• Friday, March 29, 2024
businessday logo

BusinessDay

Broke FG taps lender of last resort for biggest bailout since 1999

Zainab Ahmed

As at the end of August, the Central Bank of Nigeria (CBN) had financed the Federal Government to the tune of N4.4 trillion, according to official data. The apex bank continues to act as a piggy bank to a struggling sovereign while turning a blind eye to the economic consequence.

The money, which is the net sum of outstanding CBN overdrafts to the FG minus the government’s treasury single accounts (TSA) deposits with the CBN, went into plugging a higher-than-expected budget deficit this year as well as some carry-over obligations from the last two years.

More than anything, the rapid growth in the CBN’s bailout for the Federal Government this year exposes how the latter’s financial challenges have worsened in 2019.

As at the end of December, the CBN’s net claims on the Federal Government, which is the difference between the apex bank’s total claims on the FG versus the FG’s deposits with the bank, was N400 billion.

Fast forward eight months and that figure grew more than tenfold to N4.4 trillion, according to CBN data, the most since at least the return to democratic rule in 1999.

For context, N4.4 trillion is equivalent to the entire FG’s 2014 budget and more than half of the 2019 budget. The figure is also 15 percent more than the FG’s total revenue in 2018.

The CBN’s spokesperson, Isaac Okarafor, didn’t immediately respond to calls seeking comment.
Sometime in July, the CBN, in a scathing response to what it called false media reports, said that it was a net creditor to the FG only on two occasions in the last five years being 2016 and 2018.

With the trend observed this year, the CBN is almost nailed on to be net creditor to the FG in 2019, a trend analysts and economists say could be a future drag on economic growth.

“It’s a dangerous game we are playing and there are signs the CBN is becoming worried as well,” a former CBN deputy governor told BusinessDay.

When the Central Bank is funding the government this much, it raises money supply and risks spurring inflation.

Pumping so much liquidity into the market also has negative implications for the exchange rate and could see the CBN dig even deeper into already thinning external reserves to defend the naira against all odds. It also crowds out the private sector, which in turn starves the economy of new investment and jobs.

“That’s why at the last MPC meeting, the CBN called on the government to adopt a big bang policy to boost revenues through privatisation,” the person who did not want to be quoted due to the sensitivity of the matter said.

Beyond its economic risks, the excessive funding of the federal government by the CBN contravenes the financial law binding on member countries of the Economic Community of West African States (ECOWAS).

The ECOWAS norm for central bank financing of the government’s budget deficit is capped at 5 percent of revenue, which has now been well surpassed in Nigeria.

Analysts say while central bank’s financing may be inevitable in an environment with lower tax revenues due to recession and undeveloped financial systems, borrowing from the apex bank should be on a transitory basis.

Ideally, where such borrowing is undertaken, the loans should be repaid within the same fiscal year, and gradually, the government should wean itself off central bank financing of deficits.

Zainab Ahmed, the finance minister, may need to reassert herself and put an end to the fiscal recklessness of the federal government, according to some sources familiar with the matter. Standing up against the president is no easy task, but the minister needs to act fast, if the country is to avert a severe financial crisis, sources tell BusinessDay.

A new economic advisory council (EAC) set up by President Muhammadu Buhari has as its chairman, Doyin Salami, a former member of the Monetary Policy Committee (MPC) who heavily criticised the CBN’s funding of the government in 2017 while still an MPC member.

There are expectations that Salami would have as part of his remit as head of the new EAC, advice  the government to finance its budget in a more sustainable manner and ditch the excessive CBN bailouts.

Since 2015, when President Muhammadu Buhari first assumed office, the total amount of money borrowed from the CBN (Ways and Means) to meet fiscal obligation has surged by more than 14 folds on the back of consistent higher than planned budget deficits owing to the unrealistic revenue target set by Africa’s biggest oil producer in its budget.

In 2014, borrowing by the Federal Government stood at N922 billion. This later surged to N2.5 trillion in 2015, N5.21 trillion in 2016, N5.87 trillion in 2017, and a whopping N8.12 trillion in 2018.

“The Federal Government has been running a huge fiscal deficit and as such, the central bank is lending to the Federal Government through Ways and Means and this has a serious multiplier effect in the economy,” said Johnson Chukwu, managing director/CEO at Lagos-based financial and investment house, Cowry Asset Management Limited.

“What this does is that it would increase inflation, crowd out the private sector and make the CBN to have a weaker balance sheet,” Chukwu said on the phone.

Since 2016, the Federal government has failed to meet the revenue target stipulated in the budget and the variance keeps getting wider as the country gradually recovers from the global collapse in oil prices that sent the oil-dependent nation to its first recession in a quarter of a century in 2016.

In 2018, for example, Nigeria approved a fiscal expenditure of N9.12 trillion and hoped to rake in about N7.2 trillion from both non-oil and oil sources. An anticipated revenue of about N7.2 trillion means the government would have to borrow about N1.9 trillion which in the budget is stipulated as fiscal deficit.

However, data from the Budget Office of the Federation showed that the Federal Government could only retain a meagre N3.9 trillion, thereby pushing the deficit higher than projected.
The poor revenue turnout highlights the need for the government to urgently seek ways to improve non-oil revenues.

Plans to raise VAT by 2020 to 7.5 percent is one way the federal government will be seeking to plug its gaping revenue shortfall that has seen it rely so much on CBN bailouts. But whether that will be enough to significantly boost revenues remain to be seen.

On the evidence of previous tax revenue rescue schemes like the Voluntary Assets and Income Declaration Scheme (VAIDS), any optimism that the government can significantly boost its tax take in the short term fades. While targeting to raise N360 billion from the scheme, only N30 billion has since been raised.

“Privatisation is the best way out for the government, there are assets idling away that can generate income and help alleviate the increasingly reliance on life support from the CBN,” said Wale Okunrinboye, head of research at Lagos-based Sigma Pensions.

LOLADE AKINMURELE