CBN-FG romance has come home to roost

By ‘Femi Asu

It was in December 2012 that the Federal Government started borrowing from the Central Bank of Nigeria (CBN), according to CBN data. 

From N134.81 billion, the debt grew to N789.67 billion at the end of President Goodluck Jonathan’s administration in May 2015. In between, there were some repayments. 

The law allows the central bank to lend to the government through Ways and Means Advances, a loan facility used to finance the government in periods of temporary budget shortfalls subject to limits imposed by law.

The total amount of such advances outstanding shall not at any time exceed five percent of the previous year’s actual revenue of the Federal Government, according to the CBN Act, 2007.

“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,” it says.

Buhari on a borrowing spree
President Muhammadu Buhari’s administration inherited the N789.67 billion debt and then borrowed to the hilt from the central bank. For the first time on record, the CBN became the biggest lender to the Federal Government. 

A year after he came to power, the economy slipped into recession following the collapse of global oil prices coupled with a slump in the country’s crude oil production.

At the end of his first term, the debt owed to the CBN stood at N6.59 trillion, up more than eightfold (735%) in four years. There were some repayments, with the last made in May 2017, the data show.

Just over a year after the start of his second term, the economy slid into another recession amid the COVID-19 crisis and the Saudi Arabia-Russia oil war, which led to a sharp drop in oil prices. 

Fast-forward to Oct. 2022, the debt owed to the central bank had ballooned to N23.77 trillion, more than 30 times what the administration met in 2015. Buhari said this week that the funding enabled the government “to meet obligations to lenders, as well as cover budgetary shortfalls in projected revenues and/or borrowings”.

The debt owed to the CBN is not included in the country’s public debt stock, which stood at N44.06 trillion as of Sept. 2022, according to the Debt Management Office. The N44.06 trillion comprises the debts of the Federal Government, the 36 state governments, and the Federal Capital Territory.

An “unhealthy” relationship
On Buhari’s watch, the Federal Government’s borrowing from the central bank repeatedly exceeded the statutory limit of five percent of the previous year’s revenues.

The government failed to heed warnings from the World Bank and the International Monetary Fund (IMF), among others about the dangers of its continued reliance on CBN financing. 

In December 2016, a former head of the apex bank raised the alarm over the violation of the CBN Act. “The CBN-FGN relationship is no longer independent,” Muhammadu Sanusi II, a former Emir of Kano, said in his presentation at an event in Abuja.

“In fact, one could argue their relationship has become unhealthy. CBN claims on the FGN now top N4.7 trillion – equal to almost 50 percent of the FGN’s total domestic debts. This is a clear violation of the Central Bank Act of 2007 (Section 38.2) which caps advances to the FGN at 5 percent of last year’s revenues. The overdrafts alone are equal to more than 10 times that prescribed limit, and are growing every month. Has the CBN become the government’s lender of last – or first – resort?” he added.

A major source of inflation
Many homes are bearing the brunt of the borrowing spree. The financing of the government’s growing fiscal deficit by the CBN fuelled inflation, which quickened to a 17-year high of 21.47% in Nov. 2022 and has impoverished millions of Nigerians.

The money supply in the country surged to a record N51.78 trillion in Nov. 2022 from N21.86 trillion in May 2015, partly driven by the CBN deficit financing. 

Today, high inflation is undercutting purchasing power as Nigerians are facing higher prices for virtually everything from food to fuel to rent. Many workers’ real (inflation-adjusted) wages have taken a tumble.
Between 2020 and 2022, the inflation shock has pushed an estimated 15 million Nigerians into poverty, according to the World Bank.

Interest payment pain looms large
With less than five months to the end of his administration, Buhari is keen to repackage the debt and push its repayment to 2063, with interest payments to be delayed until 2026.

He is seeking lawmakers’ approval to convert the debt to 40-year bonds that will be sold to investors at 9% interest, with a three-year moratorium. 

The securitisation of the debt will enable the CBN to remove it from its balance sheet as an asset; the investors will be the new creditors; and the securitised debt will be added to the country’s public debt stock. It will also clear the way for the next administration to borrow from the central bank without violating its law. 

The lawmakers failed to approve the plan last week, with Buhari urging them on Tuesday to reconsider their stance. He said failure to grant the securitisation approval would cost the government about N1.8 trillion in additional interest in 2023. 

The CBN charges an interest rate of the MPR plus 300 basis points, which is 19.5% now. The monetary policy rate (MPR), also known as the benchmark interest rate, was raised by 500 basis points last year to 16.5%.

“From a financial management perspective, using the overdraft facility to finance the government deficit is costly,” the World Bank said in a report released in late 2021.

In 2020, when the country was seeking emergency financial assistance of $3.4 billion from the IMF, the Federal Government said in its letter of intent that the existing stock of overdrafts held at the CBN would be securitised, and the recourse to central bank financing would be eliminated by 2025.

Without doubt, the negative consequences of CBN’s deficit-financing spree will reverberate for years. Let’s face it, the chickens have come home to roost.

●’Femi Asu, a business journalist, posted this article on his Facebook account on Saturday.