Analysts are concerned about the governors’ proposal to convert the federal government’s debt to the Central Bank of Nigeria (CBN) into a 100-year bond with a 1% interest rate.
According to a Premium Times story, Nigerian governors encouraged the federal government to issue a 100-year bond with a 1% interest rate out of the N19.01 trillion in outstanding Ways and Means Advances from the Central Bank of Nigeria (CBN) in a meeting with President Muhammadu Buhari in July.
One of the governors expressed worry over the CBN’s provision of N19 trillion for federal government spending, which appeared to be against the law. He claimed that trillions of naira chasing a few billion dollars would put pressure on the foreign reserves and the exchange rate.
The governor also stated that the CBN’s “fixed exchange” policy hindered diaspora inflows ($20 billion) and foreign investment (peak of $90 billion in investment pledges in 2018 to $20 billion in 2021), just as the petrol subsidy was eliminated all accruals to reserves.
Under the Ways and Means provision found in Section 38 of the CBN Act of 2007, the apex bank is allowed to grant short-term advances to the government; however, the total amount of such advances outstanding may never exceed 5% of the Federal Government’s real revenue for the preceding year.
But since there has been a serious revenue shortage, the government has had to significantly rely on the central bank to fund its spending plans through Ways and Means Advances.
According to Oluwasesan Adeyeye, an analyst with CSL Stockbrokers Limited, “the proposal to convert N19 trillion ways and means to bond at 1% is not viable.”
Adeyeye asserts that the price does not accurately represent what is available on the market.
Furthermore, because it is a 100-year bond, the government should charge a higher interest rate than it would for a bond with a 10- to 30-year maturity, he continued. “The 1 percent proposed is not reflective of the market realities and does not consider the maturity of the bond.”
“Long-dated securities are expected to attract greater rates, and the longer your hold, the more likely it is for you to fail, so the 1 percent isn’t acceptable,” said Olaolu Boboye, an economist analyst at CardinalStone.
He characterized the N19 trillion as enormous and said it would be challenging to allocate it to the market. He continued, “Liquidity is relatively tight to absorb the money all at once.”
Boboye contends that if the federal government is to take the governors’ recommendations seriously, it must take a definite position towards borrowing from the CBN.
“After this transaction, how would the government handle further borrowings from the CBN? Will it be sold, or will it just keep building up? He questioned, “Will the entire market have access to this, or just a chosen few?”
According to data acquired from the CBN, the total amount borrowed by the Nigerian government through Ways and Means Advances increased from N17.46 trillion in December 2021 to N19.01 trillion in April 2022.
The overall public debt stock of the nation, which the Debt Management Office estimates to be N41.60 trillion as of March 2022, does not include the N19.01 trillion.
Only the debts owed by the Federal Government of Nigeria, the 36 state governments, and the Federal Capital Territory are included in the debt stock.
The N1.63 trillion in revenue was revealed by Zainab Ahmed, minister of finance, budget, and national planning, for the period from January to April 2022. This amount, when annualized, equals N4.89 trillion, which is 41% less than the N6.91 trillion allocated for non-debt recurrent spending, according to CSL Stockbrokers analysis.
“The expected total revised government spending for 2022 was an all-time high of N17.31 trillion. It is anticipated that the projected revenue of N9.96 trillion will fall short of the prediction. The estimate predicted that the budget deficit would be N9.7 trillion, exceeding the government’s objective of N7.35 trillion.