Firm to FG: Relying on CBN to finance deficit worrisome

A London-based economic research firm has lamented that the situation in which the Federal Government relied on the Central Bank of Nigeria for the financing of budget deficits is worrisome and dangerous.
In a report on Monday, Capital Economics , said the government had turned to the central bank to plug ever-larger budget deficits in recent years.
The report further stated that government officials are unlikely to kick their deficit monetisation habit, particularly if the fiscal position worsens next year.
The Africa Economist, Capital Economics, Virág Fórizs, said that the situation would deepen some of Nigeria’s existing economic woes, including high inflation, downward pressure on the naira and weak economic growth
“Nigeria has a pretty poor track record of sticking to its budget plans. Over the past six years, on average around 55 percent of annual budget shortfalls have been financed by the CBN,” she said.
The report stated that funding through domestic and foreign borrowing has often fallen short of targets.
She said, “Moreover, interest rates on domestic debt tend to be high; before the onset of the pandemic, 10-year government bond yields last dropped below 10 per cent in 2011. Public debt servicing costs have risen sharply in recent years.
“Debt servicing was equivalent to 13 per cent of the Federal Government’s total revenues in 2010 – last year, the ratio reached a staggering 83 per cent. All of this has pushed policymakers to turn to the central bank to help finance budget deficits.”
She further lamented that financing budget deficits through central bank financing had contributed to many of the problems plaguing Nigeria’s economy.
She said, “This year, we think that Nigeria’s public finances will improve to the extent that the government will not necessarily require CBN financing.
“But the public finances will probably come under renewed pressure over 2022-23, as oil prices are likely to drop back – our forecast is that Brent crude will end next year at $60 per barrel. And we think that borrowing conditions will become less favourable too, particularly if we’re right in expecting US Treasury yields to rise, pushing the authorities to once again turn to the central bank to plug fiscal financing gaps.”
Fórizs added, “While the scale of deficit monetisation in Nigeria is certainly worrying, it’s not likely to be on the scale that will cause a dramatic spiral in prices (as happened in Venezuela or Zimbabwe).
“And policymakers in Nigeria are not completely blind to inflationary concerns. Instead, we think that deficit monetisation will contribute to keeping inflation elevated in the low double-digit range in the coming years.”