Nigeria’s Federal Government acknowledged its unhealthy reliance on central bank (CBN) loans by announcing plans to securitise the existing loans and take them off the CBN’s stretched balance sheet.
The CBN’s net financing to the Federal Government stood at N4.4 trillion as at August 2019 from less than N400 billion in December 2018, according to most recent CBN data, the highest bailout since 1999.
For context, N4.4 trillion is equivalent to the entire FG’s 2014 budget and over a third of the 2020 budget. The figure is also 15 percent more than the FG’s total revenue in 2018.
This massive expansion of the CBN’s balance sheet is not the only problem such excessive lending causes.
Pumping so much liquidity into the market has negative implications for the exchange rate as it boosts naira supply 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.
Added to the negative economic consequences, lending so much to the Federal Government violates the CBN’s own rule. It is a violation of the Central Bank Act of 2007 (Section 38.2) which caps advances to the FGN at 5 percent of the previous year’s revenues.
In this case, the CBN allowed the Federal Government access to overdrafts topping its entire revenue when it should not be lending it more than N400 billion.
The N4.4 trillion net loans to Federal Government, which is the net sum of outstanding CBN overdrafts to the FG minus the government’s Treasury Single Account (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.
Last July, the CBN said 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 last year, the CBN was probably a net creditor to the FG in 2019 and there were fears same could happen again this year owing to lower oil revenues.
“It was a dangerous game we were playing and it comes as a relief that the Federal Government seems to be retracing its steps one at a time,” a former CBN deputy governor told BusinessDay.
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.
There were expectations that the Doyin Salami-led Presidential Economic Advisory Council, when it was inaugurated last year, would have as part of its remit 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-fold 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.
Sources familiar with the FG’s plan to securitise its borrowings from the CBN commended the move.
They say the securities will be sold to private investors in the form of bonds with varying tenors by the Debt Management Office (DMO).
This way, the CBN gets some cash flow and is able to repair its balance sheet which has taken a hit from the increased funding of the Federal Government via ways and means in response to lower revenues.
The tenors of the securities and offer rates are yet to be decided. Also, no specific timeline has been given to when this will happen but BusinessDay learnt that the president has given his approval.
The impact of the move will see yields on other government securities go up as supply would have increased by the time the new securities hit the market.
Demand for the securities is mostly anticipated to come from the pension funds and other non-bank local investors who have been banned from buying Open Market Operations (OMO) bills.
LOLADE AKINMURELE
