As Nigeria faces perhaps its biggest economic test in decades, the move by the Central Bank of Nigeria (CBN) to convert the N4.4 trillion the federal government owes it into securities shows how constrained the balance sheet of the CBN is.
Securitisation – the conversion of an asset, especially a loan as a means to raise cash by selling them to other investors – is one of the few options the central bank has to build the much needed buffer it lacks in these unprecedented times.
To put this in context, Nigeria is heavily susceptible to swings in crude oil prices and a low price favours her in no way. Over 90 percent of Nigeria’s dollar earnings come from oil. As at Monday, a barrel of crude oil was $25.91, way below the recently revised benchmark price of $30, down from $57. The external reserve has fallen to $35.9 billion.
The revenue challenge of the government isn’t new. Prior to the current collapse in oil prices it sought to grow non-oil revenue via an increase in value added tax. In the meantime, the CBN has always stepped forward as the lender of last resort. This habit has now proven to be a bad idea. It has left it unprepared for a far bigger fiscal problem. A corona-induced plunge in demand for oil which pushed prices into a free fall coupled with battle between Saudi Arabia and Russia. The price has dropped by 60.74 percent since 2020, falling to near 2003 levels.
Though the CBN may pull off its plan to securitise the debt the government owes there are risks. The CBN is autonomous in name only, it’s not immune to political interference and likely to loan the government money when it comes calling again.
The strain on the government’s revenue won’t end soon. While the securitisation may clean the balance sheet of the apex bank, it could see the government’s debt service to revenue near 100 percent. As at today, the federal government’s debt service is over 61.4 percent of its revenue, higher than South Africa (13.7 percent), Egypt (54.5 percent), Ghana (44.2 percent), Kenya (34.8 percent) – the World Bank prescribes a debt service to revenue ratio of not more than 22.5 percent.
This is synonymous to a move-the-bad-apple-around policy. The bad apples are still there regardless of who is currently holding them. This will put the federal government in search for more revenue. With oil prices not making the oil source of revenue feasible to boost revenue, the non-oil source isn’t looking viable either as covid-19 slows down economic activities.
Although, allowing its official exchange rate for the naira to weaken to a more market-reflective rate is a big boost for cash-strapped federal, state and local governments who could all do with more cash at an unstable time like this.
While this move will help cushion the negative impact of falling crude oil prices on revenues, the concern is whether at an exchange rate of N308 to a dollar is fair enough. Analysts say the rate may need to weaken a bit more to between N400 N450 for it to be market-reflective.
As the economic consequences of the pandemic manifest, it will test if the initial measures the CBN, with its limited buffer, can absorb the effects. As numbers infected with the coronavirus increases, the upheaval it will cause will demand a more creative response from the CBN; in the US, for instance, the central bank has gone all out with an unlimited bond buying programme.