Nigerian government’s excessive borrowing from the central bank, inflation and naira depreciation

Renaissance Capital has backed the claim of  ex-CBN governor and Emir of Kano Muhammadu Sanusi II that the Nigerian government’s borrowing has surpassed the the cap of 5 percent stipulated in the Central Bank of Nigeria’s (CBN) Act of 2007 (Section 38.2). The economics and politics research company, however, admitted that the Nigerian government had enough funds saved as shown by checks, but wondered why the country was borrowing.

Sanusi was speaking at a policy monitoring event on December 2, in Abuja when he noted there was violation of a rule stipulated in the Central Bank Act of 2007, which caps central bank financing of the FGN’s budget deficit at 5 percent of the last fiscal year’s revenue.

However, presidency sources dismissed the claim. According to a fact sheet to defend this, inflows into the Federal Government’s Treasury Single Account (TSA) as at December 2 stood at N4.4 trillion and foreign exchange transfers into the account was N101.7 billion, giving a grand total of N4.574trillion. The fact sheet also showed that government spent N1.913 trillion, giving a credit balance of N2.66 trillion in the TSA as at December 2, 2016.

When RenCap ran the numbers, its estimates showed that CBN financing of the Nigerian government surged to 48 percent and 54 percent of the previous year’s revenue, in 2015 and as at October 2016, respectively, laying credence to Sanusi’s claim.

A note by ReCap’s Yvonne Mhango revealed that the first sharp increase in CBN financing under the Muhammadu Buhari-led administration was in November 2015, when the cabinet was first announced.

“The FGN increased its overdraft on its account at the CBN by NGN785bn (or c. $4bn). In March 2016, the FGN issued a ‘converted bond’ of NGN974bn (or $4.9bn) that the CBN invested in,” the note read.

“In the year to October, CBN lending to the government increased by NGN2.7trn to NGN4.2trn. Over the same period the FGN’s deposits rose by NGN1.9trn to NGN5.2trn. This affirms the Presidency’s argument that the FGN 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 FGN has funds, particularly when there are macro implications.”

…but why borrow from CBN when there are macro implications?

A sharp fall in revenues compelled the Nigerian government to increase its borrowing requirement. 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). Central bank financing tends to be frowned upon because it expands money supply and adds to inflation. Nigeria’s narrow money YoY growth has gone from a negative 1 percent in October 2015, to 50 percent a year later. And in that period YoY inflation accelerated to 18.3 percent in October, vs 9.3 percent, and the naira weakened, against the dollar in the parallel FX market, from NGN227/$1 to NGN450/$1.

Revenue constraints imply CBN funding may not be transitory

Central bank lending is considered acceptable when used to smooth out revenue fluctuations, and when transitory, according to Alagidede P. in his paper Central bank deficit financing in a constrained fiscal space, published in June 2016. We have established that Nigeria has the funds to settle the borrowed funds in the short term, unlike Ghana, where it took an IMF programme to reduce central bank funding. That said, the government’s proposed 20 percent increase in spending to NGN7.3trn, in 2017, when we see resources still being constrained, raises the risk of central bank funding continuing, implying inflation may remain elevated and naira depreciation pressures persist.