Here is how CBN violates own Act, Fiscal Responsibility Act

THE Central Bank of Nigeria (CBN) has been violating Section 38 of its own Act by overlending the sum of $49.2 billion to the Federal government through Ways and Means.

The situation, with other issues regarding management of the economy, put intense pressure on Nigeria’s inflationary surge to 21.09 per cent, The ICIR findings have shown.

Section 38(2)of the CBN Act 2007 provides that lending to the government should not exceed five per cent of the previous year’s actual revenue.

The ICIR findings further showed that with respect to revenue accruals, lending to the Federal government should not have exceeded $450 million, but had spiked to $49.2 billion, through CBN’s Ways and Means.

Emefiele Godwin
Godwin Emefiele, CBN Governor

This development, among others, led to Moody’s downgrading of the Nigerian economy to B3 rating, driven by the significant deterioration in Nigeria’s government finances and overburdening debts.

An economist, Kelvin Emmanuel, told The ICIR that one implication of the development is that it puts intense pressure on lending to small and medium enterprises.

Emmanuel said, “You notice that cash supply deposits are higher than the production outlook of the economy. When so much cash is chasing few goods without commensurate production and services, it creates a problem.

“Basically, we printed $49.2 billion out of thin air when the window says you can only give $450 million. You can see the wide margin. The apex bank violated its own Act. This is part of the major reason the economy is in a mess. The wider implication is that lending to real sector is now extremely difficult.”

He stressed that when there is so much paper money that is not backed by assets, it inadvertently spikes prices and inflation.

“The lending rate of 16.5 per cent is as a result of this kind of overbloated cash into the economy not being tied to specific assets. The banks will now have to put their own mark-up and would now lend around 27 and 28 per cent.

Another economist with global consultancy experience, Kalu Aja, held that CBN’s abuse of the lending window in its chari to the Federal government was, indeed, a violation.

A financial consultant and rconomist, Kalu aja

“The CBN’s guidelines limit the amount available to the government under its Ways and Means Faculty of 5 per cent of last year’s revenue. However, according to Fitch Ratings report in January 2021, “the Federal Government’s borrowing from the CBN repeatedly recorded around 80 per cent of FG 2019 revenues in 2020.”

The Central Bank of Nigeria’s Governor, Godwin Emefiele, had said that part of the reason the government redesigned the some naira notes was because 80 per cent of the currency was out of the bank’s vault.

By implication, there are lots of monies in circulation not tracked by the CBN, fuelling false purchasing power and surging price, amid rise in inflation.

This also confirmed the fact of too much cash chasing few goods, and high lending rate almost shutting out the real sector, giving no respite to the production side of the economy.

Available statistics have shown that in September, the CBN gave the Federal government another N749 billion, a situation that analysts posited also violated the stipulated lending window.

Further checks by The ICIR revealed that in terms of conversion of the debt, section 8 sub-sections 3 and 4 of the CBN Act specifically state that you cannot convert advances and overdrafts issued through Ways and Means to government bonds, certificates and bills as a mode of repayments of government’s debts.

This is because the Central Bank gurantees government’s bonds issuance and cannot guarantee its own loan to the government.

Other economists have also lent their voices to the discretionary lending of the apex bank to the Federal government to fund its budget deficits.

Kingsley Moghalu, an economist and former CBN Deputy Governor

A former Deputy Governor of the Central Bank, Kingsley Moghalu, and a former Monetary Policy Committee member and current Head of the Economic Advisory Council to the President, Doyin Salami, had at different fora expressed their worries about the piggy services being provided to the government by the CBN.

Besides the CBN Act, the Fiscal Responsibility Act of 2007 provides a threshold and the guidelines for national and sub-national borrowing.

Section 41 (1) (a) and (b) of the FRA stipulates that borrowing shall only be for capital expenditure and human development, be on concessional terms with low interest rates, and be for a reasonably long amortization period.

The FRA also requires legislative approval for borrowing, as well as stipulates that the government should ensure that the level of public debt as a proportion of national income is held at a sustainable level.

Analysts say the violation of this section, with weak fiscal management of the economy, had put the Nigerian economy in dire distress, with some analysts expressing pity on who takes over from the present government as President in the battle to steer the economy onto the right course.

Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.

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