Basic macroeconomics knowledge holds that fiscal and monetary policies are usually correlated to steer an economy toward pre-determined directions.
For this reason, a policy mix that combines efforts from the fiscal and monetary sides respectively is generally considered an appropriate combination to help drive macroeconomic targets of any nation.
While the fiscal authorities are armed with budgetary and tax-related tools to steer the economy, monetary authorities, on the other hand, make use of monetary instruments like reserve controls, bank rates, open market operations (OMO), exchange controls, and so on.
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Usually, one expects that a fiscal objective should not come in the way of a monetary objective. This means that there should not be the case where fiscal agents are in pursuit of an expansionary policy while monetary agents are at the same time driving a contractionary policy target. This would result in policy confusion, and the set macro objectives will not be realised.
Nigeria’s Central Bank has lamented the federal government’s excessive interaction with the apex banking authority of the nation in a bid to close its ever-widening budgetary gap.
With the government’s fiscal rascality and consequent budgetary impotence, the Central Bank has become one of the many way-outs the nation’s fiscal authorities run to for succour. Nigeria’s drooling appetite for debts has launched the country into an ever-increasing external and internal indebtedness trend, which has earned the country a bad spot amidst global indebted nations. While the government still boasts of a sustainable debt profile, experts are afraid that the country may soon run aground if Nigeria’s rising debts in the face of a deteriorating revenue capacity reach a point of insolvency.
As of September 2021, the Debt Management Office (DMO) maintained that the nation’s total public debt stock had reached an all-time high of N38 trillion. Since the current administration of President Muhammadu Buhari assumed office in 2015, Nigeria’s public debt experience has been worsening, as external debts have risen by 291.37 percent while domestic debts have reached up to 86.31 percent.
The CBN’s concern revolves around the Federal Government’s excessive borrowing from the apex banking authority through the Ways and Means Advances window. According to the bank, this loan facility advancement to the fiscal authorities could hurt monetary policy efforts to keep the nation afloat if limit restrictions are exceeded.
Fitch Ratings, a renowned international rating agency in January 2021, criticised the CBN over the federal government of Nigeria’s excessive borrowing from the apex banking authority above the regulated five per cent limit.
“The CBN’s guidelines limit the amount available to the government under its Ways and Means facility to 5 percent of the previous year’s fiscal revenues.”
“However, the Federal Government’s new borrowing from the CBN has repeatedly exceeded that limit in recent years and reached around 80 percent of the federal government’s 2019 revenues in 2020”, the global rating agency remarked.
Usually, the CBN, who acts as the banker to the nation’s sovereign authority, can lend to the federal government through the Ways and Means channel to fund temporary budget gaps. However, accessing this fund over and beyond regulated limits, as highlighted by the Fitch Rating’s remarks, can lead to disturbances in the monetary base, thus, fuelling macroeconomic instability.
Surges in the monetary base from excessive liquidity injections can adversely affect domestic prices and exchange rates, thus, frustrating monetary policy stabilisation efforts. Traditionally, the CBN has the responsibility to secure the mandate of controlling inflation, preserve the integrity of the nation’s financial system and maintain a healthy balance of payments to safeguard the international value of the local currency. Any counter-action by fiscal actors will frustrate efforts towards securing this mandate.
Data obtained from the CBN show that total borrowings from the Federal Government through the Ways and Means Advances have sprung northwards to N15.51 trillion as of June 2021, representing a 2,286 percent increase in six years. By the first half of 2021, total Federal Government borrowing through the W&M channel was N2.4 trillion, exceeding half of what was borrowed in 2020. These borrowings do not form part of the federal government’s total debt stock.
However, the DMO has announced that there are efforts underway to restructure CBN’s overdrafts for the government’s loan support to long-term debt. If this is done, it is expected that some sanity should return to the W&M arrangement of sovereign loaning, and the apex banking authority can once more regain monetary might in the delivery of its monetary policy targets.
