Last week the Ministry of Finance and the Debt Management Office announced they were in the process of converting the central bank’s N10 trillion ($25 billion) debt to the CBN (Ways and Means lending) into a 10-year Bond. According to our records, CBN’s total gross Ways and Means loans to the Federal Government rose to as high as N13.8 trillion in the second half of 2020.
The Ways and Means related loans are legal means by which the central bank lends money to the Federal Government to fund budget deficits. Typically, the government funds its deficits by either issuing bonds or drawing on multilateral loans. But sometimes this is not enough, meaning that it must turn to the apex bank to bridge the funding gap.
In 2020, the Federal Government revealed it borrowed N2.8 trillion from the CBN via Ways and Means to fund the part of its budget deficits. Nigeria has recorded a total budget deficit of about N24.8 trillion in the last 10 years, according to data collated from the Federal Budget Office and analyzed by Nairalytics, and expected to keep borrowing all through 2021. In fact, the CBN’s monetary policy committee recommended that the CBN continues to fund the government citing its importance to stimulating the economy. But how is the CBN funding all this money? Is it printing new money?
The central bank typically publishes financial statements on its websites giving analysts an opportunity to review its income statement and balance sheet. That way it is easy to discern the bank’s assets and liabilities providing useful insights into how it has sourced money to fund some of the intervention loans it has issued in the past including the Ways and Means. But the last time it published one was in 2015 and for obvious reasons. Without this, it is difficult to determine its sources. However, we can extrapolate.
In the CBN’s balance sheet, the asset side is divided into Property Plants and Equipment, Investments, Cash and Bank Balances, and loans and receivables expected from its debtors. On the liabilities, the side is deposited from banks, notes, and coins in circulation, CBN bills (like OMO and T-bills), loans from multilateral institutions, tax liabilities, and other liabilities.
The total of Ways and Means funding issued by the CBN to the FG will be classified as an asset in the balance sheet of the CBN under loans and receivables. Going by the accounting rule, there should be a liability side classifying how the money was funded. In theory, it could be via the printing of new money or issuance of bills, or regulatory induced policies. We believe it is also via the issuance of CBN Bills and deposits from banks.
One common policy pursued by the central bank throughout 2019 and 2020 was its policy of debiting banks for failing to meet Cash Reserve Requirement targets. Through its banking regulatory guidelines, it debits the accounts of banks that do not meet its CRR criteria moving the sequestered customer deposits away from the vaults of the banks to that of the CBN. It also does this at zero interest starving the banks of earning any return on the deposits. According to the CBN, if the banks are not lending that money, it is better off being kept with the CBN.
Nairametrics estimates total CRR debits rose to as high as N12 trillion in 2020 before falling to under N10 trillion early this year. We believe a huge chunk of these debits would have been funneled to the government through some of the CBN’s short-term lending. Cash is fungible, so it is implausible to rule that out.
Another way the CBN may have funded the $25 billion loan to the Federal Government may have been via issuance of CBN-denominated bills. A familiar one is the CBN’s OMO bills which it has since whittled down to just N2 trillion after it yanked of local investors from the market.
At its height in early 2020 Nairametrics estimates OMO bills to as high as $30 billion. A recent Chapel Hill Denham report seen by Nairametrics estimates at as of June 2020 foreign portfolio investors held about $11.2 billion (35% of total) in OMO Bills. It is not inconceivable that some of the proceeds may have also been channeled to the federal government.
We might not be totally correct with our extrapolation but we can’t be far off the mark. This is why the CBN must release its audited financial statements.
The controversies surrounding the application of Ways and Means will be debated for years to come. While the CBN and the Ministry finance scramble to clean up the integrity of its monetary policy via bond issuances, Nigerians will someday ask if this was a right to extend the loans in apparent contravention of the CBN Act for expediency reasons such as saving the government from a financial collapse.