FRA: Banks need to obtain proof of compliance before lending

Banks are under obligation to request and obtain proof of compliance with the relevant provisions of the Fiscal Responsibility Act (FRA) 2007 before lending to any government, according to Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi.

The Fiscal Responsibility Act 2007 established the Fiscal Responsibility Commission (FRC) to, among other things, as provided in Section 3 (1a) of the Act, monitor and enforce the provisions of the same Act.

An important function of the Commission is, to monitor the borrowing and indebtedness of the three tiers of government in the Federation in order to ensure debt sustainability.

Section 44(1) stipulates that any Government in the Federation or its agencies and corporations desirous of borrowing shall specify the purpose for which the borrowing is intended and present a cost-benefit analysis detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.

Section 44 (2) of the Act, it says the existence of prior authorization in the appropriation or other Act or Law for the purpose for which the borrowing is to be utilized, and the proceeds of such borrowing shall solely be applied towards long-term capital expenditures.

The Commission shall verify, on a quarterly basis, compliance with the limits and conditions for borrowing by each Government in the Federation, as seen in Section 44(4). Section 45: Lending by Financial Institutions

All banks and financial institutions shall request and obtain proof of compliance with the provisions of this Part (Part X Borrowing) before lending to any Government in the Federation, as stated in Section 45 (1).

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Section 45 (2) says lending by banks and financial institutions in contravention of this part shall be unlawful. Section 46 (1c) prohibits the CBN from granting guarantees on behalf of any Government in the Federation.

As stipulated in Section 47 (1), ‘the Minister may, with the approval of the Federal Executive Council, grant guarantees on behalf of any Government in the Federation’.

However, ‘any guarantee provided in excess of the debts limits set according to section 44(1) of this Act shall be an offence’. S. 47 (4).

Government borrowing (at all levels) has been on the rise over the years causing strain on the government balance sheet and stifling development, said Uwaleke.

Speaking at a stakeholder dialogue on implementing Section 45 of the Fiscal Responsibility Act 2007, at the weekend in Lagos, he said the CBN can help to restrain State governments from unbridled borrowing from commercial banks by imposing stiff sanctions on erring banks for failing to comply with the requirements of the FRA.

The public debt has become unsustainable. According to the International Monetary Fund (IMF), ‘A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default’.

Nigeria’s total public debt stock as at June 30 2023 amounted to about N87.4 trillion according to the Debt Management Office (DMO).

This comprises external debt of about N33.3 trillion (or $43.2 billion) and domestic debt of about N54.1 trillion (or $70.3 billion).

Nigeria’s official public debt stock has risen by as much as 677 percent between December 2014 and June 2023. While the domestic debt component rose by over 460 percent, the external component between the same period increased by over 1,900 percent.

Nigeria’s debt service/revenue ratio (76% as at November 2021) is the highest among African top economies; the pressure point is on debt service to revenue ratio.

For example, between January and April 2022, whereas actual government revenue was N1.63 trillion, debt service gulped N1.94 trillion, according to the Budget Office.

Raising a major challenge in view of the opportunity cost of debt service- the forgone use to which this huge sum could have been put.

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“As earlier noted, fiscal risks from subnational governments may be manifested in several forms, the FG may have to bail out a State government if its debt becomes unsustainable. There have been several instances of FG’s bailout of states, severely impacting the public finances.

“In 2015, for example, President Buhari approved a special intervention fund and a relief package aimed at assisting State governments restructure their commercial loans which was put at over N660 at the time,” he said.

There is the need to verify if a proposal for borrowing by any government in the Federation meets the stipulations of Sections 41 and 42 of the FRA, 2007.

It has been argued that unconditional bailouts of states by the FG create a moral hazard- a situation where states become lazy and pay little attention to internally generated revenue (IGR) as well as develop the penchant to overspend and to borrow in anticipation of a rescue package from the FG.

Bailout packages have also been criticized for rewarding state governments that made poor decisions such as borrowing short term loans from the commercial banks to finance long term projects instead of approaching the capital market.

State governments are legally empowered to borrow domestically subject to terms and conditions set by the center. So, they are expected to domesticate the FRA. But not all States in the federation have domesticated the FRA.

This funding mismatch is one of the reasons for the huge debt burden in many states of the federation, he said.