Fitch Ratings has warned Federal Government against repeated recourse to ways and means financing (WMF) from Central Bank of Nigeria (CBN).
In a report on Wednesday, Fitch warned “sustained use of direct monetary financing could raise risks to macroeconomic stability – given the current weak institutional safeguards – but we expect the FGN to reduce its use of the facility in 2021.
“The FGN directly borrowed 1.9% of GDP from the CBN to fund its fiscal deficit in 2020, estimated by Fitch at 3.6% of GDP.”
While noting that a number of emerging markets resorted to central bank deficit financing in 2020 against a background of urgent spending needs and temporary market dislocations associated with the coronavirus pandemic, the use of central bank financing in Nigeria predates the pandemic shock.
“We estimate that the balance of the government’s WMF with the CBN was around NGN9.8 trillion (6.7% of GDP) at end-2019, up from NGN5.4 trillion (4.2% of GDP) at end-2018.
“Unlike the government, we include this balance in our metrics for Nigeria’s government debt. Borrowing from the facility accounted for 30% of the FGN’s debt at end-2019, on our estimates.”
According to the agency, repeated central bank financing of government budgets could raise risks to macro-stability in the context of weak institutional safeguards that preserve the credibility of policymaking and the ability of the central bank to control inflation.