By Ade Jacobs
Global rating agency, Fitch Ratings, has disclosed that the Federal Government’s excessive borrowing from the Central Bank of Nigeria (CBN) could worsen inflation rate in the country.
It noted that the Buhari administration abused the CBN Ways and Means Facility (WMF) after it borrowed 80 per cent of the 2020 Budget from the apex bank.
The CBN Act provides for a five percent cap for fiscal borrowing under this instrument.
The agency said in its report titled “Nigeria’s Deficit Monetisation May Raise Macro-Stability Risks”, that the WMF balance with the apex bank increased from N5.4 trillion in 2018 to N9.8 trillion in 2019.
It added that the federal government failed to comply with enabling law that required that such borrowing be cleared within the budgetary year. Such actions, it noted, would further compound the macro-economic problems facing the country.
Fitch said, “We estimate that the balance of the government’s WMF with the CBN was around NGN9.8 trillion (6.7% of GDP) at end-2019, up from NGN5.4 trillion (4.2% of GDP) at end-2018. Unlike the government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30% of the FGN’s debt at end-2019, on our estimates.
“Repeated Central Bank financing of government budgets could raise risks to macro-stability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the Central Bank to control inflation.
“The CBN’s guidelines limit the amount available to the government under its WMF to 5% of the previous year’s fiscal revenues. However, the FGN’s new borrowing from the CBN has repeatedly exceeded that limit in recent years, and reached around 80% of the FGN’s 2019 revenues in 2020.”
The federal government failed to take advantage of other available windows, but rather, focused on the WMF, thus raising interest rates in the equity market, it further noted.
It continued by stressing the continuous flouting of the CBN guidelines on the issue even though “The CBN’s guidelines require borrowing under the WMF to be repaid in the year in which it was granted. The government has stated its intention to securitise balances borrowed under the facility, but published statistics indicate that the amounts borrowed have been rolled over repeatedly in recent years.”
According to the agency, “Data published by the government indicate that the treasury paid NGN912.6 billion on the facility in 2020, equivalent to 9% only of the outstanding balance at end-2019. The government has opted to use this source of financing, despite ample liquidity on its domestic debt markets, as illustrated by negative real yields.
“Our understanding is that its ability to borrow from domestic debt markets is constrained by the authorisation granted by parliament in the budget law. The repeated resort to CBN thus reflects higher-than-expected deficits, pointing to entrenched weaknesses in public finance management,” it said.
Worried by the trend, the Minister of Finance, Budget and National Planning, Zainab Ahmed said in Abuja last week, during a public presentation of the budget, that the loans will now be converted to tradable equities.