On Wednesday, May 3rd, 2023, the Senate approved President Buhari’s request to securitize the N22.7 trillion loaned by the CBN to the Federal Government under the ‘Ways and Means’ provision.
The Ways and Means provision enables the government to obtain short-term or emergency financing from the central bank in the event of delayed cash receipts or fiscal deficits. This borrowing can help cover the government’s immediate financial needs. With the securitization, these short-term borrowings have been restructured into long-term loans to be repaid over the space of 40 years with an interest rate of 9% p.a.
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The proposal for securitization of the loans was earlier made by President Buhari in December 2022, however, the proposal was rejected at the Senate, with Senators citing lack of sufficient detailing. However, Buhari urged the Senate to reconsider its decision, stating that if the securitization approval is not granted, the government could potentially face an additional interest cost of about N1.8 trillion in 2023.
On Wednesday, the Senate granted the request after reviewing the presidential proposal and considering the submission made by the Finance Ministry and CBN, based on the recommendation of its special committee. In addition, the Senate approved the sum of N180.4 billion, which includes the balance of the supplementary budget and the interest earned on the Ways and Means advances.
In a statement, Senator Ibrahim Gobir, the chairman of the committee, said that advances of N22.7 trillion were made to prevent the government from shutting down due to revenue shortfalls.
Senator Gobir noted, “Due to the serious shortfall in government revenue, the Federal Government in order for the economy not to collapse, was compelled to borrow repeatedly from the CBN, exceeding the 5% threshold of the prior year’s revenue as stipulated by the CBN Act, 2007.”
What the Securitization of the Loans Implies
In a statement released by the Debt Management Office (DMO), the implication of the securitization was explained. The loans were converted to securities to be issued by the FG, however, only to the Central Bank of Nigeria (CBN). The loan has a tenor of 40 years, with an interest rate of 9% p.a. Repayment of the loans is scheduled to occur over 37 years, with a principal moratorium of 3 years.
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According to the DMO, the benefits of securitization include improved transparency with the inclusion of securitized Ways and Means Advances in public debt statistics. It was also noted that it expected to lower the Debt Service Cost as the new interest rate of 9% per annum will replace the current rate of Monetary Policy Rate plus 3%, equivalent to 21.0% per annum (MPR – 18.0% + 3%) charged on Ways and Means Advances.
DMO also noted that the securitization of the Ways and Means Advances does not entail providing fresh funds to the federal government, as the CBN had already disbursed the required funds.
Avoiding Heavy ‘Ways and Means’ Borrowing in the Future
Previous administrations before the Muhammadu Buhari administration had a total of N790 billion ‘Ways and Means’ debt. With Buhari’s N23 trillion, it brings the total ‘Ways and Means’ debts to N23.7 trillion. The heavy borrowings made by the Buhari administration from the CBN were frequent violations of the CBN Act (2007).
s.38 of the CBN Act allows the CBN to grant temporary advances to the Federal Government in cases of deficient revenue. However, s.38(2) of the Act also states that the total amount of the advances outstanding should not at any point exceed 5% of FG’s previous year’s revenue. The Federal Government throughout Buhari’s time as president has flagrantly breached these provisions.
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However, as Chidi Odoemenam, a corporate and financial lawyer noted in his interview with BudgIT, “Avoiding a reoccurrence of the breach of the CBN law and over-borrowing is more economical than legal.” Mr Chidi noted that it is beyond enforcing legislation to establish a supportive framework that prevents the federal government from resorting to borrowing. He noted that in a weak economic climate where the government requires funds, the temptation to borrow will always exist.
