RenCap: FG Has Substantial Deposits to Cover Loans from CBN

Obinna Chima

Renaissance Capital Limited (RenCap), a financial advisory and research firm has shed more light on the controversy surrounding the withdrawals of the account of the federal government domiciled at the Central Bank of Nigeria (CBN), affirming that the federal government has substantial deposits in the account to cover its loans from the CBN.

Rencap, which stated this in a report yesterday, however estimated that by the end of full year 2016, central bank lending to the federal government would exceed 50 per cent of the previous fiscal year’s revenue. This, it noted would be strikingly higher than the cap of five per cent stipulated in the CBN Act of 2007 (Section 38.2).

A former CBN governor and Emir of Kano, Alhaji Muhammad Sanusi II, last week stated that the CBN’s claims on the federal government now topped N4.7 trillion — equal to almost 50 per cent of the FGN’s total domestic debt, which he said was unhealthy for the economy.

But RenCap in the report yesterday pointed out that: “At the same time, the FGN’s deposits have been building up, which mitigates the contention of central bank funding. However, to us this raises the question of why the FGN is borrowing from the CBN when it has funds in its accounts.

“A sharp fall in revenues compelled the FGN to increase its borrowing requirement. Governments have four sources to borrow from to finance their budget deficits: abroad; the central bank; domestic commercial banks; and the domestic non-bank sector (i.e., pension funds).

“Central bank financing tends to be frowned upon because it expands money supply and adds to inflation. Nigeria’s narrow money year-on-year (YoY) growth has gone from a negative one per cent in October 2015, to 50 per cent a year later. And in that period YoY inflation accelerated to 18.3 per cent in October, versus 9.3 per cent, and the naira weakened, against the dollar in the parallel FX market, from N227/$1 to N450/$1,” the report stated.

Furthermore, the report cited a research paper by Alagidede (2016), which stated that central bank lending is considered acceptable when used to smooth out revenue fluctuations, and when transitory.

“We have established that Nigeria has the funds to settle the borrowed funds in the short term, unlike Ghana, where it took an IMF programme to reduce central bank funding,” it added.