May 9, 2023/United Capital
Last week, the National Assembly approved the securitisation of the N22.7tn loans that the Central Bank of Nigeria (CBN) advanced to the Federal Government (FG) under its Ways and Means Policy. The Ways and Means provision allows the government to borrow from the CBN when there is a need for short-term or emergency loans to tide over temporary budget shortfalls subject to statutory restrictions. As stipulated by the CBN Act 2007, the maximum threshold to be advanced is 5.0% of the prior year’s revenue. However, the Federal Government of Nigeria (FGN) has exceeded this threshold, as the Ways and Means balance climbed by N5.3tn to N22.7tn in 2022 from N17.4tn in 2021 compared to the required N275.5bn (5.0% of N5.5tn revenue generated in 2021).
The terms of the securitisation of the loan include the issuance of bonds with a forty (40) year tenor period and an interest rate of 9.0% per annum. Also, there is a provision for a three (3) year moratorium period on the principal only, which indicates that principal repayments will not commence until 2027, while interest payments will be provided for in the 2023 budget. This move will reduce the debt service cost as the new interest rate is lower than the current rates on Ways and Means Advances (MPR-18.0%, plus 3.0%). The large savings arising from the much lower interest rate will help reduce the budget deficit. Lastly, the securities will be issued to the CBN by the FGN and not to the public for fundraising.
Notably, CBN’s advances to the FG have increased by 2551.9% in the last seven years. This increase has fueled inflation and worsened the country’s debt burden. According to the World Bank, Nigeria’s Debt Service to Revenue ratio climbed to 96.3% in 2022 from 83.2% in 2021. We note that the country’s debt profile will deteriorate further, given that the N22.7tn Ways and Means will be added to the country’s total public debt stock. Lastly, we expect this to extend foreign investors’ apathy towards Nigeria as it erodes confidence in the economy.
