FGN Borrowing from the CBN – Curse or Blessing?
The standard definition of a central bank is that it is the bankers’ bank and the bank to the government. Therefore, the central bank is often obliged to provide financial support to the government to meet its financing needs.
Central bank lending to their host governments is usually funded by selling government paper directly or issued on behalf of the government. In some cases, a government’s expenditure is funded by ways and means advances, which grants the government an overdraft by means of direct monetary financing.
Since the oil price shock of 2014-2016, the Nigerian government has often relied on borrowings from the Central Bank to plug its revenue shortfalls. The practice has, however, become increasingly worrisome due to the inflationary risks associated with and the delayed repayment of the loans.
In January 2021, the international rating agency, Fitch Ratings, warned that continual dependence on central bank lending could undermine the stability of the Nigerian economy. Notwithstanding, the CBN has insisted on sustained credit financing to the government.
While the minister of finance recently affirmed the need to reduce reliance on central bank lending, the CBN’s commitment to upholding the practice poses a fundamental threat to investor confidence and the stability of the economy. The Nigerian government’s debt at the CBN was estimated at N13.2 trillion (8.6% of GDP) as of September 2020 and headline inflation is already at a more than four-year high of 18.17%.
Impact of Central Bank lending on the Economy
Central bank lending to the government is usually necessitated by fiscal gaps and the need to support economic recovery efforts. This is different from intervention lending for developmental initiatives in the country such as the anchor borrowers programme.
CBN’s lending to the government is targeted at reducing the fiscal pressures of the government at times of significant revenue shortfalls. Nigeria’s fiscal revenue has been susceptible to swings due to peaks and troughs in the global price of oil.
For example, in 2016, the global economy recorded a huge slump in oil prices, which plunged below $30pb in January 2016. This weighed significantly on the country’s fiscal and external balances resulting in a recession in 2016.
The country also continues to face a rising fiscal deficit resulting in a surge in government borrowing, both domestic and external. Nigeria’s debt to GDP ratio rose to 34.98% in 2020 from 29.10% in 2019.6 Fiscal deficit is also estimated at 3.6% of GDP (N5.6trn) in the 2021 budget, higher than the 3% benchmark in the Fiscal Responsibility Act of 2007.
According to the CBN, the direct impact of credit financing from the Central Bank is the surge in money supply, which typically results in price and exchange rate instability.8 Hence, the CBN’s commitment to continue to finance the government undermines its core monetary responsibilities.
Although the government has announced plans to securitize its debt at the CBN, this could result in an increase in its debt service costs, which will weigh on its credit rating.
Fitch retained its credit rating for Nigeria at ‘B’ with a stable outlook on March 19 but highlighted sustained central bank lending as one of the potential threats to the country’s rating.9 In addition, continual reliance on CBN financing could encourage fiscal complacency in the implementation of revenue generation reforms by the government.
Lessons from Zimbabwe
The Zimbabwean government resorted to central bank financing after sanctions from the international community in 2001. The sanctions were prompted by the contentious land reform program initiated by the then president, late Robert Mugabe, in 2000.
The program encouraged black farmers to reclaim their farmlands from white commercial farmers. The US, in reaction, imposed sanctions on the economy restricting support for multilateral financing to Zimbabwe.
The country, therefore, relied on monetary financing to meet its fiscal obligations, which led to a spike in its inflation rate to as high as 79.6 billion percent in November 2008, the second-highest cause of hyperinflation on record.10 Although the inflation rate has since reduced, Zimbabwe is still struggling with three-digit inflation, which stood at 194.07% in April 2021.
The Nigerian government needs to intensify its revenue generation efforts and step up measures towards economic diversification to reduce its vulnerability to oil price shocks. The current focus on the development of the agriculture sector is commendable.
However, there is the need for an effective monitoring process to track the progress of several agriculture interventions schemes and areas requiring improvement. The government should also adopt business-friendly economic policies to encourage growth in other sectors of the economy such as manufacturing, mining, trading and ICT.
This will help broaden the government’s revenue base and reduce reliance on oil. Moreover, the government needs to be committed to fiscal discipline to prevent an increase in the country’s debt burden and the risk of a credit rating downgrade.