By Sunday Michael Ogwu and Philip Shimnom Clement (Abuja) Abdullateef Aliyu (Lagos)
Economists have said the hurried move by the Senate to amend the Central bank of Nigeria act that will allow the executive to borrow up to 15 percent of previous year revenue as “Ways and Means” will open door for more unsustainable borrowing and Increase the debt burden of children yet unborn.
The Nigerian Senate had in an emergency plenary session on Saturday amended the Central Bank of Nigeria (CBN) Act to increase the total CBN advances (Ways and Means provision) to the Federal Government from 5% to a maximum of 15%.
The emergency plenary session which was reported to have started around 11 am on Saturday is a departure from the usual practice which has the sitting days for the Senate plenary on Tuesdays and Wednesdays.
The Senate Leader, Abdullahi Gobir, who read the lead debate on the bill, said the proposed amendment is to enable the Federal Government to meet its immediate and future obligation in the approval of the ways and means by the National Assembly and advances to the Federal Government by the Central Bank of Nigeria.
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According to a study by the International Monetary Fund (IMF), during the last three decades, many countries have reformed their central bank legislation with the objective of defeating inflation. One of the pillars of this reform was restricting central bank financing of the government, as this was considered a chronic source of inflation.
Limiting such financing was also considered critical for building central bank credibility, a key ingredient for achieving monetary policy effectiveness.
Based on a study of over 150 Central banks , the IMF study layed out key recommendations for the design of the institutional foundations underlying central bank credit to the government
The study noted that as a first best, central banks should not finance government expenditure. The central bank may be allowed to purchase government securities in the secondary market for monetary policy purposes.
As a second best, financing to the government may be allowed on a temporary basis. In particular, central bank lending to the government is warranted to smooth out tax revenue fluctuations until either a tax reform permits a stable stream of revenues over time or markets are deep enough to smooth out revenue fluctuations. Financing other areas of the state, such as provincial governments and public enterprises, should not be allowed.
The terms and conditions of short-term loans should be established by law. Central bank financing should be capped at a small proportion of annual government revenues (on a case-by-case basis), priced at market interest rates, and paid back within the same fiscal year.
The latest move by the Nigerian Senate follows recent approval for the sum of N22.7 trillion that was spent by the executive arm of government without the initial approval of the national assembly.
The approved funds borrowed by the Federal Government from the Central Bank of Nigeria (CBN) through ways and means advances, have been subject of dispute between the executive arm of government and some members of the national assembly, especially the opposition members.
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An Economist, Dr. Austin Nweze warned that Nigeria’s capacity to repay debt is limited, saying increasing the debt ceiling would amount to overburdening even children yet unborn.
He said the decision to increase the borrowing headroom should have been left for the next administration.
But he said the implication of more borrowing would be too grave on the country and the nation yet unborn.
“Borrowing is one thing, capacity to pay back is another. The question is, does Nigeria have the capacity to pay back? Already, children unborn have a debt overhang on their necks.
So if you borrow now, is it to improve their lots or to steal?
Asked specifically on the implication of increasing the CBN’s Ways and Means provision, he said, “They have done that to prepare ground for the incoming administration so that they can borrow and the question is do we have the capacity like I said and what is the borrowing for? Borrowing should be tied to projects. Maybe because Nigeria is broke. They want to borrow themselves out to do one or two things that they want to do. My point is borrowing must be tied to projects. They should show us the projects to warrant increasing from 5 percent to 15 percent. It doesn’t make sense.
In his reaction, a senior economist at SPM Professionals Paul Alaje said what the Senate has done is give the incoming administration more window to borrow as borrowings from executive can now be gotten as an advance or ways and means which will now be 15% of whatever government generate in the previous year.
“What this entails is that whatever government generated in 2022, it is allowed to borrow 15 per cent of it. As such, for us not to self-medicate like the previous year (2022) when our borrowing instead of 15 per cent, shot up 91 per cent. Thus, the Senate pegged it at 15 per cent which means the potential to borrow will now be up to 15 per cent,” he further explained.
Matthew Ogagavworia, a chartered accountant with interest in forensic accounting said: “ What the government has done is to give its rascality a venial legality. It is basically trying to paint the fraud it has committed.
“I pray that the incoming government will seek caution to work within the limit of its revenue and debt service.”
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