Stakeholders hing inflation on abuse of ‘Ways & Means’

…Asks government to obey CBN’s Act on borrowing limit

By Abiodun OBA

Financial Stakeholders – economists and analysts have indicated that the securitization of outstanding Ways & Ways poses a huge threat to price stability with sustained inflationary pressures.

They also hinted that the situation has now burdened the Central Bank of Nigeria, CBN, with a battle to control excess money in circulation outside the banking system.

The inflation rate for December 2023 rose to 28.92% from 28.20% recorded in the previous month according to the National Bureau of Statistics (NBS), as the analysts see further rise significantly beyond 30% in the first quarter of 2024.

Ways & Means is a loan facility through which the CBN finances the government’s budget shortfalls, mainly by printing cash.

The securitization means that Federal Government (FG) will issue bonds and begin to use funds from the budget to repay the Ways & Means loan.

Criticisms have trailed the approval for the securitisation of N7.3 trillion granted to President Bola Tinubu by the National Assembly at close of 2023.

Giving more insight to this development, economists and financial analysts said the abuse of the Ways & Means by the FG over the last eight years has culminated, among other economic issues, to fuelling inflation in the economy with huge rise in money supply, not backed up with productive economic activities.

They cautioned the present government to obey the CBN’s Act on borrowing limit. The CBN’s Act puts Ways & Means borrowing at a limit of 5% of the previous year’s revenue until it was reviewed by the 9th National Assembly to 15%.

But the fiscal operations of the FG between 2015 and 2023 indicated about 60% ratio of Ways & Means to average annual revenue.

The President of the Nigeria Economic Society (NES), Prof. Adeola Adenikinju, said: “Those who designed the Ways and Means as a source of budgetary support for the federal government did it with a noble objective which is to provide a limited short term budgetary support for the government. “The CBN Act of 2007 fixed the maximum amount of this support.

“It was about 5% of the previous year’s revenue and it was to be retired within the year it was provided. So, this is to ensure fiscal discipline and to guarantee macroeconomic stability. This is because if it is abused, it may drive up money supply, increase inflation and put pressure on the exchange rate of the currency.

“But it is obvious that in the last couple of years, from the revelation we have heard that both the government and central bank have abused that privilege as it were.

‘‘To resolve the problem, and provide for a clean sheet, the National Assembly, in the closing years of the last regime passed a law to securitise the Ways & Means and to move the maximum amount of support the CBN could provide through the Ways & Means to about 15% from the 5% in the CBN Act of 2007.

“Once the government starts violating this, there would be problems. The rise in inflation that we have experienced is due to expansionary money supply coming via increased credit to the Federal Government.

“This had also neutralized the efficacy of the contractionary monetary policies, characterized by the rise in the Monetary Policy Rate, MPR, and other monetary policy parameters under the last CBN management.

‘‘The expansion of the Ways & Means which fuelled government fiscal deficits is undoubtedly one of the factors that have made the management of inflation difficult.

‘‘So, if government wants to ensure that it controls inflation, support stability of the Naira exchange rate, then it is in its own interest to observe the extant rule.”

While Adenikinju said he has no problem with the use of Ways & Means within set limit, Dr. Francis A. Eniekezimene, Senior Lecturer, Department of Economics Niger Delta University, Bayelsa State, has some concerns with the usage so far.

He stated: “The Nigerian President’s proposed use of securitization to finance governmental initiatives has immediate and long-term consequences. While securitisation is expected to reduce the cost of debt servicing by 3% to 9% compared to the current monetary policy rate, this proposal exceeds the 15% limit set by section 38 of the 2007 CBN Act. ‘‘Such could increase the money supply in the economy, exacerbating the current inflation rate and leading to a decrease in purchasing power with an inflation rate of 32.84%.

“Additionally, if the Ways & Means surplus is infused into the economy, an additional N3.577 trillion could worsen the current exchange rate of N1,280 to the US Dollar on the parallel market.

“Based on the holistic point of view on the long-term implications of securitisation, it is essential to focus on sustainable development.

‘‘The programmes and projects funded by the Ways & Means advances must be evaluated for their long-term benefits to future generations.

‘‘The securitisation of the Ways & Means involves issuing 40-year bonds to the CBN with a 3-year moratorium through the Debt Management Office. ‘‘Therefore, individuals born today will be 40 years old when the debt is entirely paid off.

‘‘Ensuring that the benefits of these programmes and projects outweigh their costs for future generations is crucial.”

