BY EMEKA EJERE
The Central Bank of Nigeria (CBN’s) advances to the Mohammadu Buhari-led Federal Government is assuming a proportion that has left analysts raising legality, price stability, and debt sustainability concerns.
Ways and Means advances is a loan facility through which the CBN finances the shortfalls in the government’s budget. But such loans are tightly controlled as they can fuel inflation and distort monetary policy.
Findings show that the apex bank’s advances to the Federal Government rose 2900 per cent in the last seven years to N23.8 trillion.
When the Buhari administration came to office in May 2015, the CBN’s loans to the Federal Government stood at N789.7 billion cumulatively. Since then, the government has drawn central bank loans each year at an unprecedented level.
Between January and October 2022 alone, the government drew N5.6 trillion. By comparison, between December 2012 and May 2015, a period of two and half years, Ways and Means advances rose by N654.9 billion.
However, last week’s Wednesday, President Buhari made an attempt to obtain a delayed approval for the loan that had already been spent, causing an uproar in the Senate, with lawmakers rejecting the request and accusing the president of violating the constitution. They also demanded details of how the money was spent.
In the request titled ‘Restructuring of Ways and Means Advances,’ the President wrote, “The Ways and Means Advances by the Central Bank of Nigeria to the Federal Government has been a funding option to the Federal Government to cater for short-term or emergency finance to fund delayed government expected cash receipt of fiscal deficit.
“The Ways and Means balances as of 19th December, 2022, is N23.7 trillion. I have approved the securitisation of the Ways and Means balances along the following terms: amount, N23.7tn; tenure, 40 years; moratorium on principal repayment, 3 years; pricing interest rate, 9 per cent. Your concurrence and approval is sought to allow for the implementation of the same.”
According to the CBN Act, the apex bank may grant temporary advances to the Federal Government in respect of temporary deficit of budget revenue at such rate as the bank may determine. It, however, warns that the total amount of such advances outstanding “shall not at any time exceed five (5) percent of the previous year’s actual revenue of the Federal Government.”
In addition, it stipulates that, “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.”
If the regulation had been followed, the Ways and Means to the government for the entire 2022 should not exceed N219 billion (5 per cent of the government’s revenue in 2021).
CBN’s loan to the Federal Government as of December 2015 stood at N856 billion, but rose to N2.2 trillion in December 2016, and reached N3.3 trillion in December 2017.
By December 2018, the figure rose to N5.4 trillion and reached N8.7 trillion in December 2019. It was N13.1 trillion by December 2020 and N17.4 trillion by December 2021, but getting to the present figure of N23.8 trillion.
In October, the Federal Government said it was converting the CBN loans to bonds with a maturity of 40 years and an interest rate of nine per cent, a move analysts see as transferring the bill to the next generation.
However, the World Bank, in its recently released December 2022 edition of the Nigeria Development Update, projected that interest payments on the Federal Government’s borrowing from the CBN will gulp about 62 per cent of government revenue by 2027 despite the restructuring plan.
The report read in part, “Despite the restructuring of the Ways and Means stock in 2023, interest payments are projected to steadily increase by 2.4 percentage points of GDP between 2018 and 2027, and by 2027 interest payments will account for over 62 percent of revenues.”
Earlier in November, the International Monetary Fund (IMF) warned that the CBN’s continued financing of the country’s deficit through W&Ms would complicate the effort to contain inflation.
Similarly, in November 2021, the World Bank listed the sizeable “fiscal deficit financing” by the CBN as one of the factors undermining the business environment, compounding underlying constraints on domestic revenue mobilization, foreign investment, human capital development, and the delivery of public services.
Worsening debt burden
The N23.77tn owed the apex bank by the Federal Government is not part of the country’s total public debt stock, which stood at N44.06tn in the third quarter of 2022, according to the Debt Management Office (DMO).
The public debt stock only includes the debts of the Federal Government of Nigeria, the 36 state governments, and the Federal Capital Territory.
Analysts say drawing so much from the CBN has opened the economy to severe risks. “Specifically the Debt to GDP now surpasses the 30 per cent benchmark the DMO and Minister of Finance always quote,” Kalu Aja, a finance expert, said of the advances.
“This is a contingent liability to the federal government, it narrows the ability to do more deficit financing and essentially guarantees taxes must rise to cover the deficit.”
He said injecting so much money into the economy has made Nigeria’s inflation worse.
“On the monetary side, one wonders the strategy of the CBN, they have monetized the deficit by excessive printing of the naira, which will continue to cause inflation. Their response to fight inflation has primarily been to raise the monetary policy rate,” he said.
“A high MPR means SME cannot profitably borrow. Thus, we see a clear linkage between excessive printing by the CBN and higher interest rates.”
Nigeria’s inflation reached 21.47 per cent in November 2022, rising for the 10th consecutive month. In response, the central bank raised the benchmark lending rate to 16.5 per cent.