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Fitch raises the alarm on Nigerian government borrowing from CBN

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Nigerian banks may be worst hit by oil price plunge, coronavirus – Fitch Ratings

Fitch, a credit ratings agency, has sounded the alarm over Federal Government’s reliance on Central Bank of Nigeria(CBN) for loans through Ways and Means facility, to cover up the shortfall in revenue.

Fitch Ratings stated this in its report on Wednesday titled ‘Nigeria’s deficit monetization may raise macro-stability risks’.

Ways and Means financing is basically the printing of money by the CBN to enable the FG to plug its budget deficit.

“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 report reads.

The FGN directly borrowed 1.9 percent of GDP from the CBN to fund its fiscal deficit in 2020, estimated by Fitch at 3.6 percent of Gross Domestic Product.

While it says it understands the need for the Federal Government to look for ways to finance the budget against a background of the coronavirus pandemic, Fitch said, the use of central bank financing in Nigeria predates the pandemic shock.”

Read also: Fitch revises Nigeria’s creditworthiness outlook to stable, but fiscal capacity remains weak

The report added, “We estimate that the balance of the government’s WMF with the CBN was around N9.8tn (6.7 percent of GDP) at end-2019, up from N5.4tn (4.2 percent 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 percent of the FGN’s debt at end-2019, on our estimates.”

Fitch Rating stated that 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.

The credit rating agency, however, provided a positive outlook for the Nigerian government’s fiscal revenue and expenditure projections for 2021 describing it as broadly realistic, saying “we believe it should preclude further significant borrowing by the FG from the CBN facility this year.”

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