CBN Supports Federal Government with ₦6.3 trillion in 5 Years
The Central Bank of Nigeria (CBN) has been noted to have supported the federal government with total sum of ₦6.3 trillion in the last five years.
In its recent macroeconomic note, Chapel Hill Denham stated that the government has largely relied on deficit monetisation by the CBN to fund its widening deficit.
The report reads that between 2015 and 2019, less than 40% of fiscal deficit excluding extra-budgetary items were funded by market borrowing, both domestic and external.
Chapel Hill Denham said net lending by the CBN (adjusted for deposits) to the federal government rose to ₦4.7 trillion or 3.3% of GDP in March 2020.
This is against a net credit position of ₦1.6 trillion in 2014, which implies a ₦6.3 trillion increase in gross borrowing from the CBN in the past five years.
The CBN has been accused by critics of supporting the federal government above prescribed level as enshrine in the apex bank Act.
Analysts indicated that Nigeria’s fiscal position has come under increased scrutiny since the oil price plunge of 2014-2016, the situation that is attributed to consistent large revenue miss and weak debt affordability.
Although the economy has returned to growth since the 2016 economic recession, albeit below trend level, as the firm explained that Nigeria’s fiscal accounts are yet to recover from the damage of the oil price crash.
According to data from the budget office, fiscal deficit has exceeded target by an average of 71% over the last three fiscal years (2017 to 2019).
This was principally due to ambitious revenue targets and consequent underperformance of revenue generating agencies, the firm noted.
Nigeria’s hitherto conservative fiscal policy has also been replaced with a more expansionary one.
FG’s fiscal deficit has more than doubled from pre-recession level of 1.5% of GDP to an average of 3.0% between fiscal year 2017 to 2019.
Chapel Hill Denham analyst Omobola Abimbola said these estimates exclude substantial extra-budgetary expenses in recent years which was used to to settle salary backlogs, contractual arrears, power sector liabilities and transfers to sub-nationals (budget support, on-lending and Paris Club refund).
Adjusting for these extra-budgetary expenses, the IMF estimates fiscal deficit more than tripled to ₦7 trillion or 4.9% of GDP in 2019 from pre-recession level of 1.5% of GDP, also above the 3% of GDP ceiling recommended by the Fiscal Responsibility Act.
Analyst said disappointing revenue performance and increase in borrowing have weighed on debt affordability metrics.
Debt service to revenue ratio hit a record 69% in 2017, before moderating to 59% in 2019, from 20% in 2011.
Chapel Hill Denham said coming into 2020, fiscal authorities had ambitious plans to raise revenue, with two major revenue reforms signed into law.
The first being the Deep Offshore and Inland Basin Production Sharing Contract (PSC) Act, which improves the fiscal terms for deep offshore fields.
Also, the Finance Act 2020, which amongst other provisions, prescribes an upward review of Value Added Tax (VAT) rate to 7.5% from 5.0%.
Despite these revenue measures, fiscal pressures have persisted, against the backdrop of increase in public sector wages, unrealistic budget projections and disappointing revenue out-turn.
Against this backdrop, Chapel Hill Denham said the budget performance report for Q1-2020 left a lot to be desired.
Revenue was 52% below target, debt service to revenue ratio spiked to 99.2%, and fiscal deficit was 207% above budget projection.
“We think the massive fiscal slippage in Q1-2020 suggests that the initial 2020 budget was unrealistic, even before accounting for the impact of COVID-19”, Chapel Hill Denham said.
A more realistic budget proposition:
The firm remarked that it was against a fragile fiscal position that COVID-19 induced economic slowdown began in March, and rendered much of the revenue assumptions for the 2020 budget unrealistic.
The revised budget signed by President Buhari has marked down aggregate revenue target lower by 34% to ₦5.6 trillion from ₦8.4 trillion – including revenue from top 10 GOEs.
This was due to 62% reduction adjustments made to oil revenue to ₦1 trillion, 10% reduction in non-oil tax revenue ₦1.6 trillion, 63% drop in signature bonus and renewal of oil mining licences to ₦350 billion, and 57% slash in Stamp Duty to ₦200 billion.
Analysts said the large adjustments in oil revenue was on the back of more prudent assumptions.
Oil production and prices were adjusted to 1.7 million barrels per day (Mb/d) and US$28 per barrel from 2.18mb/d and US$57/b, respectively.
“We think the oil revenue estimate is conservative, considering the early adjustment to FX rate for converting revenues to ₦381 from ₦306 over the past four months, as well as our relatively more positive oil revenue assumption of US$40/b”, Chapel Hill Denham said.
