- 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.”