Nigerian govt’s reliance on central bank financing worrying: Capital Economics

The Nigerian government’s growing reliance on the Central Bank of Nigeria for the financing of budget deficits is certainly worrying, a London-based economic research firm has said.

Capital Economics, in its ‘Africa Economics Focus’ released on Monday, noted that Nigeria’s government had turned to the central bank to plug ever-larger budget deficits in recent years.

According to the firm, policymakers are unlikely to kick their deficit monetisation habit, particularly if the fiscal position worsens next year.

“This will deepen some of Nigeria’s existing economic woes, including high inflation, downward pressure on the naira and weak economic growth,” its Africa Economist, Virág Fórizs, said.

She noted that the government’s reliance on CBN financing had occurred in recent years irrespective of whether the budget shortfall was in line with official projections or not.

She said, “Nigeria has a pretty poor track record of sticking to its budget plans. Over the past six years, on average around 55 percent of annual budget shortfalls have been financed by the CBN.

“This has its roots in very high domestic borrowing costs and difficulties in securing funding from external sources in line with borrowing targets, which has pushed policymakers to turn to the CBN for funding. The result is that the central bank’s net claims on the government have shot up, hitting six percent of GDP in Q1.”

Fórizs said plugging budget deficits through central bank financing had contributed to many of the problems plaguing Nigeria’s economy.

She noted that headline inflation had surpassed the upper bound of the CBN’s target range for the past six years.

According to her, high inflation, in the context of a heavily managed exchange rate, has undermined the competitiveness of local industry, leading to strains in the balance of payments and sluggish activity.

She said, “This year, we think that Nigeria’s public finances will improve to the extent that the government will not necessarily require CBN financing.

“But the public finances will probably come under renewed pressure over 2022-23, as oil prices are likely to drop back – our forecast is that Brent crude will end next year at $60 per barrel. And we think that borrowing conditions will become less favourable too, particularly if we’re right in expecting US Treasury yields to rise, pushing the authorities to once again turn to the central bank to plug fiscal financing gaps.”

Fórizs added, “While the scale of deficit monetisation in Nigeria is certainly worrying, it’s not likely to be on the scale that will cause a dramatic spiral in prices (as happened in Venezuela or Zimbabwe).

“And policymakers in Nigeria are not completely blind to inflationary concerns. Instead, we think that deficit monetisation will contribute to keeping inflation elevated in the low double-digit range in the coming years.”