The Central Bank of Nigeria’s (CBN) unconstitutional lending of N23.5tn to the Federal Government over the past eight years has rolled back years of progress in the area of fiscal sustainability.
Nigeria is open for business. This was the signature campaign of the Federal Government of Nigeria to investors after seeking and obtaining relief from obligations to the Paris Club, a group of bilateral lenders, in 2006. The debt relief did not come cheap. To settle the debt, $18bn was cancelled while Nigeria paid $12bn.
The impact of the debt settlement on the Nigerian economy was transformative given that the FG’s credit worthiness determines that of the private sector. Nigeria’s risk premium, which is the return investors demand for doing business locally, reduced significantly. Investors who wouldn’t want to do business due to Nigeria’s risk gradually re-entered the country. The FG was given a blank slate upon which they could impact the lives of Nigerians as it could fund public goods such as healthcare and education rather than crippling debt obligations. Nigerian businesses could finally borrow and at cheaper rates in the international market. The economy boomed partly due to an increase in foreign investment, which led to better economic growth, incomes and employment.
Seventeen years after the debt relief led to a credit rating of BB- from Fitch Ratings in 2006, the rating has fallen three places to B- in 2023. Moody’s, another rating agency, puts our credit rating at substantial risk; they have gradually downgraded Nigeria four places from a peak rating of Ba3 in 2012 to Caa1 in 2023. The implication of this is that Nigeria’s risk premium has once again risen significantly, making investment in Nigeria and financing more expensive and hard to come by.
While the blame for the deterioration in fiscal finances fully rests on the Presidency through the Ministry of Finance, the CBN carelessly enabled it
While the blame for the deterioration in fiscal finances fully rests on the Presidency through the Ministry of Finance, the CBN carelessly enabled it. In the CBN Act of 2007, CBN’s lending to the FG was capped at 5% of prior year’s revenues which must be repaid in the same year. In complete disregard of this legal guidance, the CBN loaned N23.5tn to the FG as at 2022, an increase of N22.9tn from N592.0bn in 2014. Per the CBN Act, this should have never been more than N1.9tn, when we sum up 5% of prior year revenues since 2015.
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The CBN enabled the FG even when it was in direct conflict with its own objectives. The most important goal of the CBN is low and stable inflation, and the target is 6-9%. Central Bank financing of the governments is a primary driver of money supply which eventually leads to higher inflation, especially when it is aggressive like in Nigeria. It is standard knowledge in economic policy setting, and there are numerous examples of the consequences, with Zimbabwe and Venezuela being the most recent. In Nigeria between mid-2019 and mid-2023, money supply growth was aggressive and ranged from 16.1% (M3 money supply) to 22.8% (M2 money supply), which if sustained puts long-term inflation at a similar range.
The CBN enabled the FG so much that its financing was 44% of FG’s total expenditure in 2022, the highest since 1992. In an even worse turn, the CBN now accounts for about 54.2% of the FG’s outstanding domestic debt, the highest level ever based on CBN data extending to 1981. And shockingly, the public sector which contributes less than 10% of economic output (GDP) accounted for 41.3% of total domestic credit in Nigeria in May 2023 from 11.2% in May 2015. In simple terms, the CBN took on a passive role in tackling its objective of low and stable inflation and in allocating resources efficiently.
It is therefore not surprising that the CBN never achieved its target of a maximum inflation of 9% since 2015. Headline inflation averaged a devastating 14.5% between 2015 and 2022, which meant that prices doubled on average every 5 years in Nigeria. Even when we correct for inflation outside the control of the CBN through core inflation, which excludes volatile food and energy prices, inflation still averaged 12.3%.
With a new government starting May 2023, there is little indication that fiscal reforms are top of the agenda. While repayment terms have been set for outstanding debt of N22.7tn, we have to wait to see if the FG will fulfil its obligations. Early indications are not promising as the legislature bumped up the government’s borrowing limit from 5% to 15% of prior year revenues, creating the space for more borrowing.
Nigeria is facing a fiscal crisis similar to what obtained prior to 1999 and until 2006, which created no room for the funding of public goods which benefitted citizens. Instead, most of the government’s spending was on servicing debt obligations. Today, the FG spends more than 90% of its revenues on debt servicing despite a limit of 28% by the DMO and 22.5% by the World Bank. This only worsens the fiscal situation as more debt will be raised to fund salaries, overheads and capital expenditure.
Ongoing reforms at the CBN must prioritise lending to the FG within the limits established by the CBN Act of 2007 (as amended). Otherwise, it would be difficult to achieve the macroeconomic stability, especially price stability, critical to creating economic prosperity for Nigerians.
Owodunni writes from Lagos.
