CBN Monetisation of Federal Government Budget Deficit Fueling Inflation

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The net Central Bank of Nigeria (CBN) claims on the Federal Government (FG) grew by a whooping N2.8 trillion in 2020, equating to 1.8 percent of GDP and 45 percent of the federal budget deficit, helping to engineer a steep rise in money supply (M2), and also fueling inflation.

It has grown another N800 billion in the first quarter (Q1) of 2021, equivalent to 0.5 percent of GDP and 17 percent of the projected full-year federal deficit.

The CBN loans to the Federal Government (FG) has accounted for nearly 50 percent of the increase in money supply (M2) since mid-2020, according to World Bank estimates.

“Unless the CBN reduces its monetisation of the deficit to reduce money supply growth, and eases shortages of FX and goods caused by their exchange rate policy, inflation in Nigeria will remain in the double digits for the foreseeable future,” said analysts at Tellimer research in a recent note.

Nigeria’s consumer price index (CPI), a measurement of the rate of change in prices of goods and services rose by 17.75 percent in June from 17.93 percent recorded in May 2021, according to data from the National Bureau of Statistics (NBS).

Meanwhile, money supply M2 was growing at a rate of 18.7 percent year on year in May 2021, CBN data shows.

The monetisation of the budget deficit has not only pushed up yields but has also been the key driver of Nigeria’s rapid money supply growth, according to Tellimer.

The Central Bank of Nigeria (CBN) net overdrafts extended to the Federal Government (FG) had earlier surged to N2.44 trillion at the end of 2019 as budgeted revenues by the Government failed to materialize.

MoneyCentral calculated the net overdrafts as the total outstanding CBN overdrafts to the FG minus the government’s deposits with the CBN.

Total Overdrafts to the FG stood at N9.04 trillion at the end of 2019, while FG deposits were equivalent to N6.6 trillion at the end of last year, according to the last available CBN statistical bulletin data analyzed by MoneyCentral.

Net Overdrafts by the CBN to the FG have been rising drastically over the past years.

In March 2019 the FG had a net surplus of N196 billion as deposits with the CBN of N6.13 trillion covered all overdrafts of N5.94 trillion for the period.

By June 2019 however, the surplus had evaporated as deposits stood at N6.86 trillion while overdrafts to the FG was N6.8 trillion the data shows.

In September 2019 net overdrafts rose to N1.6 trillion with total FG deposits of N5.9 trillion and total overdrafts to the FG by the CBN of N7.5 trillion.

The FG has failed to meet its targeted revenues in its budget for each of the past 4 years and the overdrafts went into plugging the deficit.

Public debt in Nigeria remains relatively low however, but estimates vary widely by source.

Official (converting external debt at the Nafex rate of 410/US$ instead of 380/US$, as currently calculated) puts total public debt (comprising the federal government, states, and the federal capital territory) at 21.5 percent of GDP as of March (13% domestic, 8.5% external), or 24.4 percent of GDP including contingent liabilities (2.9% of GDP at end-2020).

The World Bank includes CBN overdrafts in their definition, with public debt rising from 23.6 percent of GDP in 2019 to 27 percent in 2020, while the IMF adds both CBN overdrafts and AMCON bonds, which shows debt rising from 29.2 percent to 35.1 percent of GDP in 2020.

The government has raised its public debt limit from 25 percent to 40 percent of GDP to accommodate slightly wider post-Covid budget deficits and the planned securitisation of CBN overdrafts into bona fide public debt instruments, which will improve debt management and transparency.

Nigeria’s revenue collection is however amongst the lowest globally, with total government revenue declining from 8.2 percent to 6.5 percent of GDP in 2020 and federally retained revenue dropping from 3.2 percent to 2.2 percent over the same period.

This is probably why the CBN is increasingly monetizing the FG debts and financing the government.

Debt service ate up nearly 50 percent of total government revenue and 85 percent of federally retained revenue in 2020, and the portion has risen to 65 percent and 98 percent, respectively, over the first five months of 2021.

The International Monetary Fund (IMF) has however warned that pumping so much liquidity into the market has negative implications for the exchange rate and financial system stability.

“A monetary policy that avoids direct financing of the government…would help reduce macroeconomic vulnerabilities and create an environment for a diversified private-sector led economy,” the IMF said.

Huge monetary financing of the fiscal deficit crowds out the private sector, and can lead to financial repression.

Lending so much money to the FG also violates the CBN’s own rule, the Central Bank Act of 2007 (Section 38.2) which caps advances to the FGN at 5 percent of the previous year’s revenues.

The data shows that in 2006 total CBN claims on the Federal Government stood at N652 billion. This later surged to N5.2 trillion in 2016, N5.87 trillion in 2017, and a mammoth N7.12 trillion at the end of 2018 and N11.65 trillion at the end of 2019.

The FG through the Ministry of Finance says it plans to reduce reliance on CBN financing below the statutory limit of 5 percent of the previous year’s revenue and bring past CBN overdrafts onto the government balance sheet, helping to alleviate inflationary pressures from monetisation.

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