THE Central Bank of Nigeria, CBN, has expressed concern over the borrowing activities of the federal government, saying the pace of government’s borrowing has exceeded the target for the 2017 fiscal year.
The CBN position came along with its Monetary Policy Committee, MPC, decision at the end of the second quarter 2017 meeting, yesterday, to retain all its key policy rates, citing challenges weighing down the domestic economy and uncertainties in the global environment. The decision also followed announcement by the National Bureau of Statistics, NBS, that the nation’s economy contracted for the fifth consecutive quarter, as the real Gross Domestic Products, GDP, declined by 0.52 per cent in the first quarter of 2017.
According to the NBS, “In the first quarter of 2017, the nation’s Gross Domestic Product, GDP, contracted by -0.52 per cent (year-on-year) in real terms, representing the fifth consecutive quarter of contraction since Q1 2016. This is 0.15 per cent higher than the rate recorded in the corresponding quarter of 2016 (revised to -0.67 per cent from -0.36 per cent) higher by 1.21 per cent points from rate recorded in the preceding quarter, (revised to -1.73 per cent from -1.30 per cent). Quarter-on-quarter, real GDP growth was 12.92 per cent. During the quarter, aggregate GDP stood at N26.03 trillion in nominal terms, compared to N22.24 trillion in Q1 2016, resulting in a nominal GDP growth of 17.06 per cent.”
FG borrowing excessively: Announcing the decision of the MPC meeting, CBN Governor, Mr. Godwin Emefiele said the Net Domestic Credit, NDC, grew by 1.40 per cent in April, 2017, annualized to 4.21 per cent, which is significantly below the 17.93 per cent provisional growth benchmark for 2017. However, net credit to government, according to him, grew by 24.08 per cent over end-December 2016, representing an annualized growth of 72 per cent.
The MPC Communique stated: “The Committee was concerned that credit to government continued to outpace the programmed target of 33.12 per cent for fiscal 2017, while credit to the private sector declined considerably far below the programmed target of 14.88 per cent.” On the other hand, the MPC called for increased lending to the private sector by banks, even as it urged the CBN to increase surveillance of the banking sector.
“On the financial stability outlook, the Committee noted that in spite of the banking sector’s resilience, the weak macroeconomic environment has continued to exert pressure on the banking system. The MPC urged the CBN to intensify its surveillance, in order to address emerging vulnerabilities.”
Commenting on the concern express by the CBN on the level of federal government’s borrowing, Head of Research, Vetiva Capital Management Limited, Mr. Pabina Yinkere said: “The high pace of government borrowing is coming as a result of government revenue undershooting the budget expectation hence the need for government to borrow more to cover up for the short fall in revenue
“The impact on the economy is first, increase in interest rates and government crowding out the private sector. People see government as the safest borrower so they will prefer to give their money to government, while the private sector will be getting less money. But I don’t expect the pace of government borrowing to continue through the year. The government itself is aware of the impact of its borrowing and hence the decision to consider borrowing from external sources. Instead, the government is looking at Eurobond issuance, and borrowing from external DFIs.”
Why rates were retained
Explaining the rationale to retain the Monetary Policy Rate, MPR, at 14 per cent as well as other policy rates, Emefiele said, “In consideration of the challenges weighing down the domestic economy and the uncertainties in the global environment, the Committee decided by a unanimous vote of the eight members in attendance to retain the MPR at 14.0 per cent alongside all other policy parameters. One member was absent at the meeting. In summary, the MPC decided to: Retain the MPR at 14 per cent; Retain the CRR at 22.5 per cent; Retain the Liquidity Ratio at 30.00 per cent; and Retain the Asymmetric corridor at +200 and -500 basis points around the MPR.”
The CBN governor said the committee welcomed the passage of the 2017 Budget but identified associated risks, inherent in its implications and decided to leave the rates unchanged. He identified such associated risks as banking system liquidity of the envisaged fiscal injections during the remainder of the year, stressing that the Committee decided that the MPR should not be lowered, to avoid exacerbating inflation. On the other hand, he said that tightening rate it further could widen the existing income gap, depress aggregate consumption and hurt the real sector.
Budget needs expeditious implementation
According to the CBN boss, “the Committee urged the fiscal authorities to expeditiously commence the implementation of the recently approved 2017 budget, especially, the capital expenditure portion, to sustain the momentum of recovery, engender employment and restore confidence in the Nigerian economy.
“The Committee expects that the timely implementation of this plan, judicious execution of the approved 2017 Budget and sustenance of the new foreign exchange implementation regime supported by the restoration of security in different parts of the country, especially, in the Niger Delta region, would help accelerate growth and restore confidence in the economy.”
Experts react: In separate reactions, financial sector experts described the GDP figures as a positive development even as they commended the decision of the CBN to retain key policy rates. According to Lukman Otunuga, a Research Analyst at Forex Times, FXTM, “Although this economic contraction may weigh heavily on sentiment moving forward, it should be kept in mind that it still remains the best performance seen in four quarters. With many sectors of the Nigerian economy turning positive, the overall outlook still looks encouraging with the bullish impacts likely to be realized in the second and third quarter of this year.
“The Central Bank of Nigeria has made the logical decision to maintain key interest rates at 14 percent as the nation stabilizes and continues its ongoing quest to diversify beyond relying on oil exports.”
Analysts at Financial Derivatives Company, said: “The good news is that economic contraction is occurring at a slower pace. In other words, there is an expansion of activity directionally but still negative in nominal terms. The budget has been approved and is awaiting presidential sign off which is expected this month. Therefore, we anticipate that increased spending on the fiscal front will help increase output both in the long and short run.
‘‘However, for the economy to feel the full impact of investment, private sector investment has to be amplified. With the recent policy shift especially towards improving the ease of doing business in the country, we expect a slow but consistent recovery in investor confidence. Even though the economic recovery may have begun, it is only likely to become manifest in Q2 and Q3.”
In his comment, Mr. Sola Oni, Managing Director, Sofunix Comm & Chartered Stockbroker said, “Any form of decline in the Gross Domestic Product (GDP) indicates that it is not yet uhuru for the economy. This symbolises unemployment, weak purchasing power of consumers and the rest. These imply that recession has not really gone; hence, the economy is still in dire need of stimulus packages to put it on track.’’