FG’s revenue shortfall, debts weaken CBN’s interventions

• CBN financing deficit is highly inflationary, says DG, LCCI
• Could complicate efforts to bring inflation under control – FITCH
• Takes time to fix disparity between revenue and expenditure, says Prof. Ajibola

The Federal Government’s repeated recourse to Ways and Means (WM) facility with the Central Bank of Nigeria (CBN) has raised concerns about weaknesses in public finance management, complacency on the part of many revenue generating agencies who use most of the generated funds as overhead costs and excessive dependence on the apex bank for fiscal stability.
   
While it is not unusual for countries to resort to money creation to finance expenditure, as deployed by some in the bid to tackle the coronavirus pandemic, the Federal Government’s repeated recourse to this option is raising concerns in the economy. Some think this could further weaken institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation.
   
With limited fiscal policy options, going by the government’s inability to generate enough tax from citizens, who are largely unemployed and underemployed, alongside poor production among local manufacturers seeking access to limited foreign exchange for production, the CBN has continued to apply monetary policy to address economic concerns.

THE Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf urged the Federal Government to be cautious in allowing the CBN to finance its deficit, especially when such credit was never included in the budget.
  
“The CBN has been engaged in a lot of interventions in the economy in various sectors. Getting the CBN to be involved in deficits that are not highlighted in the budget, even though government highlights other sources of deficit financing is worrisome. There is a level to which the CBN can intervene and with the level of financing in 2020, it is overboard.
  
“CBN financing of deficit is highly inflationary. We hardly look into these factors when discussing inflation. This kind of deficit financing is characterised in some literature as inflation tax. As inflation increases, real income reduces and purchasing power reduces. This is a society where incomes are hardly adjusted in line with inflation. It should not become a norm as it is major source of macro-economic challenges,” he added.
  
On the effect of the loans being converted to special instruments, Yusuf explained that while formalising FG’s borrowing from CBN will increase the country’s debt profile, converted instruments like the low yield government securities are helpful to the productive sector as funds can be invested in the real sector as being witnessed presently.
   
“Presently, companies are able to raise funds at a cheaper rate than they used to before now, through corporate bonds and commercial papers. It is a good source of resource mobilisation for the real sector,” he added.

CREDIT rating agency, Fitch Ratings noted, however, that while 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, the use of central bank financing in Nigeria predates the pandemic shock.
      
Fitch views the Nigerian government’s fiscal revenue and expenditure projections for 2021 as broadly realistic, which should preclude further significant borrowing by the sovereign from the CBN facility this year. The government may nonetheless use the facility more extensively if the deficit proves wider than forecast or if external financing falls short of planned amounts.
 
“Monetary financing of the fiscal deficit raises challenges to 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 could also complicate official efforts to bring inflation back under control.

ECONOMISTS who spoke with The Guardian say actions of the CBN are consistent with what central banks all over the world are doing, pursuing developmental responsibilities. 
 
They explained that fiscal deficit arises because public spending rises while revenue remains unchanged, adding that the growth in public revenue in developing countries is restricted by many factors such as low per capita income, limiting the base on which direct taxes can be imposed, as well as income tax exemptions in the form of tax holidays, accelerated depreciation rate and tax credits usually provided to the manufacturing sector, and deficiencies in tax administration.
  
On the other hand, they noted that public spending continues to grow due mainly to mismanagement; increased public participation in production and control of economic variables; and sheer inability to control spending.
  
Professor of Economics and former President/Chairman of Council, Chartered Institute of Bankers of Nigeria (CIBN), Segun Ajibola explained that CBN now plays the role of lender of last resort to not just the banks, but more to the Federal Government, adding that to finance its intervention, the CBN “has to either mop up liquidity from the banking system (hence the recurring increase in reserve ratios) or monetise foreign exchange reserves.”
  
“The government is no doubt working hard to improve its internally generated revenue, but it may take time to fix the disparity between its revenue and expenditure. Hence, the reliance on CBN to support the deficit financing through either direct lending to the Federal Government or the use of monetary instruments to raise such funds from the public, which may continue for a while. CBN is finding itself under a situation where it has to balance the challenges of monetary policy with those of fiscal management,” he added.