The CFG Advisory is proposing a resolution trust SPV backed by legislation, to operate within the current DMO act and framework; as a mechanism for the refinancing as opposed to the illegal securitization of the N23.7 trillion ways and means financing on the CBN balance sheet.
After informal consultation with key capital market operators, the senate and house leadership, concerned government agencies; our suggestions and recommendations on the way forward are detailed below. We welcome feedback and critique that can improve this submission and provide a sustainable resolution.
1. The CBN must as a matter of urgency, discontinue the ways and means financing. The N23.7 trillion outstanding balance is in violation of section 38 of the CBN act.
2. How does the FGN obtain N23 trillion Naira debt from the Nigerian capital markets, when the total current outstanding domestic debt of the FGN is N21 trillion Naira? Credit to the FGN last year increased by N11.3 trillion to N24.7 trillion, while credit to the private sector increased by N6.6 trillion to N42.2 trillion. In contrast, the total Money Supply as of January 2023 is N53 trillion. FGN’s outstanding ways and means debt is about half of the total money supply in the system. Combine this with the N21 Trillion outstanding public debt, we have a situation where the total public debt stock is about equal to the total money supply. The CFG Advisory therefore recommends as a first step, the need to create a secondary marketplace with liquidity and standby line from government, to create a special asset class to refinance the ways and means.
3. The DMO annual debt maturity profile and yearly fund-raising can’t cover the quantum of the outstanding ways and means. Money supply only increases by 5-6 Trillion Naira annually. The DMO has a critical role to play with this resolution, and our review of the DMO act suggests, there are statutes we can leverage to support our recommendations. The DMO act can be expanded to create a resolution trust vehicle for FGN/CBN similar to Amcon to ensure we stay within the tenants of the law. Consultations with both Senate and House leadership suggest favourable disposition to new legislation, but we also need to create the financing structure to support that legislation. We have developed 3 financial model options with varying maturity profiles, which we are willing to share with MOF/CBN and relevant agencies. After proper engagement and depending on the circumstances and political preferences a suitable model will be adopted.
4. The main issue now is the capacity the capital markets. The FGN is gradually crowding out the private sector. This is leading to the sluggish rate of GDP growth, and the ways and means putting upward pressure on inflation trajectory. A recent basket of goods and services we surveyed shows inflation closer to 30%. FGN borrowing is increasing at 75% while private sector is going up at only 25%. FGN is already sitting on about N15 trillion or about 30% of the N50 trillion bank deposits via the statutory CRR. The Banks also don’t lend all the deposits as they are active in trading treasury bills. 65% or N9.5 trillion of the N15 trillion pension funds are already invested in FGN securities. The insurance industry and other institutional investors at best have a capacity of N1.5 trillion, and we unfortunately cannot list FGN on the equity market to optimize the FGN’s capital structure.
5. The N23 trillion will overwhelm the entire Nigerian capital markets and therefore requires a structured and gradual fund-raising program, within a special purpose intervention vehicle.
6. The need for urgent structural reforms within the fiscal regime cannot be understated. The removal of subsidies will bring in US$10-15 Billion additional revenues annually and we need to step up the privatization and concessioning program, also right sizing government. This will significantly ease the pressure and improve government revenues and cashflows going forward.
7. The right policies will help improve the country perception and improve our sub optimal international bond ratings, which has increased the cost of borrowing. A good rating will help reduce our cost of borrowing, as our debt servicing costs now exceeded our revenues. The CBN MPR rate hikes to tame inflation might stifle growth as real rates in the system are still negative as a result of the inflation locust.
8. The CBN, DMO and Fiscal Responsibility acts are designed with circuit breakers to ensure financial stability. It is unfortunate that we find ourselves where we are but we need to strengthen and not break these laws. The Ukraine/Russia war provided an opportunity for a windfall for Nigeria. While other oil producers are enjoying massive surpluses, we are contending with deficits and a N23 trillion ways and means debt, we need to get off the CBNs balance sheet. If we do not stick to the guidelines of these laws, we can be headed towards Zimbabwe and Venezuela status.
9. In order to complete the clean-up of the CBN’s balance sheet, all the CBN intervention loans should go through a credit audit review. The CBN should make a provision for the bad loans and the good loans transferred to the Bank of Industry, Bank of Agriculture and The Development Bank of Nigeria. The CBN should shift its full attention back to monetary policy and banking supervision, with policies that will support sustainable economic growth and development.