FG Borrowings From CBN Hit N19trn

<strong>FG Borrowings From CBN Hit N19trn</strong>
  • Inflation may worsen, experts react
  • W’Bank predicts more hardship for Nigerians

Cyril Ogar

Federal Government’s total borrowings from the Central Bank of Nigeria, CBN, through ‘Ways and Means Advances’ rose from N17.46tn as of December 2021 to N19.01trn as of April 2022.

According to data from the CBN, this represents an increase of N1.55trn within the first four months of 2022.

The N19.01trn owed the apex bank by the Federal Government is not part of the country’s total public debt stock, which stood at N41.60trn as of March 2022, according to the Debt Management Office.

The public debt stock only includes the debts of the Federal Government, the 36 state governments, and the Federal Capital Territory.

Ways and Means Advances is a loan facility through which the CBN finances the government’s budget’s shortfalls.

According to Section 38 of the CBN Act, 2007, the apex bank may grant temporary advances to the Federal Government with regard to temporary deficiency of budget revenue at such rate of interest as the bank may determine.

The Act read in part, “The total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the Federal Government.

“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”.

However, the CBN has said on its website that the Federal Government’s borrowing from it through the Ways and Means Advances could have adverse effects on the bank’s monetary policy to the detriment of domestic prices and exchange rates.

“The direct consequence of central banks’ financing of deficits are distortions or surges in the monetary base leading to adverse effects on domestic prices and exchange rates i.e. macroeconomic instability because of excess liquidity that has been injected into the economy” ,it said.

In June last year, London-based Capital Economics, in a report titled ‘The perils of deficit monetisation in Nigeria’, noted that over the past six years, on average, around 55% of annual budget shortfalls has been financed by the CBN.

“Many of the problems plaguing Nigeria’s economy from high inflation to a persistently overvalued currency are tied to the government’s sustained reliance on the central bank to cover fiscal financing gaps”, it said.

The World Bank had in November last year warned the Nigerian government against financing deficits by borrowing from the CBN through the Ways and Means Advances, saying this put fiscal pressures on the country’s expenditures.

The Washington-based bank added that the Federal Government’s borrowing from the CBN was increasing the cost of debt in the country.

“Cost of debt is high as the Federal Government also resorts to overdraft, Ways and Means financing, from the CBN to meet in-year cash shortfalls”, it stated.

It, however, said that the Federal Government was making efforts to negotiate terms with the CBN in order to convert the stock of overdraft financing into a long-term debt instrument, which would lower the cost of debt for the government and enhance fiscal sustainability over the medium-long term.

Despite warnings from experts and organisations, the Federal Government has kept borrowing from the CBN to fund budget deficits.

The Federal Government paid an interest of N2.03trn from January 2020 to November 2021 on the loans it got from the CBN through the Ways and Means Advances.

A Professor of Economics and Public Policy at the University of Uyo, Akpan Ekpo, said there was a need for the government to minimise its usage of central bank financing.

He however noted that, “I hope they are borrowing to finance capital projects, not for recurrent expenditure”.

“The ideal thing is to avoid the Ways and Means facility, and most countries avoid that”, he added.

The Managing Director and Chief Executive Officer, Financial Derivatives Company Limited, Mr Bismarck Rewane, had stressed the need for the government to securitise the debt, which he described as quite large.

He said, “What we need to do is to actually securitise this formally. But I think that right now, the Federal Ministry of Finance or DMO is paying interest on the Ways and Means advances. So, the effect is that there is a cost to the borrowing, and the central bank is receiving the interest on it”.

The Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu, said the central bank borrowing put pressure on the exchange rate and the inflation rate, with “liquidity that has no productivity attached to it coming into the system”.

He said, “What that means is that the central bank has been struggling with mopping up excess liquidity as a result of injection of liquidity not coming from productive activities but rather from Federal Government’s W&M borrowing.

According to Chukwu, the securitisation of the ways and means advances will further increase the interest obligations of the Federal Government.

“It might be difficult for the Federal Government to securitise those borrowings. The key thing for me is that we need to restructure the fiscal framework of the country so that we take out this dependence by the Federal Government on CBN funding”, he said.

An economist and public sector reforms expert, Dr Chiwuike Uba, who is also the chairman of the Board, Amaka Chiwuike-Uba Foundation, urged the government to reduce its appetite for borrowing.

