Fitch, a Rating Agency, has said that the sustained use of direct monetary financing, could raise risks to macro-economic stability, given the current weak institutional safeguards.
According to the Rating Agency, the Federal government is expected to reduce its use of the facility in 2021, as they have directly borrowed 1.9 percent of GDP, from the CBN to fund its fiscal deficit in 2020, which estimated by at 3.6 percentof GDP.
They noted that a number of emerging markets resorted to Central bank deficit financing in 2020 against a background of urgent spending needs and temporary market dislocations associated with the coronavirus pandemic.
However, 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 (6.7percent of GDP) at end-2019, up from N5.4 trillion (4.2percent of GDP) at end-2018.
Unlike the government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30 percent of the FGN’s debt at end-2019, on our estimates.
The warned that repeated Central Bank financing of government budgets could raise risks to macro-stability 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 the government under its WMF to 5percent 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 80percent 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.
Available data by the government indicate that, the treasury paid N912.6 billion on the facility in 2020, equivalent to 9percent 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.
Fitch views the Nigerian 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.