CBN Finances N2.86trn of FG’s 2020 Fiscal Deficit

• Debt, deficit woes to grow on optimistic revenue targets

The Central Bank of Nigeria (CBN) financed the Federal Governments (FG) 2020 fiscal deficit to the tune of N2.86 trillion, equivalent to 46.6 percent of the shortfalls recorded in that time period.

Nigeria saw a substantial shortfall in revenue collections in 2020 due to the impact of the coronavirus pandemic on economic activity.

As at year end 2020, the FG’s retained revenue was N3.94 trillion or 73 percent of the target, with the Federal share of oil revenues put at N1.52 trillion (representing 157% performance, over and above the prorated sum in the revised 2020 budget) while non-oil tax revenues totaled N1.28 trillion (79% of revised target).

However, on the expenditure side, N9.97 trillion was appropriated (excluding GOEs and Project tied loans), while N10.08 trillion (representing 101%) was spent.

Of the expenditure, N3.27 trillion was for debt service, and N3.19 trillion for Personnel cost, including Pensions.

This led to a fiscal deficit of N6.145 trillion for the period (Jan – Dec 2020), according to budget documents seen by MoneyCentral.

Optimistic revenue assumptions

MoneyCentral analysis of the budget documents show that the Federal Government expects 2021 revenues to be 108 percent higher than the actual 2020 revenues.

“We expect significant improvement in macroeconomic performance by the second quarter of 2021, as the Federal Government is already implementing several measures to overcome our fiscal constraints. In addition to the Strategic Revenue Growth Initiatives (SRGI), we are leveraging technology and automation, plugging fiscal drainers and ensuring more effective Independent revenue monitoring,” Zainab Shamsuna Ahmed, Nigerian Minister of Finance, Budget and National Planning, said in a presentation of the 2021 FGN approved budget breakdown, last week.

The aggregate revenue available to fund the 2021 budget is projected at N7.99 trillion (36.9% higher than the 2020 projection of N5.84 trillion).

The increased revenue projections for 2021 come despite the 2020 actual received revenues underperforming projections by 27 percent.

Analysis shows the FG expects its oil revenue to double to N2 trillion in 2021 from 2020 budgeted levels, NLNG dividends to more than double to N208.5 billion, Revenues from Government owned agencies to hit N2.1 trillion, signature bonus of N677 billion, stamp duty to double to N500 billion, while grants and donor funding to surge six-fold to N354 billion.

The wishful (budget) thinking means that the financing of the expanded 2021 budget will largely fall on debt and CBN financing.

Overall the 2021 budget deficit is equivalent to N5.60 trillion representing 3.93 percent of GDP. The budget deficit is to be financed mainly by borrowings from domestic sources of N2.34 trillion and foreign sources N2.34 trillion.

Economists MoneyCentral spoke to say they expect CBN financing to take up a huge chunk of the deficits.

Steadily rising borrowing costs

The projected debt service costs in the 2021 budget is N3.32 trillion, 12.6 percent higher than the 2020 revised Budget for debt service and 24.5 percent of the total budgeted expenditure for 2021.

The projections may well be understated as the actual 2020 debt service was equivalent to N3.26 trillion, 10 percent higher than the budgeted figures.

Nigeria is seizing on historically low domestic bond yields to keep debt payments costs as low as possible even as it piles on more borrowing and economists sound alarm over a future sovereign debt crisis.

Interest payments on the domestic debt fell marginally by 1.6 percent to N1.18 trillion in the first 8 months of 2020 (Jan – Aug), compared to a year ago, according to data compiled by MoneyCentral.

This comes as total FG domestic debt rose by N1.55 trillion or 11 percent between September 2019 and June 2020, according to Debt Management Office (DMO) data.

Outstanding domestic debts for the Federal Government were equivalent N15.846 trillion as at September 2021, according to the NBS. Domestic debts grew by 14 percent year on year between September 2019 and September 2020, NBS data shows.

Bond yields drop

Benchmark 10-year bond yields due 2030 currently yield 7.7 percent down from double digits just a year ago.

The yields have fallen below similar South African 10-year securities equivalents (currently yielding 8.84%) – a key gauge of risk in the region – and knocked billions of Naira’s off Nigeria’s debt financing bill in 2020, according to MoneyCentral calculations.

While Nigeria’s total public Debt to GDP remained at a ratio of 22.23 percent as at the end of June 2020, the low revenue collection as a percentage of GDP is a concern for economists.

“Revenues as a percentage of GDP are extremely low at about 6 percent,” said Ravi Bhatia, Director, Sovereign & IPF Ratings at S&P Global Ratings, which rates Nigerian debt at B- with a stable outlook.

“Less than 10 percent of corporates pay any taxes.”

The problem is compounded by the huge level of government borrowing now needed to fund the budget through 2023 amid the pandemic, revenue shortfalls and slumping growth.

CBN deficit financing of Federal Government

The Central Bank of Nigeria (CBN) is breaking its own rules regarding Ways and Means Advances extended to the Federal Government (FG), MoneyCentral analysis shows.

Ways and Means financing is basically the printing of money by the CBN to enable the FG plug its budget deficit.

The CBN in a draft Monetary, Credit, Foreign Trade, and Exchange policy set of guidelines released on Friday September 11, 2020 indicated in section 3.2.15, that Ways and Means Advances shall continue to be available to the Federal Government, to finance deficits in its budgetary operations to a maximum of 5.0 per cent of the previous year’s actual collected revenue.

This is expected to continue in the 2020/2021 fiscal years, according to the guidelines.

However, the CBN financed the Federal Governments (FG) 2020 fiscal deficit to the tune of N2.86 trillion, equivalent to 46.6 percent of the shortfalls recorded in that time period, according to budget documents seen by MoneyCentral.

It also shows that the FGs retained revenues was N3.937 trillion in 2020, a 27 percent shortfall compared to budgeted estimates.

Assuming a strict 5 percent of Federal Government revenues (N3.93 trillion) is applied as given in the guidelines, it means that the CBN should extend no more than N196.5 billion to the FG this fiscal year.

That means that the CBN is exceeding its mandate.

In any case the CBN guidelines note that any such Ways and Means advances are expected to be liquidated as soon as possible, and shall be repayable at the end of the year in which it was granted, meaning no carryover from a previous year is anticipated by the law.

Consistent with the banking arrangement of Treasury Single Account (TSA), Ways and Means Advances would now be determined after recognizing the subaccounts of the various MDAs, which are now linked to the Consolidated Revenue Fund (CRF) to arrive at the FGN consolidated cash position.

The CBN’s net financing to the Federal government stood at N4.4 trillion as at August 2019 from less than N400 billion in December 2018, according to most recent available CBN data.

The N4.4 trillion net loans to the Federal Government (August 2019), is the net sum of outstanding CBN overdrafts to the FG minus the government’s treasury single accounts (TSA) deposits with the CBN.

Printing so much money and lending it to the federal government is also a violation of the Central Bank Act of 2007 (Section 38.2).

Since 2015, when President Muhammadu Buhari first assumed office, the total amount of money borrowed by the FGN from the CBN (Ways and Means) to meet fiscal obligation has surged astronomically.

In 2014, borrowing by the Federal Government stood at N922 billion. This later surged to N2.5 trillion in 2015, N5.21 trillion in 2016, N5.87 trillion in 2017, and a whopping N8.12 trillion in 2018.

Analysts say that such money printing or financing of the FG by the CBN has the effect of debasing the local currency the naira, and could spark hyper-inflation.