How loan-for-bond swap breaks CBN law

Ways and Means Advances is a loan facility used by the central bank to finance the government in periods of temporary budget shortfalls subject to limits imposed by law.

Zainab Ahmed, minister of finance, budget and national planning, revealed that the President has approved plans to securitise the CBN’s N20 trillion-worth Ways and Means portfolio over a 40-year period with an interest rate of 9 percent, adding that payment has been ongoing for the interest component at the current rate charged on the Ways and Means Advances.

What the law says

Section 38, sub-section 3(b) of the CBN Act 2007 states: “…no repayment shall take the form of a promissory note or such other promise to pay at a future date or securitisation by way of issuance of treasury bills, bonds, certificates or other forms of security which are required to be underwritten by the bank.”

The debt owed by the Federal Government to the CBN has ballooned in recent years as the nation’s monetary regulatory authority has failed to obey its own law.

CBN loans to the federal government rose to N22.07 trillion in August from N20.61 trillion in July, according to data from the apex bank.

One of the provisions of the CBN Act, 2007 mandates that in the event of a revenue shortfall, the CBN must not lend to the Federal Government an amount more than 5 percent of the previous year’s revenue of the government.

That section of the CBN Act aims to prevent the overreliance of the central government on CBN financing, instead of opening up the economy to boost domestic investments as well as attract foreign direct investments.

Section 38 of the CBN Act states: “Notwithstanding the provisions of the section 34(d) of this Act, the Bank (CBN) may grant temporary advances to the Federal Government in respect of temporary deficiency of budget revenue at such rate as the Bank may determine. The total amount of such advances outstanding shall not at any time exceed five (5) percent of the previous year’s actual revenue of the Federal Government.

“All advances shall be repaid as soon as possible and shall, in any event, be repayable by the end of the Federal Government financial year in which they are granted and if such advances remain unpaid at the end of the year, the power of the bank to grant such further advances in any subsequent year shall not be exercisable, unless the outstanding advances have been repaid.”

Analysts’ views

Olaolu Boboye, a fixed-income analyst at Lagos-based CardinalStone Limited, said total government debt would increase and the loan would be subject to market factors such as interest rate risks.

Boboye said the N20 trillion is bigger than the entire pension fund in the market, and the market might not be ready to take the N20 trillion at once, adding that the government would need to spread the amount over a period of time, maybe two to three years.

Gbolahan Ologunro, a senior research analyst at Cordros Securities, said over the years, there has been an increased focus on the government to reduce its reliance on the CBN, so it is not unexpected that the government has decided to securitise the N20 trillion debt.

Ologunro said the government has breached the CBN Act several times with ways and means advances exceeding the 5 percent revenue threshold, adding that it would be more precarious if steps are not taken to reduce the overdraft facility with the CBN.

He said: “The conversion would add further uptick in market yields which would not be favourable to debt servicing. We are likely to see further financing for debt servicing, just as the 2023 budget has shown.

“Furthermore, taking that huge debt from the central bank would send signals to international communities on the monetary policy framework. Overall, we shouldn’t see a further increase in the overdraft facility.”