBN claims on the Federal Government more than doubled to N2.513 trillion in 2015.
It doubled again at the end of 2016 to N5.2 trillion, stood at N5.87 trillion at year end 2017, and expanded to an unprecedented N8.124 trillion in 2018.
Given the implications of unrestrained monetary financing of fiscal deficits through overdrafts and converted bonds facilities, there is cause to wonder if the CBN has a plan to unwind the huge expansion of its balance sheet that it has undertaken.
Central banks sometimes finance government in period of temporary budget shortfalls, however what should be a temporary and small effort has become increasingly permanent with no end in sight in Nigeria.
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.
This also puts the CBN’s monetary tightening stance under increased scrutiny, because it looks increasingly counterproductive.
First the CBN has reduced banking sector liquidity by maintaining a high Cash Reserve Ratio (CRR), which mandates lenders to stash 22.5 percent of total customer deposits with the Central Bank at zero interest.
It has also pushed short-term rates higher through open market operations (OMO), while at the same time pumping liquidity into the economy via its backdoor financing of the FG.
The higher, the CRR, the less money commercial banks have for lending purposes, with negative consequences for the real economy.
Bank lending to the private sector has been flat to down since 2016 moving from N15.85 trillion (2016) to N14.599 trillion (2018), according to CBN data.
The CBN has in the recent past come out to justify its support for the Federal Government on the basis of its current revenue shortfalls.
According to the third quarter 2018 budget implementation report, the FG could only manage N2.8 trillion in the first eight months of 2018, about half of the N4.77 trillion it should have raised in that period to meet a full-year revenue target of N7.165 trillion.
Two straight years of lower than planned revenues in 2016 and 2017 pushed the government’s fiscal deficit to worrying levels.
In 2016, the government budgeted N3 trillion but earned only 56 percent, with revenues of N1.7 trillion.
In 2017, actual revenue of N2.7 trillion was only 54 percent of a N5 trillion target, according to data from the Budget Office.
So it is somewhat understandably that the CBN feels obligated to provide support to the FG at such difficult times.
However one key question the CBN must ask itself is whether the monetary support it is extending to the FG is causing more harm than good, and leading to greater distortions in the wider economy.
With growth below trend, inflation elevated, and companies not creating enough jobs but barely surviving, the outlook is grim for any hopes of a surge in revenue collection by the FG, any time soon.
This means that the value of loans/overdrafts extended by the CBN to the FG may continue to climb unrestricted, unless there is a deliberate change in policy or a hyperinflationary naira crises leading to an economic collapse, forces a halt!
In that sense one hopes that there is some method to the seeming monetary madness going on within the Central bank of Africa’s largest economy.
