CBN’s “Piggy bank”, piggy-headed policymakers, and other fiscal pitfalls
Last week, economists at the International Monetary Fund (IMF) and the World Bank revealed what ought to define public discourse ahead of the 2023 general elections. The Bretton Wood institutions said that persisting inflationary pressure will limit the ability of central banks in Nigeria and other emerging markets to borrow from their respective governments in order to finance their budgets. This is ostensibly because the pandemic has increased the gross financing needs of the public sector, and many emerging economies have run down this source of financing.
Within the same week, the National Bureau of Statistics said that the Nigerian Consumer Price Index (CPI), which measures inflation, increased to 15.92 percent in March from 15.70 percent recorded in February. It was the highest rate in five months. The increase was recorded against the backdrop of increase in prices of gas, bread, cereals, liquid fuel and other food products.
To underscore the inflationary concerns thrown up by the CBN’s management of the nation’s fiscal conditions, the NBS said in a new Transport Watch report this week that Nigerians paid high transportation fares across different parts of the country in March, with the average road transport fare shooting up by 36% in 12 months. Similarly, on a month-on-month basis, the average fare paid by air passengers for specified routes single journey increased to N 46,810.62 in March from N44,825.04 in February, representing 4.43 percent increase.
The IMF revelations—as well as the NBS reports—were drowned in the ocean of clownish presidential declarations. Since 1999, Nigeria is perhaps witnessing the most farcical moment in the history of presidential declarations as almost every Dick and Harry has shown interest in the nation’s top job. In the ruling All Progressives Congress (APC), at least ten (10) major contenders have shown interest. The Peoples’ Democratic Party (PDP) on Friday said it screened 17 presidential aspirants and disqualified two (2).
Sadly, even if expectedly, all of the aspirants across party lines have shown little interest in the issues that matter.
Yet, the IMF revelation once again throws up concerns about the nation’s fiscal condition, and the danger of unrestrained borrowing, even amidst the government's claim of infrastructural ‘rebirth’.
Infrastructural ‘rainfall’, Fiscal Pitfalls
The Buhari administration’s loudest claims are often in the area of infrastructural renaissance. Having failed in the management of the economy and security, the government is often too quick to flaunt its scorecards in infrastructure.
In 2020, presidential spokesperson Garba Shehu said the government had touched mega roadways infrastructure development projects numbering up to six hundred (600) in number. The “upgradation or rehabilitation call for public attention and appreciation”, he said.
The unstated part, however, is that the infrastructural projects are being financed with heavy loans, most notably from China.
As at March 31, 2020, data from the Debt Management Office (DMO) showed that total borrowing by Nigeria from China was $3.121 billion (₦1,126.68 trillion at USD/₦361), representing 3.94% of Nigeria’s Total Public Debt of $79.303 billion (₦28,628.49 trillion at USD/₦361). Similarly, in terms of external sources of funds, DMO said loans from China accounted for 11.28% of the External Debt Stock of $27.67 billion at the same date.
Will China seize Nigeria’s assets?
A default in loan servicing/repayment comes with drastic measures on the part of Beijing. Concerned about the public tension generated by claims that Nigeria may lose its critical infrastructure to Beijing as reported in some other African countries, the DMO in 2020 said that China was not a major source of funding for the Nigerian Government.
Nigeria has in recent years struggled to offset its debt obligations amid dwindling revenues. Analysis of revenues and overheads showed that Nigeria will spend a whopping 92% of its 2022 revenue servicing its ever-growing debts.
In 2020, debt servicing obligations gulped 97 percent of the Nigerian government's total revenue, according to a BudgIT report. The civic-tech non-profit organization said that of the N3.42 trillion generated as revenue, Nigeria expended N3.34 trillion on debt servicing.
In effect, in the light of emerging data, the DMO claims have failed to erase the fears of many Nigerians, especially amid claims that most of the debt obligations aren’t often recorded in balance sheets.
IMF said in a recent note that due to the low global interest rates of the past decade, emerging markets’ external debt-servicing burden has been steadily climbing with a sharp rise in 2020, as exports slumped, debt spiked, and borrowing terms deteriorated for many of these economies. According to data from Real Economy, the average rate for 2020 based on 100 countries was 6.96 percent. The highest value was in Guyana (48.52 percent) and the lowest value was in Zimbabwe (-79.8 percent.)
From Beijing with tears
Amid slump in global finance, declining overseas lending by China is poised to hit harder as Beijing deals with its own property sector bankruptcies.
Already, Nigeria is feeling the hit of Beijing’s reluctance.
In February, the Nigerian government said it received only about 15% of the funding required for the Lagos-Kano rail line originally estimated to cost $8.3 billion. When the government failed to get any response from China, it declared that it would look elsewhere for funding.
When things go wrong abroad, governments often turn to the domestic banking system to meet their financing needs. But the increase in government debt held by emerging market domestic banks implies that sovereign debt distress could spread to banks, pension funds, households, and other parts of the domestic economy.
Nigeria’s handling of its own domestic bank as though it was a “piggy bank” could pose a bigger problem.
“Piggy bank”, Red flags?
In 2017, an external member of the CBN monetary planning committee, Doyin Salami, raised the alarm over CBN reckless financing of the Nigerian government’s budget deficit.
Mr. Salami, now economic adviser to the government, took the CBN to the cleaners when he revealed how the bank’s monetary policy was pushing the country towards a serious economic crisis. He infamously described the bank as a “piggy bank” serving the government against its own rules.
The CBN at the time dismissed Mr Salami’s claim, saying there was no cause for alarm. Its officials remained piggy headed, dismissing cautionary notes from risk agencies and other international bodies.
Since 2017, CBN’s funding of the government’s deficit, which should not be more than five per-cent of the previous year revenue, has since shot up sporadically. From about N2.51 trillion in the first half of 2017, it has risen far above N10 trillion, according to data from the CBN.
The government has now announced plans to “securitise” the debt and spread it into the future. Now, with the numerous challenges associated with external financing and the near-total abuse of the CBN Ways and Means facility, where does the nation turn to in times of fiscal crisis?
Apparently, this and numerous other critical questions aren’t on the minds of those jostling to take over the government from Muhammadu Buhari.
But ultimately, winning the general elections would be the simplest of the tasks before the man that would take control of Nigeria’s presidency from 2023. There are more dangerous fiscal pitfalls ahead.