Thwarting monetary policy goals through Ways and Means

May 10, 2021
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WAYS and Means financing is a short term loan facility to government. It is to bridge the gap in the receipts and payment of government. However, this must be for a short term and is usually fully defrayed within the fiscal calendar. Chapter 38 of Central Bank of Nigeria (CBN) Act 2007 allows the apex bank to grant short-term loans to Federal Government through Ways and Means. There is an obvious difference between borrowing through Ways and Means and quantitative easing. However, the difference thins out when government borrows through ways and means but refuses to pay back at stipulated times thus increasing money in circulation without a corresponding increase in productivity.

Dangers 

In a frequently asked questions section on its website, CBN stated that Federal Government has the ability to frustrate the apex bank’s realisation of its monetary policy objectives. 

“When the Federal Government exceeds its revenue, the CBN finance government deficit through Ways and Means Advances subject (in some cases) to the limits set (by) existing regulations, which are sometimes disregarded by the Federal Government. The direct consequence of Central Banks financing of deficits are distortions or surges in monetary base leading to adverse effect on domestic prices and exchange rates i.e. macroeconomic instability because of excess liquidity that has been injected into the economy.” 

For third rated economies like Nigeria, simply increasing money in circulation without a commensurate increase in economic output simply raise inflation rate. Consumers are able to demand more goods but since production of goods and services remain at the same level, producers usually respond by increasing prices. In essence, doubling money supply without increasing output, leads to a doubling in prices and a doubling in inflation rate. 

Borrowing for frivolities 

Since 2015, when President Muhammadu Buhari first assumed office, the total amount borrowed from the CBN through Ways and Means has surged. In 2014, borrowing by the Federal Government stood at N922 billion. This increased to N2.5 trillion in 2015; N5.21 trillion in 2016; N5.87 trillion in 2017; and N8.12 trillion in 2018. 

In the most difficult year 2020, Federal Ministry of Finance purchased 2020 model of Toyota Camry for every of its director. An analysis of the 2021 budget showed billions of what could be regarded as frivolous spending with at least ₦37.7 billion dedicated to items that could be dispensed with considering the dire financial straits of the country. Some ₦11.3 billion is to be spent on the purchase on imported vehicles. Another ₦10.8 billion was budgeted to construction and infrastructure provision in MDAs that may not have the mandate. Over ₦8 billion was budgeted for international training and transport while the Ministry of Defense got more than ₦2bn to procure uniforms for generals alone. Another ₦1.5 billion was budgeted for the purchase of office materials. 

Aside these, BudgIT, a non-governmental organisation discovered some inconsistencies and unconscionable appropriation in the budget at a time when government was borrowing money to spend. Such include over N9 billion for renovation of National Assembly Complex; N3.1 billion to fence National Defence College; N42.7 million to procure metres for military barracks when CBN was financing free distribution of metres; N103 million to appraise the design of War College permanent site; N30 million for Ministry of Water Resources to procure legal equipment. Some other recurrent expenditure was hidden under capital in order to make the percentage of capital appear larger than it really was. 

Fitch warning 

In January, Fitch Ratings published a report warning that “Nigeria’s Deficit Monetisation May Raise Macro-Stability Risks” wherein it stated that federal government’s repeated recourse to its Ways and Means facility (WMF) highlights weaknesses in public finance management and that sustained use of direct monetary financing could raise risks to macroeconomic stability – given the current weak institutional safeguards. 

And anticipating an excuse that 2020 was a rather difficult year because of the COVID-19 disruptions, Fitch Ratings declared that the use of central bank financing in Nigeria predates the pandemic. 

“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 the 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. 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 policy making 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 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. 

“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 higher-than-expected deficits, pointing to entrenched weaknesses in public finance management. 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.” 

An obviously irritated Governor of CBN, Mr Godwin Emefiele in a reply wondered what Fitch expected the bank to do “if government cannot finance all its obligations.” He said “it is unfair and very unfortunate that Fitch, which is known to be a first-class company, would hold such views on what we are doing.” 

Notwithstanding, the issue of WMF is one in which fiscal and monetary authorities have brainstormed over with some development partners. In its letter of intention to borrow $3.4 billion from the International Monetary Fund in 2020, both Emefiele and Finance Minister, Mrs Zainab Ahmed committed to “eliminate recourse to central bank financing by 2025” and that “the existing stock of overdrafts held at the CBN will also be scrutinised.” Also while giving the breakdown and highlight of 2021 FGN Approved Budget, Minister of Finance, Zainab Ahmed revealed that CBN lent a total of N2.8 trillion to the Federal Government in 2020, which simply translates to 52.8 per cent of the year’s total revenues or 62.2 per cent of 2019 earnings of N4.5 trillion. This is clearly a violation of the CBN Act, which states that the outstanding amount should not exceed five per cent of prior years’ actual revenue. 

What the law says 

Section 38 of CBN Act 2007 permits the bank to “grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate of interest as the bank may determine. “(2) The total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the Federal Government; “(3) All advances made pursuant to this section shall be repaid- “(a) As soon as possible and shall in any event be repayable by the end of the Federal Government financial year in which they are granted and if such advances remain unpaid at the end of the year, the power of the CBN to grant such further advances in any subsequent yeas shall not be exercisable, unless the outstanding advances have been repaid; and “(d) In such form as the Bank may determine provided that no repayment shall take the form of promisory note or such other promise to pay at a future date or securitisation by way of issuance of treasury bills, bonds, certificates or other forms of security which is required to be underwritten by the Bank.”  

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