Economy & Politics
FG to create “Special Instruments” as part of plans to formalize its borrowing from CBN
Minister of Finance revealed there are plans to convert loans from the CBN into tradeable securities.
The Minister of Finance Dr. Zainab Ahmed revealed there are plans between her ministry and the central bank (CBN) to convert loans from the apex bank into tradeable securities.
This was disclosed in the question and answer session following the recent public presentation of the 2021 approved budget – breakdown and highlights by the Minister of Finance and DG Budget Office.
READ: FG discloses how it will finance N5.36 trillion budget deficit
She responded to a question about any plans to tap into CBN financing for the 2021 budget as no provision was made last year, yet about N2.8 trillion was borrowed as exclusively reported by Nairametrics.
FG to turn CBN loans into formal borrowing
According to Mrs. Ahmed, the government is working with the central bank to regularize the loans and will turn them into formal borrowings, suggesting that the over N2.8 trillion in Ways and Means extended loans could be repackaged and sold as bonds.
READ: Growing concern for Nigeria’s ballooning debt profile
“On CBN financing, we will not normally make a line provisioning for the financing. So we have domestic borrowing in the budget and that covers whatever remit of financing required to fund the national budget.”
She then went on to confirm that talks are ongoing with the central bank to turn their loans into formal borrowings and that there is a need between her ministry and the central bank to agree on the rates and the tenures and the cost of borrowing, all of which will be decided in 2021.
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“We are working with the CBN to regularise the previous borrowing that have been made to turn them into formal borrowing and by the Nigerian economy and to this extent, the CBN and I (fiscal authorities) need to agree on the rates and the tenures and the cost of the borrowing, so we would be formally doing that in early 2021 on the previous borrowing that has been made, and also projected borrowings in 2021. So we will design special instruments that limits what is done in terms of domestic borrowing from the CBN.”
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Nigeria’s budget deficit of N6.1 trillion part-funded by CBN
Nairametrics reported exclusively on Wednesday that the central banks borrowed N2.8 trillion from the central bank through a provision in the CBN Act called “Ways and Means” to help fund its budget deficit of about N6.1 trillion.
- The budget deficit was created by massive revenue shortfalls created by a drop in oil prices and the covid-19 pandemic.
- The result of the revenue shortfall and increased expenditure is a fiscal deficit of about N6.1 trillion as against the N4.6 trillion budgeted by the government.
- To fund this, they borrowed N2 trillion from the domestic market and another N1.2 trillion from foreign markets.
- The balance N2.8 trillion was obtained from the CBN.
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The government further plans to incur a budget deficit of N5.60trillion for 2021, representing 3.93% of GDP, and will likely tap CBN Ways and Means window again even though it claims it will fund the deficit via N2.34 trillion in domestic and foreign borrowing respectively and another N709 billion from multilateral sources.
READ: Over 1 million people took loans from banks below 20% interest rate in 1 year- CBN
CBN Special Bills
The central bank last December also announced the introduction of what it calls the “Nigeria Special Bills” in what it claims is an effort to deepen the financial markets.
- The special bills provide banks with the opportunity to earn from trillions of naira of customer deposits sequestered by the CBN through CRR debits.
- Some analysts who spoke to Nairametrics believe some of this money is also used to fund government expenditure via the CBN Ways and Means programme.
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Effects on the market
The introduction of “special bills” and “special instruments” by the central bank and the ministry of finance respectively will inject over N3 trillion into the fixed income market in 2021.
- This will have huge implications on the capital markets in 2021 particularly equities that have benefited from the lack of fixed income securities which for years had posted returns higher than most dividend yields.
- However, with yields at record lows, dividend yields appear to be a better investment for investors.
- The Nigerian stock market was adjudged the best performing in the world with over 50% returns in 2020 and this was mostly driven by local institutional and retail investors who revved up liquidity in a market that has for years chosen fixed income securities over it.
- More government bonds in 2021 could also crowd out the private sector which as of 2020 had only received N19 trillion in credit representing just 13% of GDP, one of the lowest among frontier markets counterparts in the world.
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IMF lifts 2021 global GDP growth to 6%
The group also warned that economic recoveries are diverging dangerously across and within countries.
The International Monetary Fund has lifted its global growth outlook to 6% in 2021 (0.5% point upgrade) and 4.4% in 2022 (0.2 percentage point upgrade), after an estimated historic contraction of -3.3% in 2020 due to the effects of the COVID-19 pandemic. This disclosure was made on the organisation’s website on Tuesday.
The group also warned that economic recoveries are diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.
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What the IMF is saying
“The upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent this year.
This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic.
China is projected to grow this year at 8.4 percent. While China’s economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.”
READ: Nigeria needs structural and monetary policy reforms to unlock potential – IMF
On divergent recoveries
The IMF stated that divergent recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations.
“The average annual loss in per capita GDP over 2020–24, relative to pre-pandemic forecasts, is projected to be 5.7 percent in low-income countries and 4.7 percent in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3 percent,” they said.
“Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways.“
For Africa, IMF forecasts economic growth of 3.4% in 2021 and 4% by 2022, Nigeria is expected to grow by 2.5% in 2021 and 2.3% by 2022, while South Africa is projected to hit growths of 3.1% and 2.0% for the respective years in focus.
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In case you missed it
The International Monetary Fund (IMF) identified some factors that hamper the economic recovery of low-income countries from the devastating impact of the coronavirus pandemic, factors including access to vaccines, limited policy space to respond to the crisis, the lack of means for extra spending, pre-existing vulnerabilities such as high levels of public debt in many low-income countries and sometimes weak, negative, total factor productivity performance in some low-income countries. These factors continue to act as a drag on growth.
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