The federal government’s borrowing binge is pushing the country towards insolvency, argues Ndubuisi Francis
Despite government’s argument to the contrary, there are increasing fears that its borrowing binge is pushing the country towards insolvency, or at best, a debt trap.
When confronted with the debate over the burgeoning public debt profile, the federal government has always taken refuge in the alibi that Nigeria is still below the global threshold in the area of borrowing.
While Nigeria’s debt-to-gross domestic product (GDP) is at about 22 per cent, which is below the stipulated 58 per cent global ceiling, it is worrisome that as at March 31, 2021, public debt stood at N33.26 trillion.
Interestingly, the debt of some states were not captured in the latest official figures, which the Debt Management Office (DMO) released at the end of March.
But while concerns continue to mount over the debt quagmire, one of the disturbing signals is the federal government’s $25 billion (about N10 trillion) loans or overdraft from the Central Bank of Nigeria (CBN).
When the debt of some states that were not added to the last figures released by the DMO and the $25 billion (N10 trillion) overdraft secured under the CBN Ways and Means window are brought into the mix, the country might be heading for a more complex debt crisis.
CBN Act
Section 38(1) of the CBN Act allows the federal government to borrow from the apex bank to finance budget deficit. It allows the bank to provide financing of fiscal deficits not above five per cent of the government’s previous year’s revenues.
However, the CBN, via its Ways and Means window advanced a total of N2.8 trillion in support loans to the federal government in 2020 as the latter could not meet its revenue targets due to the impact of the dip in oil prices and COVID-19 pandemic.
During the public presentation of the 2021 budget highlights, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed disclosed that the apex bank gave financial support to the federal government to the extent of N2.8 trillion to fund the budget expenditure.
Of the 2020 budget deficit of N6.1 trillion, N2 trillion was from domestic sources and N1.2 trillion from foreign borrowing, while the CBN’s Ways and Means catered for the shortfall.
Simply put, the CBN loans/overdraft totaling N2.86 trillion to the federal government, which is 47 per cent of the government’s 2019 revenues of N4.5 trillion runs foul of the five per cent threshold permitted by the CBN Act.
Besides what is considered a violation of the five per cent threshold, the provision also requires that the loans are repaid at the end of every year, failure which the CBN will no longer be able to lend to the government in the following year.
CBN’s monetary account is currently put at over $25 billion or about N10 trillion, indicating that the Federal Government of Nigeria (FGN) is not meeting its obligations as required by the apex bank’s Act.
FGN Seeks Soft Landing
The federal government is planning to securitise the debt it owes the CBN. In essence, it intends allow the debt it owes the apex bank to be offered as bonds to the investing public while the bank recovers its money from the investors. Since the FGN unveiled the move to securitise the loans from the CBN, various reactions have trailed the plan.
Analysts View
The Socio-Economic Rights and Accountability Project (SERAP) has filed a lawsuit, asking the court “to compel the federal government to disclose details of a $25 billion overdraft obtained from the CBN.
SERAP also asked the court to compel the government to disclose spending details of the overdrafts and loans obtained from the apex bank since May 29, 2015. The group’s suit was embedded in its Freedom of Information (FoI) request to President Muhammadu Buhari to disclose the overdraft and repayment plan details.
According to SERAP, ensuring transparency and accountability in the spending of CBN overdrafts and loans would promote prudence in debt management, reduce any risks of corruption and mismanagement, and help the government to avoid the pitfalls of excessive debt.
It argued: “Transparency and accountability in the spending of CBN overdrafts would also ensure that public funds are properly spent, reduce the level of public debt, and improve the ability of the government to invest in essential public goods and services, such as quality education, healthcare, and clean water,” SERAP said in a statement.
“It is the primary responsibility of the government to ensure public access to these services in order to lift millions of Nigerians out of poverty and to achieve the Sustainable Development Goals by 2030.
“Transparency and accountability in the spending of CBN overdrafts and loans would also improve the ability of the government to effectively respond to the COVID-19 crisis. This means that the government would not have to choose between saving lives or making debt payments.
“The recent overdraft of $25.6bn (about N9.7trn) reportedly obtained from the CBN would appear to be above the five-percent limit of the actual revenue of the Federal Government for 2020, that is, N3.9trn, prescribed by Section 38(2) of the CBN Act 2007. SERAP notes that five-percent of N3.9trn is N197bn.’
SERAP explained that while Section 38(1) of the CBN Act allows the Bank to grant overdrafts to the federal government to address any temporary deficiency of budget revenue, sub-section 2 provides that any outstanding overdraft ‘shall not exceed five-per cent of the previous year’s actual revenue of the federal government.
It also noted that Section 38(3) requires all overdrafts to ‘be repaid as soon as possible and by the end of the financial year in which the overdrafts are granted.
SERAP joined the Attorney General of the Federation and Minister of Justice Abubakar Malami; the Minister of Finance, Budge and National Planning, Zainab Ahmed, and tbe CBN Governor, Godwin Emefiele in the suit.
The group said the court action was in the public interest and in line with the Nigerian Constitution, the Freedom of Information Act, the Fiscal Responsibility Act, the Central Bank Act; the Debt Management Office Act; and the country’s international legal obligations.
For the National President of the Capital Market Academics of Nigeria, Prof. Uche Uwaleke, much as he would not support the idea of CBN frequent resort to Ways and Means given its negative implications for inflation and exchange rates, it must be borne in mind that one of the functions of the CBN is to act as lender of last resort.
Uwaleke, a former Commissioner for Finance in Imo State explained that what this simply means is that the apex Bank is expected to come to the rescue of the government whenever it is in serious financial difficulty.
He recalled that the Nigerian economy suffered recession in 2016, which lasted five consecutive quarters largely on account of sudden collapse in oil price, adding that another economic downturn was also witnessed in 2020 due to the negative impact of COVID’19 pandemic.
“In these circumstances, it would have been insensitive on the part of the CBN not to bail out the government in line with its role as banker to the government and lender of last resort.
“The reality is that the give per cen ceiling on previous year’s IGR effort with regard to CBN Ways and Means never envisaged the situation the economy found itself in the last few years.
“I think the idea of scuritising these loans by the CBN will enable them to be restructured into long term tradable obligations which allow the government sufficient time to liquidate them against the backdrop of the requirement that any loan by the CBN must be repaid before any new one is extended.”
In his intervention, the founder and presidential candidate of the Abundant Nigeria Renewal Party in the 2019 general elections, Mr. Tope Fashua maintained that, going forward, the sanctity of the provisions of the CBN Act should be upheld, while the excuse of COVID-19 should be discarded.
He said: “Going forward, I think the excuse of COVID should recede into the distance and we should be able to go back to following the Act which only allows 5 per cent of previous year’s revenue, and of course what that does is that it also puts government under pressure to increase its revenue base, and in doing that, everyone is involved”
Explaining that the move to securitise the debts owed to the CBN was in order, Fasua said: “By securitising, I believe what they want to do is to package the borrowings as bonds and sell to the investing public in order to get off the balance sheet of the CBN. This will just translate into bonds as it were in the hands of people and spread out over a period of time, perhaps into the long term, so that the government can find a way of managing it.
“Of course, it is not good for the government to have over-borrowed from the central bank. However, the justification for some of these could be the Covid period…. However, the system is pretty inefficient in Nigeria and a lot of the interventions of the government have not had the impact that they were supposed to have. We’re not even seeing the multiplier effect in all the industries that the government has intervened in. We are hoping that we continue to get more accountable in Nigeria through the efforts of the media and those who speak up.”
