Banks’ net credit to the government dropped to a record low between June and November 2023 after the Federal Government securitised N22.7 trillion of its overdrafts, known as Ways and Means debt, six months ago.
Data from the Central Bank of Nigeria (CBN) showed that net credit to the government declined by 83.47 percent to N5.16 trillion in November from N31.23 trillion in June 2023 when the government securitised N22 trillion Ways and Means debt.
Ways and Means Advances is a loan facility used by the central bank to finance the government in periods of temporary budget shortfalls, subject to limits imposed by law.
With less competition from the government for loanable funds, banks might allocate more resources to lending to businesses and individuals. This could boost private sector borrowing and investment, driving economic activity, according to analysts.
Commercial banks in the country have witnessed a 44 percent year-on-year surge in their total credit to the private sector, reaching N59.7 trillion as of November 2023.
The analysts said reduced government borrowing can ease pressure on inflation, especially if it is driven by government spending financed by bank loans. This can stabilise prices and improve purchasing power for consumers.
“This drop in net credit is (I am 95 percent sure) due to the Ways and Means debt (just over N22 trillion) being officially taken on by the government,” said Charlie Robertson, head of macro strategy at FIM Partners UK Ltd.
He said Nigeria’s public debt is now about 40 percent of GDP – which is a more transparent and accurate way of accounting.
FIM Partners expects that the remaining credit (N5 trillion) will also be added to the government debt figures.
“Nigeria is moving away from money printing to finance the budget deficit and this will help cut inflation and reduce the damage that inflation does to the poorest in society,” Robertson said.
Razia Khan, managing director/chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said: “It probably reflects the earlier securitisation of Ways and Means financing. So once formally securitised, CBN lending to the government dropped out of the numbers?”
Gafar Bashiru, senior associate, global markets at Parthian Partners, said the decline in net credit from the CBN to the government is a reflection of the central bank’s move away from outsized overdrafts to the Federal Government via extrajudicial Ways and Means borrowings during the former CBN administration.
The Central Bank Act of 2007 restricts advances to the federal government to 5 percent of the previous year’s revenue, meaning that exceeding this limit, as the previous administration did, was unauthorised, he said.
“The outstanding stock of unauthorised Ways and Means (about N30 trillion) has since been securitised, as approved by the National Assembly. These excessive overdrafts made it difficult for the monetary authority to combat inflation, as money was effectively being printed,” Bashiru said.
According to him, a move away from that regime would lead to improved fiscal discipline, as the federal government will now be compelled to manage its finances more responsibly since it now has to increase revenue through permitted channels and limits.
It will also mean that the central bank’s capacity to bring inflation under control has improved. Monetary tightening policies such as issuing Open Market Operation bills and raising the monetary policy rate now have a better chance at effectiveness.
Muhammad Sanusi II, former governor of the CBN, said in November last year that the CBN’s lending to the federal government under the administration of former President Muhammadu Buhari through Ways and Means triggered inflationary pressure in Nigeria and weakened the value of the Naira.
The House of Representatives granted approval in May 2023 for the restructuring of a substantial N22.7 trillion loan from the CBN, as requested by Buhari.
As per information provided by the Debt Management Office (DMO), the terms of the loan restructuring included a lengthy tenor of 40 years, a three-year moratorium solely on the principal amount, and an annual interest rate fixed at 9 percent. The repayment, following an amortizing structure, was set over a period of 37 years.
This decision aimed to manage the financial obligations effectively, aligning with the economic priorities of the nation. However, the restructuring comes against the backdrop of a continual rise in Nigeria’s total public debt.
According to the latest data from the DMO, as of September 30, 2023, Nigeria’s total public debt stood at N87.91 trillion or $114.35 billion.
This figure reflects a 0.61 percent increase compared to the debt recorded on June 30, 2023, which was N87.38 trillion.
The uptick in public debt underscores the ongoing fiscal challenges facing Africa’s largest economy, prompting close scrutiny of the government’s financial strategies and their implications on the country’s economic landscape.
Facing revenue challenges in the 2024 national budget, the federal government has announced a departure from allowing the CBN to print money via Ways and Means to cover the budget deficit.
Atiku Bagudu, minister of budget and national planning, revealed in a recent discussion with journalists in Lagos that the central bank will no longer be printing money for the government.
Instead, if borrowing from the CBN occurs, it will strictly adhere to the legal limit, not exceeding 5 percent of the previous year’s revenue.
The minister highlighted the government’s commitment to rectifying past practices that exceeded this 5 percent threshold.
The federal government’s 2024 budget projects a deficit of N9.2 trillion, which is about 3.9 percent of the GDP.
