Funmilayo Odude, Partner, Commercial and Energy Law Practice (CANDELP)

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Remedying the abuse of the Ways and Means advances 13 Feb 2023

The high debt profile of Nigeria is a concern for many experts, especially because of the huge impact of debt service cost on government revenue. According to the Debt Management Office (DMO), the total public debt stock – which comprises the total domestic and external debt stock of the federal government, all state governments, and the Federal Capital Territory (FCT) – stood at N44.06 trillion as of Q3 2022. Domestic debt accounted for N26.92 trillion while external debt was N17.15 trillion.

This figure does not include the reported outstanding amount of N23.8 trillion debt granted by the Central Bank of Nigeria (CBN) under its Ways and Means advances to the Federal Government. Given the deficit in the 2023 budget and the fiscal borrowing operation and approval in Q4 2022, the country’s public debt is projected to rise to N77 trillion ($169.2 billion) at the end of this fiscal year. This will take Nigeria’s debt-to-GDP ratio to around 38 percent, while debt service cost as a percentage of government revenue has already risen above 80 percent.

The Ways and Means advances have been particularly at issue. They are short-term financing granted by the CBN to the government to fund budget deficit. The instrument is provided for under the CBN Act which empowers the central bank in Section 38 to grant temporary advances to the federal government to, on a temporary basis, cover shortfalls in budgeted revenues at such interest rate as the CBN may determine.

The two key underlying principles of ways and means advances as expressly stated under the Act are its temporary nature and the limited value borrowable by the government within a specific period. The Act provides that “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.”

The advances are thus to be repaid by the end of the financial year in which they were granted – which is the 31st of December. Failure to repay bars the Central Bank from extending further advances until repayment. The Act further provides that 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.”

The Ways and Means advances are therefore meant to be short-term loans of a maximum amount. They are not to be granted arbitrarily. The timeframe and amount to be borrowed are not left to the discretion of the governor or any other officer of the CBN.

This practice is also statutorily provided for in India where the Reserve Bank of India can grant temporary advances to the central and state governments to tide over any mismatch in receipts and payments. Ways and means advances by their nature are for meeting urgent needs that cannot wait for expected revenue. Thus, it is expected that they would be repaid as soon as possible. They are not envisaged as an instrument for long-term financing; they take more of the nature of overdrafts. They are statutorily tightly controlled because of the impact such advances can have on monetary and price stability if abused, as the current situation in Nigeria has clearly shown.

Media report by Premium Times showed that CBN’s Ways and Means advances to the Federal Government rose by 2900% in the last seven years. The current administration has relied heavily on the financing framework to fund its budget deficits to the scale and duration that contravene the provisions of the CBN Act.

All the statutory gatekeeper provisions have been violated in the grant of these advances and the country is experiencing the ripple effects in high inflation and interest rates. To mop up excessive liquidity caused by the financing, the CBN has been raising the Monetary Policy Rate (MPR) to fight its inflationary impact. The efforts have been unsuccessful as the advances have continued to be granted, with the resultant high inflation and interests rates driving up bank lending rates beyond the affordability of many SMEs. The debt service cost of government’s debt now constitutes a major drain on the nation’s revenues.

The Minister of Finance, while making a case for the restructuring and securitization of the Ways and Means advances, stated that the debt would cost the nation N1.8 trillion in interest. The World Bank in its December 2022 edition of the Nigeria Development Update projected that the interest payments of the Federal Government’s borrowing for the CBN’s financing will gulp 62 percent of government revenue by 2027 even if restructured.

The country has found itself under the burden of this huge debt to the CBN as a result of the persistent direct contravention of the provisions of the law. The advances have continued to be granted even when repayment of previous ones were not made; and the advances have been granted in sums that are clearly above the limit set by the law – 5 percent of the previous year’s actual revenue of the federal government. For example, in the first six months of 2022 alone, the CBN granted Ways and Means advances in the sum of N2.5 trillion while the revenue made by the government in 2021 was N5.4 trillion. As opposed to 5 percent of the revenue of the previous year, the CBN granted advances of almost 50 percent in the six-month period.

How do we remedy this situation? The federal government has approached the National Assembly in December 2022 with a request to restructure the N23.8 trillion debt into tradeable securities. The government proposed bonds with a tenure of forty years at an interest rate of 9 percent with a moratorium of 3 years on the principal repayment. The National Assembly rejected this request in December. It will constitute a breach of duty by the legislature if it subsequently approves such restructuring. The illegality of the borrowing cannot be legitimised by converting the outstanding loans to tradeable securities.

The most salient point about the debt level is its illegality. The debt was accumulated in utter disregard of the unambiguous and express provisions of the CBN Act. Contrary to its contingency nature, the Ways and Means advances have become a primary source of deficit financing, not only amounting to an illegality but also constituting an unsustainable and inefficient fiscal management.

The first step towards returning to a good fiscal management that encompasses fiscal discipline, optimal allocation, judicious use of resources, accountability, and transparency is to ensure that all our processes – including the use of the Ways and Means advances – are subject to legal compliance. This means the CBN must refrain from granting any further Ways and Means advances until the current debt is repaid.

The current Ways and Means advances debt also calls into question the independence of the CBN. Research shows that central banks that are more independent achieve lower inflation than those with closer ties to their governments. This is because an independent central bank can pursue its mandate of conducting monetary policy without interference by the government. But by its reckless pandering to the financing requests of the government, the CBN is fostering financial instability – the very opposite of its core mandate.

The independence of the central bank is not for promoting arbitrary actions of itself or others. It entails accountability for its policy outcomes. The independence of institutions becomes dysfunctional if it is not accompanied with transparency and accountability in its activities. Therefore, beyond rejecting the proposal to restructure the debt, the National Assembly – most likely the 10th National Assembly – must conduct an investigation into the Ways and Means advances with a view to putting an end to its abuse. The report of such an inquiry should indict those responsible for the abuse.

Funmilayo Odude is a Partner at Commercial and Energy Law Practice (CANDELP).