However, making recommendations, Dr Eniekezimene stated, “Approving the securitisation of Ways & Means is a bold step towards exploring alternative solutions to tackle the multifaceted challenges in the nation. Based on a comprehensive evaluation, the decision presents an opportunity for the Nigerian government to enhance the economy in the long run.”

Commenting as well, Dr Muda Yusuf, the immediate past Director General of Lagos Chamber of Commerce & Industry, LCC1 and CEO, Centre for the Promotion of Private Enterprise, CPPE, said: “The Ways & Means financing of government operations had done significant damage to the economy over the years. This resulted largely from the flagrant violation of the law guiding the use of this funding window. It hurts the economy because it accelerates naira liquidity growth without any corresponding growth in output. It has therefore been a major driver of inflation in the economy. The effect on macroeconomic stability is very profound.

‘‘It is difficult to decouple federal government completely from the use of Ways & Means. What is paramount is compliance with the CBN Act.”

In his comment, Tajudeen Olayinka, CEO, Wyoming Capital and Partners, said: “Ways & Means Advances are extended to the Federal Government to enable it fund budget deficit ahead of receipt of expected revenue in instances where such funding requirement cannot be further delayed.

Before the recent amendment to this provision of CBN act 2007 by the 9th Assembly, the law provided that such advances to government should not exceed 5% of previous year actual revenue of Federal Government, which means that CBN shouldn’t have extended up to N500 billion to Federal Government as at the time it had over N23 trillion outstanding against government in December 2022, which was subsequently securitized.

‘‘It means that both CBN and Federal Government acted outside their respective powers, by engaging in illegal transactions.

‘‘Not only that they engaged in illegality, they also created distortions in the economy by putting too much money into the system against the absorptive capacity of the economy because the money printing arrangement by CBN could not be supported by appropriate level of production.

“On the second part, CBN cannot underwrite primary issuance of securities, but can deal in securities, especially government securities, by buying and selling in the secondary market. What this means is that CBN cannot hold securitized Ways & Means Advances because, doing so amounts to underwriting government securities.

‘‘This is a blunder; this is another illegality on the part of CBN. So, former President Muhammadu Buhari put the country in a big dilemma. The additional N7.3 trillion in recently securitized Ways and Means Advances by the 10th Assembly was done to clear the same old Buhari’s mess.

‘‘This is one of the reasons economy is struggling: high inflation, low GDP growth, high unemployment, poor standard of living, etc.

“So, what should government and CBN do to stop the illegality? The options are very few. CBN should begin to offload the securitised Ways & Means Advances to the market in a systematic manner, so as not to crowd out private sector borrowers.

‘‘Whichever way, this will cause a spike in interest rate and push up yields in the fixed income space, causing further jump in cost of capital in the economy.

‘‘This could hurt the economy in the immediate to near term but could provide much needed incentives to foreign portfolio investors who might be eyeing higher yields in the Nigeria’s fixed income market’’.

In his analysis of this development, David Adonri, Analyst and Executive Vice Chairman at Highcap Securities Limited said: “FGN is in precarious financial situation. It is already choked by debt and yet without new debt, it will go bankrupt. Its basic expenses have continued to escalate partly due to galloping inflation and due to its profligate spending.

‘‘Of all the options available on the table for FGN, the easiest means of raising funds is Ways & Means, and because CBN as part of the government and banker to the government it can be arm twisted easily to advance legal or illegal Ways & Means.

‘‘After exit of President Muhammadu Buhari’s disastrous administration, public borrowing through Ways & Means in disregard of laid down procedure has continued.

‘‘The special dispensation granted by the NASS for recently obtained Ways & Means advances to be securitized is like medicine after death because its negative impact has already been inflicted on the economy.

‘‘Securitization of a debt is like rescheduling its repayment wherein the debtor issues long term debt instruments which investors can buy. The money raised in the process is used to settle the immediate liability while enough room is created for future redemption of the debt instrument.

‘‘However, in this case, I understand that CBN is the investor in the securitized Ways & Means advances. The exercise therefore has not materially repaired the damage to its balance sheet arising from the illegal Ways & Means.

‘‘The responsibility of NASS is to support government in balancing the budget and not balloon it to the point where government will be under undue pressure to seek unorthodox finance. Secondly, NASS must caution both government and CBN by compelling them to abide unfailingly with existing rules on advancing Ways & Means credit because the money saturation now fuelling inflation has arisen from excessive Ways & Means advances.”