- RenCap Questions FG’s Increased borrowing From CBN
The increase in the Federal Government’s borrowing from the Central Bank of Nigeria has been described as strikingly higher than the cap stipulated in the CBN Act of 2007.
The Sub-Saharan Africa Economist, Renaissance Capital, a Russian investment bank, Yvonne Mhango, noted that the Emir of Kano and former CBN governor, Muhammadu Sanusi II, recently drew attention to the violation of the rule stipulated in the CBN Act of 2007, which caps central bank financing of the FG’s budget deficit at five per cent of the last fiscal year’s revenue.
“We ran the numbers and our estimates show the CBN financing of the FGN surged to 48 per cent and 54 per cent of the previous year’s revenue, in 2015 and in October 2016, respectively,” she said in an emailed note on Thursday.
According to Mhango, in the fiscal year 2016, the central bank lending to the Federal Government will exceed 50 per cent of the previous fiscal year’s revenue, by RenCap’s estimate.
She said, “This is strikingly higher than the cap of five per cent stipulated in the Central Bank of Nigeria Act of 2007 (Section 38.2).
“At the same time, the FG’s deposits have been building up, which mitigates the contention of the central bank funding. However, to us, this raises the question of why the FG is borrowing from the CBN when it has funds in its accounts.”
Mhango said the first sharp increase in CBN financing under the current administration was in November 2015, when the cabinet was first announced, adding that the FG increased its overdraft on its account at the CBN by N785bn (or about $4bn).
She said, “In March 2016, the FG issued a ‘converted bond’ of N974bn (or $4.9bn) that the CBN invested in. In the year to October, the CBN lending to the government increased by N2.7tn to N4.2trn. Over the same period, the FG’s deposits rose by N1.9tn to N5.2tn.
“This affirms the Presidency’s argument that the FG holds substantial deposits to cover its loans from the CBN. But for us, this raises the question of why the deficit is being monetised when the FG has funds, particularly when there are macro implications.”
The RenCap economist noted that a sharp fall in revenues compelled the government to increase its borrowing requirement.
According to her, governments have four sources to borrow from to finance their budget deficits: abroad, the central bank, domestic commercial banks, and the domestic non-bank sector (i.e., pension funds).
“The Central bank financing tends to be frowned upon because it expands money supply and adds to inflation. Nigeria’s narrow money year-on-year growth has gone from a negative one per cent in October 2015 to 50 per cent a year later. And in that period, year-on-year inflation accelerated to 18.3 per cent in October versus 9.3 per cent, and the naira weakened against the dollar in the parallel forex market, from N227/$1 to N450/$1,” Mhango said.
She said revenue constraints implied that the CBN funding may not be temporary.
“We have established that Nigeria has the funds to settle the borrowed funds in the short term, unlike Ghana, where it took an International Monetary Fund programme to reduce the central bank funding.
“That said, the FG’s proposed 20 per cent increase in spending to N7.3tn in 2017, when we see resources still being constrained, raises the risk of the central bank funding continuing, implying inflation may remain elevated and naira depreciation pressures persist.”
The Drop in US Crude Oil Inventories Boosted Oil Prices on Wednesday
Crude oil prices rose on Wednesday following a decline in US crude inventories last week.
The American Petroleum Institute (API) had reported that United States crude oil inventories declined by 5.3 million barrels in the week ended January 22, 2021, more than a reduction of 430,000 barrels predicted by a Reuters poll.
The unexpected decline, coupled with slowing new COVID-19 cases in China, the world’s largest importer of crude oil, boosted oil prices on Wednesday.
Brent crude, against which Nigerian crude oil is measured, rose by 41 cents or 0.7 percent to $56.32 per barrel.
The U.S. West Texas Intermediate (WTI) crude oil also gained 56 cents or 1 percent to $53.17 a barrel.
“WTI is slightly firmer on the back of a larger-than-expected draw in US crude inventories reported by the API, which is offset by builds in gasoline and distillates,” said Vandana Hari, oil market analyst at Vanda Insights.
The data, however, showed petrol inventories grew by 3.1 million barrels in the week, more than experts projected.
Similarly, API data revealed that distillate fuel inventories that include diesel and heating oil, jumped by 1.4 million barrels, far higher than the 361,000 barrels decline predicted. However, refinery runs declined by 76,000 barrels per day.
“Market participants are now in ‘wait and see’ mode, wanting to see how lockdowns evolve in the coming weeks and months, and how successful countries are in rolling out Covid-19 vaccines,” ING economics said in a note.
COVID-19 Plunges Nigeria’s Oil Revenue by 41% in the First Nine Months of 2020
Nigeria’s oil revenue declined by 41.44 percent in the first nine months of 2020 to $2.033 billion, according to the latest data from the Nigerian National Petroleum Corporation, NNPC.
This represents a decline of 41.44 percent from $3.47 billion filed in the same period of 2019 when there was no COVID-19.
In the September 2020 edition of NNPC’s Monthly Financial and Operations Report (MFOR), revenue from oil and gas rose by 16 percent to $120.49 million in the month of September, a 66 percent or $234.81 million drop from $355.3 million posted in the same month of 2019.
The global lockdowns caused by the COVID-19 pandemic plunged Nigeria’s crude oil sales and global demand for the commodity. This was further compounded by Nigeria’s high cost of production compared to Saudi Arabia, Russia and others that were offering discounts to boost sales during one of the most challenging periods in human history.
Experts like Prof. Yinka Omorogbe, President of Nigeria Association of Energy Economics, NAEE, were not surprised with the drop in earnings given the effect of COVID-19 on the world’s economy.
She, however, called for the revamp of the nation’s petroleum sector laws and diversification of the economy away from oil revenue dependence. She said “Covid-19 made 2020 a very hot year and it battered the oil industry internationally and we are not an exception; so we could not have been unaffected”.
She also said the effect of the fall “is definitely a wake-up call; we have to diversify, strengthen our other resources and capabilities”.
Omorogbe, a former NNPC Board Secretary, urged the government and the operators in the sector to look inward and think strategically, stating: “think medium term, think of where they want to be and the government, above all, must think of how best we can utilize our resources, so that we can achieve our objectives once we know and define them.
“It is a clear wake-up call, if not we will just sit here and find that we have become one of the poorest nations in the world”, she noted.
Crude Oil, Other Commodities Closing Price for Monday
Brent crude oil, Nigeria’s crude oil benchmark, gained 47 cents to $55.88 per barrel on Monday, while the US crude oil expanded by 50 cents to $52.77 per barrel.
Gold for February delivery fell $1 to $1,855.20 an ounce. Silver for March delivery fell 7 cents to $25.48 an ounce and March copper was little changed at $3.63 a pound.
The dollar fell to 103.80 Japanese yen from 103.83 yen. The euro fell to $1.2139 from $1.2167.
Wholesale gasoline for February delivery rose 1 cent to $1.56 a gallon. February heating oil rose 2 cents to $1.59 a gallon. February natural gas rose 16 cents to $2.60 per 1,000 cubic feet.
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