| Nigeria Economy |    1409 VIEWS  |
| Nigeria Economy | |
| 1409 VIEWS | |
 |
Thursday,
January 21, 2021 / 2:50 PM / By Fitch Ratings / Header
Image Credit: iStock
The federal government of Nigeria's (FGN) repeated
recourse to its Ways and Means facility (WMF) with the central bank (CBN)
highlights weaknesses in public finance management, says Fitch Ratings.
Sustained use of direct monetary financing could raise risks to macroeconomic
stability - given the current weak institutional safeguards - but we expect the
FGN to reduce its use of the facility in 2021.
The FGN directly borrowed 1.9% of GDP from the CBN to
fund its fiscal deficit in 2020, estimated by Fitch at 3.6% of GDP. 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 NGN9.8 trillion (6.7% of GDP) at end-2019, up from
NGN5.4 trillion (4.2% 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% of the FGN's debt at end-2019, on our estimates.
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 5% 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% 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 NGN912.6 billion on the facility in 2020, equivalent to 9% 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
higher-than-expected deficits, pointing to entrenched weaknesses in public
finance management.
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. The government may nonetheless use the 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.
High inflation in Nigeria is a credit weakness.
Nigeria's consumer prices rose by 15.7% year-on-year in December 2020. However,
at present, we view inflation as 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.
Related News
Signup with Facebook
Signup with Twitter
