Reducing Federal Government Loans Amid Rising Debts

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The Central Bank of Nigeria (CBN) has been urged to reduce its lending to the federal government to curb the country’s spending spree and ease the country’s growing debt burden.

The founder of Agusto & Co, a rating agency for financial services institutions, Mr. Bode Agusto, noted that the CBN taking such a stance will force the government to live within its means.

Agusto, who made the call during a webinar to commemorate the institution’s 30th anniversary, titled “Nigeria in 2022: Will 2022 be a year of strong growth driven by herd immunity against Covid-19 said the CBN has been a catalyst for government spending, and therefore urged the apex bank to cap its support for the government.

“First of all, we have to consider that the country is bigger than any government. Let’s assume that we have to save our country. Because if we don’t save our country, we will have problems. The central bank must be able to take a position that will force the government to live within its means.

“It’s going to force tough reforms on governments because what we’re doing today is giving governments an easy way out of their spending. If only we had a central bank that says the law says I can’t give you an overdraft of more than 15% of the previous year’s income.

“Therefore, if the tap is turned off, the government will look inward and look for ways to cut spending. She would manage her resources better. The government will be forced to use more resources to increase its tax revenue. But if you just open the tab and allow them to draw, the discipline won’t be there and the more we increase the debt, the harder it will be to resolve the matter later,” he pointed out.

On the country’s outlook for 2022, he said, “We believe COVID-19 will stay with us, but it will be less deadly and less disruptive to business activities.

crude oil will reach 100 million barrels per day, demand for crude from OPEC+ will also increase slightly and quota compliance will remain important. If the members are in compliance. The price of Brent could average around $75 a barrel. Brent’s price is about the same as Bonny’s. Light, which is the benchmark crude for Nigeria.

“The amount of dollars available for imports will be approximately $90 billion out of all imports will be approximately $11 billion, the remaining $79 will finance imports of goods and services, the CBN can bleed reserves and adding another $5 billion to increase the amount of dollars available for business, but overall we think the amount of dollars available for business will improve.

He added that the dual exchange rate in the country will continue and the CBN will use it to improve oil and gas revenues or maybe some of the external reserves to shore up. We estimate it will close at around N430 to $1 where we see continued pressure on parallel market exchange rates unless the CBN injects money into the parallel market we will close at N610 to N620 to the dollar at the end of this year.

He said that “federation accounts are expected to increase by around 15%. Most of the growth we announced would come from VAT and corporate income tax. The federal government’s share of this income and self-employed would be around 5 trillion naira and these are our most aggressive estimates. The FGN’s local currency debts will reach around 44 trillion naira, about nine times its revenue. The median for major sub-Saharan African countries is about twice.

“Due to the high cost of servicing these debts at commercial rates, the CBN will continue to accommodate the FGN by lending to it at rates below inflation, thereby reducing the borrowing needs of the FGN in the markets and exerting a downward pressure on interest rates as banks, pension funds, insurance companies and other institutional investors compete for government securities.

“Banking sector local currency lending will grow by around 10% in nominal terms, but growth will still be negative after adjusting for inflation. Loan growth will continue to be limited by higher than normal cash reserve requirements. The profitability of the banking sector will remain weak due to a high level of non-remunerative cash reserves, the continuation of the AMCON tax beyond the ten years initially agreed and a higher effective tax rate.