Nigeria barely meets up with projections in the budget, and for 2021 it has set an ambitious target, creating doubts in the minds of analysts on how realistic the projections are.
Discrepancies between actual and budgeted revenues have continued to widen, so much so that the government relies on life support from the Central Bank of Nigeria (CBN) to plug ballooning deficits.
In 2020 for instance, the CBN financing of the budget stood at N2.86 trillion, according to data obtained from the Budget Office of the Federation.
That is about 72 percent of the government’s retained revenue of N3.94 trillion in the period and more than the N3.28 trillion from both domestic and foreign borrowings, and far more than the 5 percent of government’s revenue threshold the CBN Act stipulates the Bank can lend to the government.
The huge deficit financing by the CBN in the period was due to the huge drop in actual revenues compared to an increase in expenditure, triggering a further widening of the actual deficit to N6.14 trillion from the planned N4.61 trillion.
This year, Africa’s most populous nation is working with a deficit projection of N5.6 trillion, which is about 42 percent of the entire fiscal spend for the year.
But that is on paper. Like other years, there is a high chance the deficit will increase further, and the monetary authorities would have to do the heavy lifting to plug the shortfalls.
When the CBN continues to lend to the government, who in turn makes no efforts to pay back the loans, it injects liquidity into the economy and puts pressure on the exchange rate and the inflation rate, according to Johnson Chukwu, MD/CEO, Cowry Asset Management Limited.
“The excess liquidity in the economy that the CBN has been managing through the issuance of several instruments including special OMO are largely as a result of the liquidity injections through Ways and Means. But the challenge is that when you push liquidity into the economy through Ways and Means, you trigger inflationary pressure, as more cash will pursue fewer goods since it doesn’t come with a simultaneous increase in production activities,” Chukwu said.
One would have argued that the CBN financing last year was as a result of the pandemic, which reigned severe havoc on Nigeria’s revenue. But the habit of taking on the burden of financing fiscal deficit has been a reoccurring one.
Data showed that in 2016 when Africa’s biggest economy was hammered by the dual impact of a fall in crude oil prices and a crash in oil production caused by agitations in the Niger Delta region, the CBN deficit financing rose to N1.9 trillion from N300 billion in 2014 and N1.2 trillion in 2015.
By 2019, the CBN was a net financer of the shortfall in the budget to the tune of N3.3 trillion.
“When the CBN prints money without a commensurate activity to back up the money, what we will have is inflation and a weakening currency, thereby eroding purchasing power,” Joachim Macebong, senior analyst at SBM Intelligence, said
“That action has been the reason why we have had high double digit inflation for the entirety of the Buhari administration,” Macebong told Businessday.
Omotola Abimbola, senior associate, investment research, Chapel Hill Denham, said nearly all central banks did the same (or worse) last year given the extraordinary situation. “But the problem is that this isn’t a cyclical problem in Nigeria, but more of a structural one,” Abimbola said in a tweet.
Whether the CBN continues to act as a piggy bank to the Federal Government this year will depend on the revenue outturn. However, going by the revenue trends of the past decade where actual revenues have always fallen short of budgeted revenue, the possibility of the CBN stepping in to bail out the Federal Government is high.