Recent years have seen the Federal Government borrow more money from the Central Bank of Nigeria than allowed under the CBN Act, which has had an impact on the country’s economy. In this article, CHIMA NWOKOJI analyzes the severity and effects on the nation’s monetary and fiscal circumstances.
According to recent research, the Federal Government’s total borrowing from the Central Bank of Nigeria (CBN) through Ways and Means (W&M) Advances increased by N19.26 trillion in seven years, more than 25 times more than what it was in 2015.
According to a swarm of economic and financial experts, this might reach N22.6 trillion by the end of the year, with inflation and currency depreciation representing the largest dangers.
Analysis of the information collected from the CBN website revealed that, from a mere N648.26 billion in 2015, the overall W&M liabilities have escalated by more than 25 times over the last seven years.
Claims on the FG through W&M reached a new milestone, according to the CBN, increasing by 28.4% year over year (y/y) to reach $19.9 trillion at the end of June 2022 from the $15.5 trillion reported in June 2021. Consequently, this accounts for 82.1% of the CBN’s overall claims against the FG. It demonstrated that the FG has received over 2.5 trillion in disbursements in just the first six months of 2022 alone, suggesting that the entire annualized disbursement may increase to 5.1 trillion (2021: 4.3 trillion).
The central bank uses a borrowing mechanism known as “Ways and Means Advances” to finance the government when there are brief budget gaps, subject to any legal restrictions.
In accordance with Section 38 of the CBN Act of 2007, the bank may, at such rate of interest as the bank may set, make temporary advances to the Federal Government in respect of temporary revenue shortfalls in the budget.
According to research by the Nigerian Tribune, as of June 2015, one month after President Muhammadu Buhari took office, the total amount of money that the government had borrowed from the top bank was N648.26 billion.
According to CBN data, it increased significantly from N856.33 billion in December 2015 to N2.23 trillion in December 2016.
To reach N3.31 trillion in 2017, the total amount borrowed from the bank increased by N1.08 trillion. In 2018, it increased by another N2.1 trillion, reaching N5.41 trillion.
At the end of 2019, the Federal Government’s borrowing from the CBN increased by 61.18 percent (N3.31 trillion) to N8.72 trillion.
To close its budgetary financing shortfall, the government once more appealed to the apex bank for a record N4.9 trillion in borrowing, increasing its total borrowing to N13.11 trillion as of December 2020.
More recently, FG’s loan from the CBN increased from N17.46 trillion in December 2021 to N19.91 trillion in June 2022 through Ways and Means Advances.
The new borrowing ceiling of 5% from the CBN by the FGN has been routinely surpassed in recent years.
For example, it exceeded 80% of the FGN’s actual revenue from 2019 in 2020 and has continued in that pattern, which is against the CBN Act’s requirement that the outstanding amount not exceed 5% of preceding years’ actual revenue.
Whether it is known as quantitative easing or ways and means, central banks around the world lend to their governments for various purposes as a government’s bank, and Nigeria is not an exception, according to a top executive at the CBN who prefers not to be quoted because he was not authorized to speak on behalf of the bank.
The hazards associated with excessive loans to the federal government are inflation and currency depreciation threats, according to Dr. Muda Yusuf, chief executive officer of the Centre for the Promotion of Public Enterprises (CPPE).
He claims it is a factor in the current escalation of inflationary pressures on the economy.
Yusuf continued. Furthermore, the currency is affected. Growing lending options expands the money supply, which inevitably weakens and depreciates the currency.
“All of these have a significant impact on production costs, operational costs, and citizen welfare.”
Aside from the aforementioned, Bismarck Rewane, Managing Director Financial Derivatives Company (FDC) Limited stated in an earlier interview that the first step in reducing inflationary pressures is for the CBN to adhere to its own rule of lending to the FGN (ways and means advances) at 5% of the previous year’s total.
As a result of lax institutional safeguards that protect the legitimacy of policymaking and the central bank’s capacity to control inflation, Fitch, a global rating agency, has frequently cautioned that the funding of government budgets by the central bank could increase threats to macro-stability.
Similarly, Mr. Johnson Chukwu, the managing director and chief executive officer of Cowry Asset Management Limited, stated that the central bank lending caused “liquidity that has no productivity tied to it to come into the system,” which put pressure on the currency rate and inflation rate.
According to Afrinvest (West) Africa Limited, a Lagos-based investment banking and financial advice company, the growing FG’s budget deficits as a result of the expanding expenditure plan with tepid improvement in revenue production can be directly linked to the rise in W&M finance.
Although one could argue that the CBN is carrying out its duty as the lender of last resort, it was noted that the fact that the FG always has access to the apex bank’s funds encourages the FG’s fiscal expansion, which has contributed to the budget deficit growing by more than 300% since 2015 despite weak revenue generation.
Additionally, the persistent growth of W&M Liabilities has helped to the rise in the amount of money in circulation, with the monetary base increasing by 18.2% y/y in the 12 months leading up to June 2022. This phenomenon, according to Afrinvest, “contributed to the growing inflationary tendency.”
In addition, the W&M funding’s interest payment accounted for a 20.9 percent share of the total debt service cost over the course of four months, despite the expected low cost of the funding (c.7.0% p.a). (Jan–Apr 2022). This emphasizes how substantial W&M is to the FG’s loan book.
