Analyst To CBN: Reduce Lending To Federal Govt Amid Rising Debts

By: Felicia Esame
Published: January 24, 2022

The Central Bank of Nigeria (CBN) has been urged to cut down on its lending to the federal government as way of reducing the country’s spending spree and lower the rising debt burden of the nation.

Founder of Agusto & Co, a financial service institutions rating agency, Mr Bode Agusto, noted that the CBN taking such a position will force government to live within its means.

Agusto who made this call during a webinar to commemorate the 30th anniversary of institution, titled “Nigeria in 2022: Will 2022 be a year of strong growth driven by herd immunity from Covid-19” said that the CBN has been an enabler to government spending, and therefore urged the apex bank to cap its support for government.

“First of all, we must take the view that the country’s bigger than any government. Let’s take the view that we must save our country.  Because if we don’t save our country, we will have problems. The central bank must be able to take a position that will force government to live within its means.

“This is going to force difficult reforms on governments because what  we are doing today is to give governments an easy way out of their spending. If only if we had a central bank that says that the law says I cannot give you the overdraft of more than 15 per cent of previous year’s revenue.”

“Therefore, if the tap is shut, government will look inwardly and look at ways of reducing his expenses. It would manage its resources better. Government will be forced to exploit more avenues to raise his tax revenues. But if you just open the tab and allow them to be drawing, the discipline will not be there and the more we grow the debt, the more difficult is going to be to resolve the question down the road,” he pointed out.

On the 2022 outlook for the country, he said: “we believe that COVID-19 will remain with us, but he will be less deadly and will cause less disruption to business activities.

crude oil will rise to 100 million barrels per day demand for OPEC+ crude will also rise marginally and compliance with quota will remain important. If members are in compliance. The price of brent could be average about $75 per barrel. Brent’s price is roughly the same thing as Bonny. Light, which is the benchmark crude for Nigeria.

“The amount of dollars available for imports will be about $90 billion out of it all the imports will be about $11 billion, the remaining $79 will fund imports of goods and services, the CBN may bleed reserves and add an additional $5 billion to increase the amount of dollars available for businesses but overall, we believe that the amount of dollars available for businesses will improve.”

He added that the dual exchange rates in the country will continue and CBN will use it improve oil and gas revenues or maybe some of the external reserves to shore up. We estimate it will close at about N430 to $1 where we see continued pressure on the parallel market exchange rates unless the CBN inject some money into the parallel market, we are going to be closing at N610 to N620 to the dollar at the end of this year.

He stated that, “federation accounts should grow by about 15 per cent. The bulk of the growth we said will come from VAT and company’s income tax. The federal government’s share of these revenues and independent would be about N5 trillion and that is our most aggressive estimates. Local currency debts of the FGN will grow to about N44 trillion or about nine times  of her revenues. The median for key countries in sub-Saharan Africa is about two times.

“Because of the high cost of servicing these debts at commercial rates, the CBN will continue to accommodate the FGN by lending to them at rates below inflation, thus reducing FGN’s borrowing requirement from the markets and put a downward pressure on interest rates as banks, pension funds, insurance companies and other institutional investors compete for government securities.

“The banking industry’s local currency loans will grow by about 10 per cent in nominal terms but growth will still be negative after adjustment for inflation. Loan growth will continue to be constrained by above normal cash reserve requirements. Banking industry profitability will remain weak because of a high level on non-earning cash reserves, continuation of the AMCON levy beyond the ten years initially agreed and higher effective tax rate.”

 

SOURCE; https://leadership.ng/analyst-to-cbn-reduce-lending-to-federal-govt-amid-rising-debts/

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