FG’s Excessive Lending Could Hurt Monetary Policy, Says CBN

The Central Bank of Nigeria (CBN) has said the Federal Government’s excessive borrowing from the bank’s Ways and Means Advances (W&M) window can frustrate its monetary policy.

The Ways and Means Advances where the federal government can access funds, is a loan facility by the apex bank to finance the government during temporary budget shortfalls subject to limits imposed by law.

However, overdrafts due to the increasing reliance on the W&M overdrafts will negatively impact CBN’s monetary policy, the bank states.

The monetary policy helps to control inflation, maintain a healthy balance of payment position, in order to safeguard the external value of Nigeria’s currency, naira.

Speaking on the policy, CBN made this known, replying to a question under the monetary policy category in its Frequently Asked Questions (FAQ) page.

The apex bank was asked, “Can the Federal Government frustrate the Central Bank of Nigeria from pursuing its monetary policy?”

The Federal Government of Nigeria’s banker answered, “Yes when the Federal government exceeds its revenue, the CBN finance government deficit through Ways and Means Advances subject (in some cases) to the limits set in the existing regulations, which are sometimes disregarded by the Federal Government. The direct consequences of the central bank’s financing of deficits are distortions or surges in the monetary base, leading to an adverse effect on domestic prices and exchange rates i.e macroeconomic instability because of excess liquidity that has been injected into the economy.”

CBN also explained that its monetary goals are to “basically to control inflation, maintain a healthy balance of payment position in order to safeguard the external value of national currency and promote adequate and sustainable level of economic growth and development.

“These goals are achieved by controlling money supply in order to enhance price stability (low and stable inflation) and economic growth,“ the bank added.

According to Nigeria’s Debt Management Office in December 2021 (DMO), the country’s total debt stock surged to $37.9 billion as of September 30.

This figure comprises the external debt stock of the Federal Government, 36 state governments and the Federal Capital Territory.

Section 3.2.15 of the CBN Monetary, Credit, Foreign Trade, and Exchange Policy notes that W&M advances, however, would continue to be available to the federal government to finance deficits up to 5.0% of the previous year’s real collected revenue.

The central bank’s financing of government’s deficits from the W&M loaning facility is notably subject to limits imposed by law.