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Fitch: FG’s borrowing from CBN may raise stability risks

…says govt’s 2021 fiscal projections ‘broadly realistic

One of the world’s top credit rating agencies, Fitch Ratings, has said that the Federal Government’s continued dependence on funding from the Central Bank of Nigeria (CBN) to finance its fiscal deficits could raise risks to macro-economic stability, especially given the country’s “current weak institutional safeguards.”

The credit rating agency which stated this in a report released yesterday, noted that the Federal Government’s recent borrowing from CBN has repeatedly exceeded the limit allowed under the guidelines of its Ways and Means Facility (WMF) with the apex bank.

Noting that government directly borrowed 1.9 per cent of Gross Domestic Product (GDP) from CBN to fund its fiscal deficit in 2020, which it estimates at 3.6 per cent of GDP, Fitch pointed out that while some emerging markets resorted to central bank deficit financing in 2020 due to urgent spending needs and temporary market dislocations occasioned by the coronavirus outbreak, “the use of central bank financing in Nigeria predates the pandemic shock.

“We estimate that the balance of the government’s WMF with the CBN was around N9.8 trillion (6.7 per cent of GDP) at end-2019, up from N5.4 trillion (4.2 per cent of GDP) at end-2018. Unlike government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30 per cent of the FGN’s debt at end-2019, on our estimates,” the agency stated.

It, however, said government is likely to reduce its use of the facility this year. According to Fitch, “repeated central bank financing of government budgets could raise risks to macrostability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation. The CBN’s guidelines limit the amount available to government under its WMF to five per cent of the previous year’s fiscal revenues. However, the FGN’s new borrowing from the CBN has repeatedly exceeded that limit in recent years and reached around 80 per cent of the FGN’s 2019 revenues in 2020.

“The CBN’s guidelines require borrowing under the WMF to be repaid in the year in which it was granted. The government has stated its intention to securitise balances borrowed under the facility, but published statistics indicate that the amounts borrowed have been rolled over repeatedly in recent years. “Data published by the government indicate that the treasury paid N912.6 billion on the facility in 2020, equivalent to nine per cent only of the outstanding balance at end-2019. The government has opted to use this source of financing, despite ample liquidity on its domestic debt markets, as illustrated by negative real yields.

Our understanding is that its ability to borrow from domestic debt markets is constrained by the authorisation granted by parliament in the budget law. “The repeated resort to CBN thus reflects higherthan- expected deficits, pointing to entrenched weaknesses in public finance management.” Although Fitch said it views the 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,” it noted that government may still use the Ways and Means 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,” the agency said. In fact, Fitch said it believes that high inflation in Nigeria is a credit weakness, noting that consumer prices in the country rose by 15.7 per cent year-on-year in December 2020.

It, however, said Nigeria’s inflation is being driven primarily by cost-push factors – including “restrictions on access to foreign exchange for imports, the impact of border closures on trade, hikes in minimum wages and VAT and the removal of the fuel subsidy – rather than overly loose monetary policy.” Minister of Finance, Dr. Zainab Ahmed, disclosed last week that there were plans between her ministry and CBN to convert loans from the apex bank into tradable securities.

She said: “We are working with the CBN to regularise the previous borrowing that have been made to turn them into formal borrowing and by the Nigerian economy and to this extent, CBN and I (fiscal authorities) need to agree on the rates and the tenures and the cost of the borrowing, so we would be formally doing that in early 2021 on the previous borrowing that has been made, and also projected borrowings in 2021. “So, we will design special instruments that limit what is done in terms of domestic borrowing from the CBN.”

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