FG Excessive Borrowing From CBN Threatens Exchange Rate, Others

FG Excessive Borrowing From CBN Threatens Exchange Rate, Others

As private sector borrowings hit N5.16trn

Charles Ebi

Federal Government’s excessive borrowing from the Central Bank of Nigeria through the Means and Ways Advances window can have adverse effects on the apex bank’s monetary policy and subsequently harm domestic prices and exchange rates.

This was disclosed in the monetary policy category of the CBN’s Frequently Asked Questions page.

Under the sub-section, titled ‘Can the Federal Government frustrate the Central Bank of Nigeria from pursuing its monetary policy?’ It was stated that there were certain distortions or surges in the monetary base due to the central banks financing deficits.

The response read in part, “Yes, when the Federal government exceeds its revenue, the CBN finances government deficit through Ways and Means Advances subject , in some cases, to the limits set in the existing regulations, which are sometimes disregarded by the Federal Government.

The direct consequences of the central bank’s 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.”

Ways and Means Advances is a loan facility by the central bank to finance the government during temporary budget shortfalls subject to limits imposed by law.

The Federal Government’s rising borrowing from the CBN has been a source of concern to economic experts and stakeholders.

A global credit rating agency, Fitch Ratings, had in January 2021 raised concerns over the Federal Government’s repeated recourse to its Ways and Means facility with the CBN.

It criticised the CBN for allowing the Federal Government’s borrowing to exceed the five per cent limit.

The CBN’s guidelines limit the amount available to the government under its Ways and Means Facility to 5% of the previous year’s fiscal revenues.

However, the FGN’s new borrowing from the CBN has repeatedly exceeded that limit in recent years, and reached around 80% of the FGN’s 2019 revenues in 2020”, it said.

The agency said that the use of central bank financing in Nigeria could pose macro-stability risks in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation.

Although Fitch Ratings said it expected the Nigerian government to reduce its use of the CBN facility, it remains unclear whether the apex bank would cut down on its continued financing of the government’s deficit.

AljazirahNigeria had reported that the Federal Government’s total borrowing from the CBN through the Ways and Means Advances ballooned to N15.51trn as of June last year, estimated at 2,286% increase in six years, according to a CBN data.

The N15.51trn owed the CBN by the Federal Government is not part of the country’s total public debt stock, which stood at N38trn as of September 2021.

In the first six months of 2021, the Federal Government borrowed N2.4trn from the CBN, more than half of what it got in 2020.

In the first 11 months of 2021, the Federal Government spent N1.12trn as interest payment on Ways and Means Facility, according to the Minister of Finance, Budget and National Planning, Zainab Ahmed, during the public presentation of the 2022 approved budget.

However, the DMO had said that it was working out plans to restructure the CBN’s overdrafts for government financing, to a long-term debt.

According to Section 38(i) of the CBN Act, 2007, the bank may offer temporary advances to the Federal Government to cover the deficiency of budget revenue at such rate of interest as the bank may determine.

The Act says, “The total amount of such advances outstanding shall not at any time exceed 5% 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”.

Similarly, Private sector credit has risen to a record high of N35.31 trillion as of November 2021, representing N5.16 trillion net new loans between January and November 2021. This is according to data from the Central Bank of Nigeria, CBN, and money and credit statistics.

Bank credit to the private sector in Nigeria increased by 17% compared to N30.2 trillion recorded as of December 2020. Bank credit in Nigeria has skyrocketed in recent times, owing to a chain of CBN policies and increased activities in the Nigerian lending space, especially with fintechs.

On a month-on-month basis, the private sector credit increased by N694.2 billion in November 2021, moving from N34.62 trillion recorded as of October 2021 to N35.3 trillion in the review period.

The Central Bank of Nigeria voted through the year to keep the benchmark monetary rate , MPR, at 11.5%, which determines the rate of acquiring loans from banks. A move, which was made in order to help stimulate real growth and recovery from the economic recession recorded in 2020 by improving credit to the real sector.

The apex bank pointed out during the monetary policy meeting in November that the stance to keep the rate has supported growth recovery and is poised to improve price stability that is conducive for sustainable growth.

The report from the Central Bank of Nigeria also shows that currency in circulation also rose by 8% in the review period to N3.15 trillion in November 2021 from N2.91 billion as of the end of the previous year.

Also, credit to the government increased by 5% to N13.03 trillion as of November 2021 from N12.4 trillion recorded as of the end of the previous year, further showing an improved credit facility to the economy.

Lending rates still on the high

Despite the increase in the amount of bank credit to the economy, lending rates still remain on the high, with the maximum lending rate as of November 2021 rising to 27.26% compared to 27.1% recorded in the previous month.

Also, the savings deposit rate increased to its highest level in six months at 1.83% in November 2021 as against 1.28% recorded in the previous month. As of the review month, one month, three months, six months, and twelve months rates were 3.72%, 4.96%, 5.36%, and 7.34% respectively.

The increase in the rates and credit supply implies that Nigerian corporations are still open to more borrowings despite the high lending rates.

The central bank has held onto its monetary stance to boost credit by holding the MPR rate at 11.5% in order to spur growth in the economy and ensure the stability of prices in the country, having endured a significant surge in inflation rate in 2020 through to 2021.

In its final monetary policy committee meeting for the year in November 2021, the CBN highlighted that its policy had started to yield positive results given the improvement in Nigeria’s GDP ,+4.03% in Q3 2021, and moderation in inflation rate ,15.4% in November 2021.

However, as much as the committee continues to encourage improved credit supply to the sector by banks, it also urged the apex bank to sustain its tight prudential regime to bring the Non-Performing Loan, NPL, ratio below the 5% prudential benchmark.

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