A former Deputy Governor of the Central Bank of Nigeria (CBN), Kingsley Moghalu, recently said the federal government borrowed N15 trillion from the CBN.
This was not the first time the federal government’s indebtedness to the CBN would be made public.
The Governor of Edo State, Godwin Obaseki, told his state transition committee members some months ago that the CBN’s total loan to the federal government would stand at between N15 and N16 trillion by the end of 2021.
“By the end of this year, our total borrowing is going to be between N15 and N16 trillion. Imagine a family that is just borrowing without any means to pay back and nobody is looking at that, everybody is looking at 2023, everybody is blaming Mr. President as if he is a magician,” he said.
While Daily Trust on Sunday could not ascertain the exact value of federal government’s indebtedness to the apex bank as of August 2021, Moghalu and Obaseki referred to government’s Ways and Means Advances (WMA) from the CBN, which becomes overdrafts if not paid on time.
What is WMA?
The WMA is the temporary loan facility given to the federal and state governments by the CBN to meet budget deficits.
Usually, it is repaid within the same year that it was taken after, which is considered as an overdraft to be repaid with an interest.
In September 2020, the CBN’s Monetary, Credit, Foreign Trade, and Exchange Policy set of guidelines indicated, in section 3.2.15, that WMA shall continue to be available to the FGN to finance deficits to a maximum of 5.0 per cent of the previous year’s actual collected revenue.
Legal backing for WMA
Checks showed that CBN lending to the Federal Government of Nigeria has a legal backing.
For instance, Section 38 of the CBN Act, 2007 provides that the CBN may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate of interest as the bank may determine.
“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,” the law stated.
CBN lending to FGN spiking
CBN’s data show that as of June 2015, the total government borrowing from CBN stood at N648.26 billion.
It jumped from N856.33 billion in December 2015 to N2.23 trillion in December 2016.
The total borrowing from the bank grew by N1.08 trillion in 2017 to N3.31 trillion.
It rose further by N2.1 trillion in 2018 to N5.41 trillion.
The federal government’s borrowing from the CBN rose by 61.18 per cent (N3.31 trillion) to N8.72 trillion at the end of 2019.
Last year, the government turned to the apex bank for N4.9 trillion to plug its fiscal financing gap, bringing its total borrowing to N13.11 trillion as of December 2020.
Meanwhile, in the first half of this year, the federal government borrowed N2.4 trillion from the CBN through WMA.
‘Why CBN lends to government’
The CBN Governor, Godwin Emefiele, has justified why the bank finances the government budget deficit through Ways and Means facilities.
“If the government cannot finance all its obligations, the central bank should offer support as a lender of last resort,” Emefiele said.
Emefiele was reacting to claims by a global rating agency, Fitch, that overreliance on bank overdraft could cause inflation.
The CBN stated in its Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for 2020/ 2021 that “Ways and Means Advances shall continue to be available to the Federal Government, to finance deficits in its budgetary operations to a maximum of 5.0 per cent of the previous year’s actual collected revenue.”
The apex bank said such advances shall be liquidated as soon as possible, and shall in any event be repayable at the end of the year in which it was granted.
“Consistent with the banking arrangement of Treasury Single Account (TSA), Ways and Means Advances would now be determined after recognizing the sub- accounts of the
various MDAs, which are now linked to the Consolidated Revenue Fund (CRF) to arrive at the FGN consolidated cash position. This would continue in the 2020/2021 fiscal years,” the bank stated.
FG sometimes disregards WMA regulation
The CBN is not unaware that the federal government sometimes disregards the limits set by existing regulations for overdrafts and this can frustrate the bank from pursuing its monetary policy.
The bank, in its Frequently Asked Questions published on its website, said when the Federal government exceeds its revenue, the CBN finances the government deficit through
Ways and Means Advances subject (in some cases) to the limits set by existing regulations, “which are sometimes disregarded by the Federal Government.”
The bank noted that “the direct consequence of Central Banks financing of deficits are distortions or surges in the monetary base leading to adverse effect on domestic prices and exchange rates i.e macroeconomic instability because of excess liquidity that has been injected into the economy.”
Experts caution CBN, FG
Early this year, Fitch Ratings warned the federal government against repeated recourse to the Ways and Means facility from the apex bank.
In a January report, Fitch warned that “sustained use of direct monetary financing could raise risks to macroeconomic stability.”
The rating agency said given the current weak institutional safeguards, it expects the Federal Government of Nigeria to reduce its use of the facility in 2021.
The agency stated: “The FGN directly borrowed 1.9% of GDP from the CBN to fund its fiscal deficit in 2020, estimated by Fitch at 3.6% of GDP.”
Similarly, an industrialist, Dr. Muda Yusuf has warned that excessive recourse to CBN overdrafts by the federal government causes inflation.
“CBN financing of deficit is highly inflationary. We hardly look into these factors when discussing inflation. This kind of deficit financing is characterised in some literature as inflation tax. As inflation increases, real income reduces and purchasing power reduces. This is a society where incomes are hardly adjusted in line with inflation.
He said though relying on Ways and Means to finance government’s overdraft, it should not become a norm as it is a major source of macro-economic challenges.
Way forward
Seven months ago, the Director-General of the Debt Management Office (DMO), Patience Oniha, told a virtual meeting with investors and analysts that federal governments loans from CBN would be converted into bonds by the CBN to end the borrowing from the CBN Ways and Means Advances.
Oniha said the bonds, which will be paid back over the next 30 years, will have a moratorium of principal for the first two years and would be sold in the open market but to select investors.
Similarly, Minister for Finance, Budget and National Planning, Zainab Ahmed, said at the meeting that the federal government was working on securitising its indebtedness to the CBN to be able to fund it.
“On CBN financing, we will not normally make a line provisioning for the financing. So we have domestic borrowing in the budget and that covers whatever remit of financing
required to fund the national budget. We are working with the CBN to regularise the previous borrowing that have been made to turn them into formal borrowing,” she said.
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