Heap of CBN loans to FG defies naira redesign logic

February 21, 2023 Mary

The Central Bank of Nigeria’s (CBN) decision to lend about N21 trillion to the federal government is more to blame for the spiralling inflation than the amount of cash outside the banking sector, according to analysts polled by BusinessDay.

In his nationwide broadcast to Nigerians concerning the new naira crisis, President Muhammadu Buhari said last week that in 2015 when his administration commenced its first term, currency-in-circulation was only N1.4 trillion, while the proportion of currency outside banks grew from 78 per cent in 2015 to 85 per cent in 2022.

He said as of October 2022, “the currency in circulation had risen to N3.23 trillion, out of which only N500 billion was within the banking system while N2.7 trillion remained permanently outside the system, thereby distorting the financial policy and efficient management of inflation.”

“The huge volume of banknotes outside the banking system has proven to be practically unavailable for economic activities and by implication, retard the attainment of potential economic growth,” he said.

Analysts say the government’s decision to turn the CBN’s ways and means advances that often involve the printing of currency is responsible for the surge in inflation in the country.

“Injecting so much money into the economy has made Nigeria’s inflation worse, not currency in circulation,” a senior economist who pleaded anonymity said.

Yemi Kale, the immediate past statistician-general of the National Bureau of Statistics (NBS), said cash outside the banking system does not retard economic activity as long as it’s used within the economy or informal sector.

“However, it can retard economic activity if the cash is kept in homes unused but only if the financial sector has maxed out its available funds to stimulate economic activities. I don’t think that is the case currently so as things stand the cash outside is not inhibiting economic activity,” Kale said on Twitter on Thursday.

The latest data from the World Bank show that Nigeria has the lowest percentage of broad money to GDP compared to its African peers.

Nigeria’s broad money as a percentage of its GDP in 2020 amounted to 25 percent while those of Egypt and South Africa stood at 84 percent and 74 percent respectively.

According to CBN, Africa’s biggest economy’s total currency in circulation as of December 2022 stood at N3.01 trillion, down 9.61 percent from N3.33 trillion in November.

“The CBN appears not to have taken into consideration the increase in the size of the country’s nominal GDP over this period, the doubling of consumer prices, rising

population and the impact of the humongous ways and means advances to the federal government by the Central Bank of Nigeria over this period,” the Nigeria Governors’ Forum said in a recent communique.

The World Bank has often identified the financing of the budget deficit through the CBN’s ways and means advances as a major source of inflation.

“Financing of the fiscal deficit through ways and means continues to fuel inflation by increasing liquidity in the money market,” World Bank said in its December 2022 update.

Since 2015, when President Buhari first assumed office, the total amount of money borrowed from the CBN to meet fiscal obligations has surged by more than 14 times.

In 2014, borrowing by the Federal Government stood at N592 billion. This later surged to N856 billion in 2015; N2.23 trillion in 2016; N3.31 trillion in 2017; N5.41 trillion in 2018; N8.72 trillion in 2019; N13.11 trillion in 2020; N17.46 trillion in 2021 and N22.70 trillion in 2022.

In that time, poverty has jumped, the economy has suffered two recessions and the infrastructure challenges, from bad roads to inadequate power supply that have dogged Africa’s most populous nation, are no less daunting.

Yet supporters of the current administration say most of the borrowed money has gone into infrastructure development, notably railways. But NBS data show the country’s construction sector is still unable to contribute significantly to its economic growth despite huge potential.

The data from the NBS show the construction sector grew by 5.52 percent in the third quarter of 2022 compared to 4 percent in Q2 2022 and 4.8 percent in Q1 2022.

The construction sector grew by 3 percent in the full-year 2021; -7.68 percent in 2020; 1.81 percent in 2019; 2.33 percent in 2018; 1.0 percent in 2017; -5.95 percent in 2016; and 4.4 percent in 2015.

“Lack of will and misappropriation of few available funds are the bigger issues facing the industry. Inflation has pushed up the price of everything,” said Olumide Akinyemi, project manager at Lagos-based Global Building Limited.

Nigeria’s headline inflation rate rose in January 2023 to a fresh 17-year high after slowing down in December for the first time in 11 months, according to NBS data.

To tame rising inflation, the World Bank recommends the enforcement of the legal limit that prevents the Federal Government from borrowing from the CBN more than 5 percent of the previous year’s fiscal revenues.

On January 17, the Senate directed Zainab Ahmed, minister of finance, budget and national planning, to liaise with the CBN and submit details of Buhari’s N23.7trn ways and means request, within three days, for scrutiny.

The President had in December urged the Senate to approve the planned restructuring of the N23.7trn ways and means advances.

“We must have the necessary information for passage of the N22.7 trillion Ways and Means Restructuring request as time is not on our side in the Senate now in view of the coming general elections,” Ahmad Lawan, president of the Senate, said.