The firm stressed that this leaves room for a positive oil revenue surprise, but may be offset by a more disappointing non-oil tax and independent revenue, as the economy continues to reel from the impact of COVID-19 and balance of payments constraints.
On the expenditure side, the government made little changes in line with its expansionary fiscal policy to support the economic recovery.
Gross expenditure (including capital and recurrent spending by GOEs and project-tied loans) is projected at ₦10.8 trillion (up 2% from ₦10.5 trillion previously), with the capital vote projected at 23% of gross expenditure.
Debt service and non-debt recurrent expenses were adjusted upwards by 8.3% and 3.5%, partly reflecting the exchange rate depreciation and impact of higher minimum wage.
Analysts said the new budget also captures a ₦500 billion COVID intervention fund, which will partly finance the ₦2.3 trillion (US$6.1 billion or 1.5% of GDP) Nigeria Economic Sustainability Plan (NESP) recently approved by the President.
Chapel Hill Denham stated that the apex bank will be supporting the NESP with ₦1.1 trillion structured loan, while the outstanding of ₦637 billion will be coming from multi/bi-lateral agencies and other sources.
“We think there is a good chance that the implementation rate of the budget will be above 90%, as FG has shown willingness to spend to ease the economic impact of COVID-19.
“Also, we envisage that debt service cost will be materially higher than forecast, due to weaker FX rate and high cost of servicing CBN monetised debt”, the firm stated.
According to the World Bank, central bank financing costs 15.5% – 16.5% which is equal to MPR +3% compared to the average borrowing cost of 3% in the treasury bills market and 7.4% in the bond market.
Although the Ministry of Finance has stated it is planning to securitise the monetised CBN debt, and possibly refinance at significantly lower interest rate in the financial market.
Analysts however stated that on this, no concrete steps have been unveiled.
On the whole, fiscal deficit has been revised higher to ₦5.2 trillion or 3.3% of GDP, from ₦2.2 trillion or 1.4% of GDP.
Although, analysts expect revenue to be below projection, Chapel Hill Denham thinks fiscal slippage will be more manageable, as the government will likely under implement the capital component of the budget, to make up for higher-than-projected debt service and personnel cost.
“As such, we estimate 2020 fiscal deficit at ₦6 trillion or 4% of revised nominal GDP”, the investment banking firm remarked.
However, including extra-budgetary expenses such as domestic arrears, electricity and fuel subsidy, NESP, fiscal deficit could easily top 6% of GDP, the firm added.
Though, analysts held that dovish monetary policy and multi-lateral supports will help ease deficit financing pressures.
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To finance the record fiscal deficit, the National Assembly approved a 2.6x expansion in borrowings to ₦4.2 trillion from ₦1.6 trillion in the previous budget.
Other financing sources, including borrowing from special accounts, privatization proceed and project-tied loans from multi/bi-lateral sources are expected to finance the rest.
Chapel Hill Denham stated that despite the proposed record borrowing, the firm thinks financing pressures will be minimal due to strong support from multilateral sources.
Another source of succor include dovish monetary policy bias of the central bank.
It said the government seeks to mobilise up to US$5.5 billion or ₦1.98 trillion from multilateral sources to finance the deficit, excluding US$1.5 billion in project-tied loans.
However, domestic borrowing target was also revised higher to ₦2.2 trillion from ₦745 billion in the previous budget.
Analysts said: “By our estimate, the DMO has already raised 67% and 45% of external and domestic borrowing targets for the year, respectively.
“It is unclear if the government will be able to secure the full amount targeted externally.
“However, we think the domestic market presents the government with sufficient pool of capital for funding the budget this year, without triggering a major increase in borrowing cost”.
The investment firm stated in the note that the Debt Management Office (DMO) has taken full advantage of the strong demand for government securities at the start of the year to front-load domestic issuances.
“By our estimate, the outstanding net domestic issuance for the year is ₦1.2 trillion, which could be easily absorbed without forcing a market repricing of interest rates, given the ₦6.4 trillion OMO maturities in the second half of 2020 as well as bond coupon payments of ₦550 billion between July and October”, Chapel Hill Denham stated.
The firm remarked that it does not anticipate any major deficit financing pressure in 2020, as analysts think COVID-19 will leave behind a legacy debt burden, and huge structural fiscal imbalances.
CBN Supports Federal Government with ₦6.3 trillion in 5 Years