Nigeria is likely to borrow more this new fiscal year, especially with the federal government facing another year with a larger budget deficit than originally projected. A major part of this borrowing will be from the Central Bank of Nigeria. Although the Ministry of Finance has highlighted some grand plans for the sources of funds for the country’s extra spending, it will be impossible to avoid loans from the CBN. However, borrowing from the CBN would not only constitute a further breach of the laws governing the CBN but demonstrates the incapacity of the federal government to live up to its fiscal responsibility under the Fiscal Responsibility Act 2007.
According to the 2023 budget signed by President Buhari on January 3, Nigeria plans to spend N21.8 trillion against revenue of N10.5 trillion. This leaves a deficit of N11.3 trillion. Zainab Ahmed, Nigeria’s finance minister, stated that N7.04 trillion will be sourced from the domestic market, and some N1.76 trillion will be borrowed from foreign sources while an additional N1.7 trillion will come from existing bilateral and multilateral facilities.
However, it is uncertain that the domestic market will be able to absorb the N7.04 trillion given the trajectory. In 2017, the Debt Management Office (DMO) raised a total of N1.25 trillion from the domestic market to partly fund the N7.44 trillion 2017 budget with the issuance of federal government bonds, Sukuk bonds, and treasury bills forming major sources. Between 2017 and 2022, the amount raised by the DMO from the same source increased by 158.4 percent as N3.2 trillion was raised to fund the 2022 budget. However, seeing that it took the DMO years to attain double its revenue from the domestic market, it is unlikely that it will produce N7.04 trillion, thus, Nigeria’s extra spending will still be funded largely through loans from the CBN – the government’s steady resort through the years.
The CBN loans to the federal government through Ways and Means Advances have greatly increased since 2015 from less than N1 trillion to N22 trillion. This is not even part of the country’s total public debt stock which stood at N44 trillion in September 2022 and is set to hit N77 trillion in 2023 with the planned securitisation of the N22 trillion owed by the government to the CBN, coupled with inevitable future loans. Between 2021 and 2022, the CBN’s loans to the FG went from N17.5 trillion to N22 trillion. This figure is already above the threshold set by the law for which the CBN should lend. These loans are a violation of the laws guiding the CBN’s operations which is to the effect that the Bank can only grant loans to the federal government in the event of a revenue deficiency if such amount is not more than 5 percent of the previous year’s revenue.
According to section 38 of the Central Bank of Nigeria Act 2007, “the Bank may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate as the Bank may determine. The total amount of such advances outstanding shall not at any time exceed five (5) percent of the previous year’s actual revenue of the Federal Government”. This provision aims to prevent dependence of the FG on the CBN and to promote more focus on domestic investments and attracting foreign direct investments.
Since the loans are temporary in nature, “all advances shall be repaid as soon as possible and shall, in any event, be repayable by the end of the Federal Government financial year in which they are granted and if such advances remain unpaid at the end of the year, the power of the bank to grant such further advances in any subsequent year shall not be exercisable, unless the outstanding advances have been repaid.”
The FG is yet to pay up most of its loans thus it should not have had further recourse to the CBN. However, it not only borrowed from the CBN but each borrowed sum was a violation of the limit set by Section 38 of the CBN Act.
In 2015, revenue stood at N3.43 trillion, meaning that the CBN’s total lending to the FG in 2016 should not have exceeded N171.55 billion. In 2016, FGN’s total revenue was N3.18 trillion which put a limit to CBN’s lending in 2017 at N159.24 billion. In 2018, the total retained revenue of N2.85 trillion would only secure a loan of not more than N209.28 billion. In 2020 and 2021, the FG should have been able to borrow only N240.05 billion and N201.24 billion respectively which would have kept the total lending of the CBN at N1.12 trillion from 2016 to 2021. But this is not the case. In 2020 alone, CBN’s loans to the FGN amounted to N4.389 trillion. In 2021, another N932.6 billion was lent to the FGN which implies that in two fiscal years, the FGN obtained N5.32 trillion from the CBN. This is in addition to loans previously owed. The CBN still largely funds the budget deficit and is clearly in breach of the law.
Between 2021 and 2022, the CBN’s loans to the FG went from N17.5 trillion to N22 trillion. This amount alone is a violation of the laws guiding the CBN’s operations which is to the effect that the Bank can only grant loans to the federal government in the event of a revenue deficiency if such amount is not more than 5 percent of the previous year’s revenue.
More so, section 41 0f the Fiscal Responsibility Act provides that “government at all tiers shall only borrow for capital expenditure and human development, provided that, such borrowing shall be on concessional terms with low-interest rate and with a reasonable long amortization period subject to the approval of the appropriate legislative body where the necessary; and the government shall ensure that the level of public debt as a proportion of national income is held at a sustainable level”. Further, the provision states that the “non-compliance with the provisions of this section shall make the action taken an offence”.
Despite these illegalities, the FG may be unable to resist the urge to borrow more money from the CBN and the Bank may yet again accept the FG with open arms. The first reason is that the Bank may be of the opinion that its hands are tied when it comes to the FG. According to the CBN (the FAQ section on the CBN website), this sort of borrowing by the FG frustrates the Central Bank from pursuing its monetary policy. “When the FG exceeds its revenue, the CBN finances the government deficit through advances to the limits set by the regulations which are often disregarded by the FG. The direct consequence of the CBN financing the deficits are distortions or surges in monetary base leading to the adverse effect on domestic prices and exchange rates, that is, macroeconomic instability because of excess liquidity that has been injected into the economy”.
Secondly, the government is already in a place where it can do nothing but borrow more from the CBN. But this could lead to further economic difficulties in the long term. Nigeria’s spending budget has been on the increase with a major chunk of it being serviced by loans. It gets worse with the unnecessary spending on things like fuel subsidy which would have been averted if Nigeria refined its own petroleum and the hike in oil prices caused by the Russia-Ukraine war which would eat deep into Nigeria’s pocket with the subsidised petroleum rate which it offers to its citizens. The government also faces other challenges such as the devaluation of its currency and its steady gaze on crude oil as its major revenue source. All in all, there is little or no boost in yearly revenue, which has made it difficult for the government to meet its financial obligations.
It is necessary to seek alternative funding sources or implement fiscal policies to reduce government spending and decrease the need for borrowing. The government should explore all options available to it and work with experts to develop a sustainable plan to manage its finances and reduce its dependence on borrowing. This could include focusing on implementing economic reforms and diversifying its revenue sources in order to reduce its dependence on borrowing. Additionally, the government needs to focus on measures to increase its non-oil revenue and reduce its expenditure by cutting unnecessary spending, increasing revenue through tax reform, and implementing policies to promote economic growth.
