FG’s Excessive Borrowing from CBN Threatens Exchange Rate, Others – Report
Excessive federal government borrowing from the Central Bank of Nigeria through the Advanced Means and Means window can adversely affect the monetary policy of the umbrella bank and subsequently adversely affect domestic prices and exchange rates.
This was disclosed in the Monetary Policy category of the CBN’s Frequently Asked Questions page.
In the subsection titled “Can the Federal Government Stop the Central Bank of Nigeria from Continuing Monetary Policy?” It was reported that there were some distortions or increases in the monetary base due to central bank funding deficits.
The response read, in part: “Yes, when the federal government exceeds its revenues, the CBN finances the government deficit through ways and means advances subject (in some cases) to limits set in existing regulations, which are sometimes ignored by the federal government. .
âThe direct consequences of central bank financing of deficits are distortions or surges in the monetary base, leading to an adverse effect on domestic prices and exchange rates, i.e. macroeconomic instability due to from the excess liquidity that has been injected into the economy. ”
Ways and Means Advances is a central bank lending facility to finance the government during temporary budget deficits subject to limits imposed by law.
The increase in federal government borrowing from the CBN has been a source of concern to economic experts and stakeholders.
A global credit rating agency, Fitch Ratings, in January 2021 expressed concerns about the federal government’s repeated use of its ways and means facility with the CBN.
He criticized the CBN for allowing federal government borrowing to exceed the five percent limit.
âThe CBN guidelines limit the amount available to the government under its Ways and Means facility to five percent of the previous year’s tax revenue.
âHowever, the FGN’s new borrowing from the CBN has repeatedly exceeded this limit in recent years and reached around 80% of the FGN’s income in 2019 in 2020,â he said.
The agency said that the use of central bank funding in Nigeria could pose macro-stability risks in the context of weak institutional guarantees that preserve the credibility of policymaking and the capacity of the central bank to control inflation.
Although Fitch Ratings has said it expects the Nigerian government to reduce its use of the CBN facility, it remains unclear whether the umbrella bank will reduce its continued funding of the government deficit.
The punch reported that the federal government’s total borrowing from the CBN through Advanced Ways and Means reached N15.51 billion in June last year, estimated at 2,286% increase in six years, according to CBN data.
The N15.51tn owed to the CBN by the federal government is not part of the country’s total public debt stock, which stood at N38tn in September 2021.
In the first six months of 2021, the federal government borrowed 2.4 billion naira from the CBN, more than half of what it obtained in 2020.
In the first 11 months of 2021, the federal government spent 1.12 billion naira on interest payments on the Ways and Means Facility, according to Finance, Budget and National Planning Minister Zainab Ahmed, during the public presentation of the 2022 approved budget.
However, the DMO had said it was making plans to restructure the CBN’s overdrafts for government funding, into long-term debt.
In accordance with Article 38 (i) of the CBN Act of 2007, the bank may offer temporary advances to the federal government to cover the shortfall in budget revenue at the interest rate that the bank may determine.
The law says, âThe total amount of such overdue advances shall at no time exceed five percent of the previous year’s actual federal government revenue.
“All advances are repaid as soon as possible and, in any event, are repaid at the end of the federal government fiscal year during which they are granted and if these advances remain unpaid at the end of the year , the power of the bank to make such additional advances in a subsequent year cannot be exercised unless the overdue advances have been repaid.
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