NASS Revisits Section 38 of the CBN Act, as Economists Flinch at Debt Securitization
Economists in the last few days have represented that the shortest distance between the government and the governed is integrity. In reviewing the 2007 Central Bank of Nigeria (CBN) Act they point out that the violation of the Act by the monetary regulator and the Federal Government of Nigeria (FGN) falls short of the minimum standards of due fiscal responsibility associated with prudent treasury management.
The analysts point out that Section 38(2) of the CBN Act states that “The total amount of such advances outstanding shall not at any time exceed five percent of the previous year’s actual revenue of the Federal Government.” Actual budget revenue for 2021 stood at N6.1trn while the Ways and Means financing accumulated to N23.7trn (increasing by N6.3trn in 10 months) in 2022, implying that the government violated the Act by 7,500%. The maximum Ways and Means finance for the government ought not to have exceeded N305bn in 2022, based on 2021 actual revenues, but the CBN financed the government to the tune of N23.7trn. The funding kicked against Section 38 (3a) of the Act which restricts the government from taking additional advances without settling the previous obligations. Analysts say the CBN showed no regard for the Act but continued to make huge advances to the federal government as if it was handing out confetti at a party. The flagrant disregard recalls the words of Orson Welles, who noted that “When people accept breaking the law as normal, something happens to the whole society”. In this light, analysts have become concerned about the ease with which public officials, make light of established laws and lay siege on regulatory compliance and governance.
Indeed the CBN and the FGN in proposing the securitization of past Ways and Means accommodation appear to be putting the sword to another Section of the CBN Act. Section 38 (b) states that “in such form as the Bank may determine provided that no repayment shall take the form of a promissory note or such other promise to pay at a future date or securitization by the way of issuance of treasury bills, bonds certificates and other forms of security which will be required to be underwritten by the Bank”. As specific as the position of the Act on the matter, analysts are baffled that the Federal Government in concordance with the CBN has lobbied the National Assembly to approve the securitization of its Ways and Means borrowings.
Although the National Assembly had initially rejected the request to restructure the N23.7trn Ways and Means Advances on the ground of being illegal and unconstitutional, analysts worry that the Assembly may eventually bow to pressure from the executive. Analysts caution the legislative body against such errors, noting that for the chief legislative officers to grotesquely condescend to abuse the Act, passed by the national assembly, would be a national embarrassment..
The ways and means advances are not part of the total public debt stock, which stood at N44.06trn as of 2022. The violation of the CBN Act would raise the country’s debt stock to N77trn which would in turn raise debt servicing to revenue beyond sustainability.
Under a scenario of the public debt of N77trn the country’s debt servicing costs would erode both recurrent and capital expenditure funding in the 2023 budget, a situation that the government cannot afford. Ignoring the fact that the approval of the securitization would promote further Ways and Means advances, the packaging of the proposed securitization as a 40-year bond at a 9% yield contradicts the investment rule which suggests that long-term instruments should have higher interest rates than short-term instruments. Analysts believe the low yield in an inflationary environment would not be attractive to retail investors, and the burden would be passed to institutional investors, particularly Pension Funds. In other words, workers with pension fund accounts would have their funds locked in a 40-year bond, catering to the inefficiency of federal fiscal management.
With the leadership of the CBN stuck in several controversies, analysts expect the regulator to be circumspect concerning future monetary policy actions. On the part of the FGN, with borrowing costs already at a third of the budget, analysts expect the government to refrain from a borrowing spree. The fiscal challenges should be addressed by broadening the national tax base in the short-run and the financialization of idle or underutilized national assets in the medium-term. Circumventing laws to meet the expediency of additional money is neither a strategy nor an acceptable statecraft