CBN’s free meal and rising fiscal complacency
No penalty on earth will stop people from stealing if it is their only way of getting food,” says Raphael Nonsenso in Utopia. This, according to Thomas More, the author of the 1,516 fictional work, was a response of Nonsenso, a Portuguese traveller, during a dialogue with the Archbishop of Canterbury, John Morton, wherein the former argued that cash hand-outs could reduce theft in the city of Antwerpa.
Cash handout is an easy escape for an individual who is in desperate need of a means of survival. But as the old economic maxim – no free meal – suggests, every decision or option necessarily comes at a cost to the giver, the society or both. The one who gives suffers the opportunity cost of the money he parts with.
But that is tolerable compared to the moral burden it leaves on the society, which could manifest in the form of indolence or complacency. And when handout becomes a norm, rather than a stop-gap measure as Nonsenso, in Utopia, must have envisaged, it stifles state enterprise and kills creativity.
Sadly, handout giving has become a norm at the level of statecraft, with many countries either depending on aids and loans not as a last resort but as a perpetual means of public funding. Where external aids or loans or both dry up, as they currently do, the states, like calcium-starved chickens, turn on their citizens for a feast.
In different forms, the Nigerian government has had to turn to Nigerians for a distasteful feast, inflicting, with varied degrees of damage, on them thereafter.
According to Fitch, a global economic research and rating agency, Ways and Means (W&M), the use of a central bank overdraft to finance deficits, has become Nigerian government’s free lunch (an unworthy public lifestyle).
Among others, Fitch said the worrisome indulgence and abuse of W&M financing is partly responsible for the escalating inflation, which hit 15.75 per cent as of December, and the tumbling naira, which fell by about 30 per cent against the dollar at the parallel market last year.
Entitled, ‘Nigeria’s Deficit Monetisation May Raise Macro-Stability Risks’, Fitch report said: “The Federal Government of Nigeria’s (FGN) repeated recourse to its Ways and Means facility (WMF) with the Central Bank of Nigeria (CBN) highlights weaknesses in public finance management. Sustained use of direct monetary financing could raise risks to macroeconomic stability – given the current weak institutional safeguards – but we expect the FGN to reduce its use of the facility in 2021.
“The FGN directly borrowed 1.9 per cent of gross domestic product (GDP) from the CBN to fund its fiscal deficit in 2020, estimated by Fitch at 3.6 per cent of GDP. A number of emerging markets resorted to central bank deficit financing in 2020 against a background of urgent spending needs and temporary market dislocations associated with the coronavirus pandemic. However, the use of central bank financing in Nigeria predates the pandemic shock.
“We estimate that the balance of the government’s WMF with the CBN was around NGN9.8 trillion (6.7 per cent of GDP) at end-2019, up from NGN5.4 trillion (4.2 per cent of GDP) at end-2018. Unlike the government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30 per cent of the FGN’s debt at end-2019, on our estimates.
“Repeated central bank financing of government budgets could raise risks to macro-stability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation. The CBN’s guidelines limit the amount available to the government under its WMF to five per cent of the previous year’s fiscal revenues. However, the FGN’s new borrowing from the CBN has repeatedly exceeded that limit in recent years, and reached around 80 per cent of the FGN’s 2019 revenues in 2020.
“The CBN’s guidelines require borrowing under the WMF to be repaid in the year in which it was granted. The government has stated its intention to securitise balances borrowed under the facility, but published statistics indicate that the amounts borrowed have been rolled over repeatedly in recent years.
“Data published by the government indicates that the treasury paid NGN912.6 billion on the facility in 2020, equivalent to nine per cent only of the outstanding balance at end-2019. The government has opted to use this source of financing, despite ample liquidity on its domestic debt markets, as illustrated by negative real yields. Our understanding is that its ability to borrow from domestic debt markets is constrained by the authorisation granted by parliament in the budget law. The repeated resort to CBN thus reflects higher-than-expected deficits, pointing to entrenched weaknesses in public finance management.”
The agency warned that monetary financing of fiscal problems, monetary policy implementation, as “tight management of domestic liquidity is a key tool under the CBN’s policy of prioritising the stability of the naira.
It stressed that rising monetary financing could also complicate official efforts to stabilise inflation, which it viewed as though being primarily driven by cost as supposed loose monetary policy.
Last week, the CBN Governor, Godwin Emefiele, described Fitch’s position as “unfair” and “very unfortunate”, noting that it would amount to irresponsibility if the Central Bank fails to continue to “support” the government at this crucial moment.
Fitch is not the only organisation that has raised dust about Nigeria’s recourse to monetising its yearly unfunded deficit. Both the World Bank and its sister International Monetary Funds (IMF) have raised the alarm.
As pressure mounted, Emefiele and the Minister of Finance, Budget and Planning, Zainab Ahmed, promised to eliminate central bank lending by 2025 before the release of IMF’s $3.4 billion COVID-19 emergency funding last year.
Whereas the government may be willing to cut down its borrowing spree, experts said commitment to fiscal has goes beyond a statement of intent but that the government would need to work hard to achieve it in the near future.
Recently, Chairman of the Presidential Economic Advisory Council (PEAC), Dr. Doyin Salami, echoed the concerns of other stakeholders, saying “fiscal imbalance” is a major challenge comforting the economy.
Of course, Nigeria has maintained an unbroken commitment to deficit budgets in the past eight years. In 2013, the deficit was 2.3 per cent of the GDP while it fell to 2.1 per cent in 2014. Thereafter, it moved up to 3.2 per cent. In 2016, when the current administration planned its first budget, the deficit crossed four per cent and jumped to 5.4 per cent the subsequent year. It was consistently above four per cent until 2021 when it decelerated to 3.6 per cent.
Even with the reduction, President Muhammadu Buhari admitted the N5.2 trillion shortfalls in the proposal, later expanded by the National Assembly, was above the three per cent threshold advised in the Fiscal Responsibility Act (2007).
For eight years Nigeria has not recorded a budget surplus or, at least, hit the magical “black zero” (to borrow from German balance budgeting culture). Rather, the deficit has been growing, surpassing 40 per cent of the total budget in the 2021 budget.
Where the government cannot meet international market borrowing terms or source the shortfall locally, it resorts to cheap funds from the Central Bank for the unfunded deficit. Fortunately for the government, regularly accused of doing nothing about the bloated cost of governance, the CBN, in its response to Fitch, has promised to continue to lend to the government.
This, Fitch, said, is heightening the country’s macroeconomic instability, which Dr. Salami had earlier described as a bug on the country’s recovery.
But Godwin Owoh, a professor of applied economics, said Fitch’s alarm came when the problem caused by the continual CBN’s quantitative easing had grown into a full-blow “fever”.
About a decade ago, Owoh, an advisor to Prof. Charles Chukwuma Soludo during his days at the apex bank, raised the alarm bell of the economic distortions of the various bailout funds created by the CBN. He told The Guardian last week that if anything has changed in the past 10 years, the “misnomer” has rather grown into a norm.
In his analysis, Managing Director of Financial Nigeria, Jide Akintunde, said the two major concerns raised by Fitch have far-reaching consequences for “the macroeconomic stability of Nigeria” and that the Central Bank ought to have taken the warning seriously.
If the CBN disregards reasoning (of both internationally-renowned agencies and local experts) because it costs next to nothing to print money and ‘dash’ government, Nigerians will continue to bear the burden in form of weak purchasing power, as prices soar and naira becomes increasingly worthless.
Perhaps, the implication may be grimmer – access to cheap funding could continue to demotivate fiscal discipline and creativity while fuelling complacency among the revenue-generating parastatals.
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