The Federal Government has allocated approximately N4.83 trillion from the proceeds of Nigerian Treasury Bills (NTBs) and Bonds issued in 2024 to settle Ways and Means Advances from the Central Bank of Nigeria (CBN).
Mr. Wale Edun, the Minister of Finance and Coordinating Minister of the Economy, revealed this during his presentation at the Lagos Business School (LBS) Breakfast Club.
A Cycle of Debt and Debt Servicing
The Federal Government of Nigeria appears caught in a repetitive cycle of borrowing and debt servicing, forming a financial carousel. Nairametrics reported that in the latter half of 2023, the government obtained N2.94 trillion from the CBN through Ways and Means Advances, which was earmarked for servicing domestic debts. This indicated the government’s reliance on borrowing from the CBN to meet its obligations to domestic debt holders.
Fast-forward to the present, and the government is now using proceeds from public domestic debt, acquired through NTBs and Bond issuance, to offset the substantial loan obtained from the CBN. This highlights a cyclical borrowing strategy in which new debt is utilized to service existing obligations.
This debt management approach raises concerns about the sustainability of the government’s fiscal strategy. Questions arise regarding its long-term impact on investor confidence and Nigeria’s creditworthiness amidst the need for a more robust economic growth trajectory and fiscal stability.
High Rates on Government Securities Attracting Foreign Investors
In his presentation titled “Reconstructing the Economy for Growth, Investment, and Climate Resilience Development,” Edun emphasized the government’s strategy of increasing the pricing of government securities. This strategy has successfully attracted dollar inflows but at a higher cost to the government.
Supported by data showing a significant rise in the volume and discount price of 364-Day NTBs from FY 2023 through Q1 2024, the government’s aggressive pricing strategy has not only spurred US dollar investments but also indicated efforts to foster productivity, job creation, and sustainable economic growth.
The CBN’s aggressive stance on naira defense is expected to result in substantial interest payouts, with an estimated N1.01 trillion. Despite a total subscription of N21.17 trillion in the quarter, reflecting high demand for government securities, the CBN’s total sales amounted to approximately N5.64 trillion, indicating a cautious approach to liquidity management in the banking system.
Foreign investors have shown a growing interest in Nigeria’s financial instruments, with over 75% of bids received during the March 2024 auctions of government securities originating from foreign sources. Higher interest rates, typically employed to control inflation, attract foreign investors seeking better yields, potentially stabilizing and strengthening the Naira. However, as noted by the minister, this comes with costs.
Insights and Legislative Developments
The Ways and Means provision allows the government to secure short-term or emergency financing from the CBN to address cash flow gaps.
A significant legislative development occurred in May 2023 when both chambers of the National Assembly approved the securitization of N22.7 trillion from the N23.3 trillion advanced by the CBN to the Federal Government through Ways and Means.
Despite statutory limits on borrowing from the CBN, recent legislative amendments have elevated the ceiling of Ways and Means Advances from five to 15% of the Federal Government’s previous year’s revenue, potentially increasing debt burdens for future generations.
Despite exceeding statutory limits in 2023, the National Assembly approved the securitization of outstanding N7.3 trillion in Ways and Means, signaling ongoing reliance on this financing mechanism.