He said, “The truth is that it will be very difficult to stop borrowing abruptly in light of the situation we are in. However, we must reduce our appetite for borrowing to refocus, redirect and rethink our need for borrowing”.

He further advised the government to adopt other public-private partnership arrangements to implement various capital projects in the country rather than accumulating debts.

A development economist, Aliyu Ilias, said the refusal of the government to remove petrol subsidy had significantly increased expenditure, forcing the government to resort to borrowing to close its widening fiscal deficit.

He advised the government to seek better ways to generate revenue, such as widening its tax net and privatising its assets.

Meanwhile, the World Bank has predicted more hardship of Nigerians and the citizens of Angola over the rising inflation, increased power outages as well as a shortage in fuel and food.

This is in spite of the steady rise in crude oil prices reaching over $120 per barrel expected to benefit these countries which are two of Africa’s largest oil producers.

According to a global economic report contained in a newsletter, the World Bank issued at the weekend, “In many SSA countries, increasing living costs have also tempered gains from looser social restrictions and higher commodity export prices.

“Growth in the three largest SSA economies Angola, Nigeria, and South Africa was an estimated 3.8% in 2021 supported by the 4.9% rebound in South Africa. Growth momentum carried on in Angola and Nigeria, where high oil prices, the stabilisation of oil production, and recovery in non-resource sectors supported activity in the first half of this year.

“Nevertheless, persistently high domestic inflation, power cuts, and shortages of food and fuel have been weighing on recoveries”, the international bank emphasised.

Inflation for April clearly seen in the consumer price index rose by 16.82%, which was 0.9% points higher than the 15.92% recorded in March 2022, mostly occasioned by a rise in the prices of foodstuff, according to the National Bureau of Statistics , NBS.

AljazirahNigeria has observed that petrol queues have persisted with many a petroleum marketer blaming the high cost of diesel at N850 per litre on the inability of tanker owners to sustain massive loading of petrol from the depots mostly in the coastal areas of Lagos and Warri to hinterlands including Abuja, the nation’s capital.

There is also a toll on household income as residents across several states decry the rising cost of cooking gas at over N750 per kilogramme; the 12.5kg capacity is sold for over N9,000 in Abuja.

Generally, on growth projection for the Sub-Saharan Africa ,SSA, the World Bank said in spite of a rebound of 4.2% in 2021, growth has weakened this year as domestic price pressures, partly induced by supply disruptions owing to the war in Ukraine, are reducing food affordability and real incomes, especially in low-income countries ,LICs.

It noted that the sharp deceleration of global growth and war-related shortages of food and fuel are creating substantial headwinds for the region, even more so in countries reliant on wheat imports from Russia and Ukraine ,Democratic Republic of Congo, Ethiopia, Madagascar, Tanzania.

In South Africa, growth has moderated substantially amid policy tightening, high and rising unemployment, and recurring power shortages. Infrastructure damage to the country’s main port following severe floods has also contributed to the supply chain disruptions related to the war in Ukraine and lockdowns in China.

Lower Growth Outlook For Nigeria, Others

For the outlook in the Sub-Saharan African region, the projected growth is an expected 3.7% this year and 3.8% in 2023, showing a 0.4% downgrade from the bank’s earlier projection in January 2021.

For Nigeria, the growth rate will drop to 3.4% this year and a further drop to 3.2% in 2023 and in 2024. The 2022 growth outlook declined by 0.9%, while those for 2023 and 2024 declined by 0.45, the economic report indicated.

Although elevated commodity prices would underpin recoveries in extractive sectors, in many countries rising inflation would erode real incomes, depress demand, and deepen poverty.

The growth slowdown in SSA could also intensify pandemic-induced losses in per capita incomes. The region is now expected to remain the only Emerging Market and Developing Economy ,EMDE, region where per capita incomes will not return to their 2019 levels even in 2023.

Surging food and fuel import bills could also reverse recent progress in poverty alleviation across the region, especially in countries where vulnerable populations are sizable ,Democratic Republic of Congo, Nigeria, and dependence on imported food is high , Benin, Comoros, The Gambia, Mozambique.

The bank also dismissed any instant remediation saying the fiscal space of Nigeria and these other countries have already been constrained by high levels of public debt and could narrow further. However, it noted that the persistent domestic inflation could speed up monetary policy tightening, escalating stagflation risks in Sub-Saharan Africa.

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