FG Spends N4.83 Trillion From Bonds, Treasury Bills To Settle Borrowing From CBN

The Federal Government has allocated approximately N4.83 trillion from the proceeds of Nigerian Treasury Bills (NTBs) and Bonds issued in 2024 to settle the Ways and Means Advances from the Central Bank of Nigeria (CBN).

This was disclosed by the Minister of Finance and Coordinating Minister of the Economy, Mr Wale Edun, during his presentation at the Lagos Business School (LBS) Breakfast Club.

A cycle of debt and debt servicing

The Federal Government of Nigeria seems to be in a repetitive pattern of borrowing and debt servicing, creating what could be described as a financial carousel.

Nairametrics earlier reported that the government, in the latter half of 2023, obtained N2.94 trillion from the CBN through Ways and Means Advances. This was earmarked for the servicing of its domestic debts, signifying that the government had to resort to borrowing from the CBN to fulfil its obligations to domestic debt holders.

Fast forward to the present, and the government has pivoted to utilising the proceeds from public domestic debt—garnered through the issuance of Nigerian Treasury Bills (NTBs) and Bonds—to offset the substantial loan obtained from the CBN. This underscores a cyclical borrowing strategy that sees new debt being used to service existing obligations.

By adopting this method of debt management, concerns are heightened regarding the sustainability of the government’s fiscal approach. Questions arise about the long-term implications on investor confidence and Nigeria’s creditworthiness, considering the pressing need for a more durable economic growth path and fiscal stability.

In his paper, titled “Reconstructing the Economy for Growth, Investment and Climate Resilience Development,” Edun underscored the government’s strategy of increasing the pricing of government securities, which has successfully attracted dollar inflows but at a higher cost to the government.

Backing this strategy is data showing a marked rise in the volume and discount price of 364-Day NTBs from FY 2023 through Q1 2024. The data highlight a surge from 908.7 billion Naira at a 19.0% discount on February 7, 2024, to 1,292.7 billion Naira at a 21.5% discount by March 6, 2024. This aggressive pricing strategy has not only spurred US dollar investments but also pointed to the government’s efforts in fostering productivity, job creation, and sustainable economic growth.

The CBN’s aggressive stance on the naira defence is projected to lead to an enormous interest payout, with the CBN set to incur approximately N1.01 trillion. The total subscription for the quarter stood at a staggering N21.17 trillion, emphasising the high demand for government securities. Despite this, the CBN’s total sales amounted to about N5.64 trillion, reflecting a cautious approach to liquidity management in the banking system.

The CBN recently disclosed that over 75% of bids received during the auctions of government securities held on March 1 and 6, 2024, were from foreign investors, showcasing their growing interest in Nigeria’s financial instruments.  Higher interest rates are typically employed to control inflation; they make borrowing more expensive, thereby tempering spending and investment, which, in theory, should reduce the upward pressure on prices.

Additionally, these higher rates tend to attract foreign investors seeking better yields, leading to an inflow of foreign currency, which can help stabilise and potentially strengthen the Naira. However, this comes at a cost as the minister noted. The increased cost of defending the naira and fighting inflation through T-bills may potentially limit the central bank’s manoeuvring capacity in other areas, such as developmental lending or currency interventions.

More Insights
The Ways and Means provision serves as a mechanism enabling the government to secure short-term or emergency financing from the CBN to address cash flow gaps.

A significant development occurred between May 3 and 4, 2023, as both chambers of the National Assembly approved the securitization of N22.7 trillion from the N23.3 trillion previously advanced by the CBN to the Federal Government through ways and means.
This debt was subsequently transferred to the Debt Management Office (DMO) with a 40-year tenor, a 3-year moratorium, and an interest rate of 9%.

In a noteworthy decision with profound implications for Nigeria’s fiscal landscape, the National Assembly also endorsed a substantial increase in the “Ways and Means” ceiling.

According to Section 38 of the CBN Act, 2007, the apex bank may grant temporary advances to the Federal Government about temporary deficiency of budget revenue at such rate of interest as the bank may determine.
The Act placed a limit of five per cent on how much the Federal Government could borrow, although the previous administration severely violated the limit.

The National Assembly introducedamendments to the CBN Act, elevating the ceiling of Ways and Means Advances from the apex bank from five to 15% of the Federal Government’s previous year’s revenue.

This endeavour to raise the limit to 15% opens the door to more borrowing and an increased burden of debt service obligations for the country’s future generations.

However, it is noteworthy that the federal government surpassed this set limit in 2023, exceeding the permissible amount it can borrow from the CBN despite the earlier statementof the current finance minister, Wale Edun, that Tinubu would adhere to the statutory limit.

Despite this breach, the Senate of the 10th assembly, mirroring its predecessor in the ninth assembly, approvedthe securitisation of the outstanding N7.3 trillion in Ways and Means.

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