Banks’ credit to govt hits 60-year high

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…Analysts blame hike in borrowing on revenue shortfall

…Govt borrowing from bank is less productive — Former President, CIBN

By Uthman Salami & By Ogaga Ariemu, Abuja

On the heels of government borrowing to finance budget, the Central Bank of Nigeria (CBN) has disclosed that banks credit to government hits 60-year high to N12.5trillion in May 2021.

The N12.5trillion government borrowing from bank as reported by CBN hits a new level bank commenced lending to government since 1960.

The apex bank in January this year reported N12.3trillion banks credit to government but that increased to N12.6trillion in February and dropped to N11.99trillion in March.

Our correspondent gathered that credit to government closed April at N12.16trillion and moved higher to N12.5trillion in May.

The CBN had disclosed that banks credit to the government rose by 28.61 per cent to N12.4trillion in December 2020 from N9.65trillion it was early in the year.

A check by Nigerian NewsDirect also revealed that government borrowing from banks in 2021 has maintained an average of N12trillion with analysts stating that government at federal and states are borrowing not only to finance capital project but to pay workers salaries.

They expressed that lending from banks have contributed highly on domestic debts of states and federal government lately.

The Debt Management Office (DMO)  in its first quarter report stated that the nation’s total public debt indicated that N12.47 trillion or 37.67 per cent of the debt was external, while N20.64 trillion or 62.33 per cent of the debt was domestic.

DMO had disclosed that “The Federal Government’s domestic debt stock alone was put at N16.51 trillion, while States and the Federal Capital Territory (FCT) domestic debt stock was put at N4.12 trillion.

“Lagos state accounted for 12.31 per cent of the total domestic debt stock with N507.3 billion, while Jigawa State, with N31.7 billion, has the least debt stock in this category with a contribution of 0.77 per cent to the total domestic debt stock,” the report said.

The former President, Chartered Institute of Bankers Of Nigeria (CIBN), and professor of Economics at Babcock University, Ilishan, Ogun State, Professor Segun Ajibola said historically borrowing is less productive for Nigeria.

Reacting to report that Banks’ credit to government has hit a 50-year high to N12.5trillion,  he stated that government’s borrowing from Banks edges out private companies, thereby limiting the contribution of the sector to Nigeria’s economy.

According to him, “Government is set to borrow about N5trillion to fund the 2021 budget, including local borrowing which is expected to raise borrowing from the banking sector.

“Unfortunately, government borrowing from banks often crowds out the private sector and limits the private sector’s contributions to growth.

“This raises the issue of productive use of the bank credit. If government borrowing is to finance the capital budget, then it is good for our economy.

“But borrowing for consumption produces less than desirable contributions to economic performance, compared to private sector use. In essence, government borrowing is historically less productive in this part of the world,” he said.

The Monetary Policy Committee (MPC) in 2020 introduced measures that will reduce banks’ access to government secured treasury bills.

The MPC frowned at the banks’ low appetite to invest in the productive sectors of the economy, preferring to lend to government as it comes higher interest rate and risk free.

Meanwhile, the former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf on his part said, the increase in Banks’ credit to government is caused by massive revenue challenge facing the country.

He disclosed that this is the reason behind the increasing debt profile of the country.

He called for deepened efforts around fiscal consolidation, rationalise government spending as silverlining to relieving government’s debt burden.

According to him, “The massive growth in banks credit to government is a reflection of the profound revenue challenges faced by governments across all levels.

“The economic downturn in the past two years has really complicated matters. The fiscal space has been severely challenged.

“It is for the same reason that we have witnessed a spike in debt profile and corresponding growth in debt service burden.

“The limited investment windows for financial institutions had also contributed to huge investments in government debt instruments such as treasury bills and government bonds.

“All these issues are interconnected.  Revenue is not keeping pace with expenditure. The worry about the growing credit to government is around the huge debt service cost which is estimated to be close to 70per cent of actual revenue, or possibly even more.

“The opportunity cost of committing such huge resources to debt service is equally a cause for concern.  There is also the risk of crowding out the private sector in financial markets.

“The CBN component of financing of government deficit could be highly inflationary because it is high powered money.

“Inflation hurts investment, It aggravates poverty and could be detrimental to the economy if it becomes intense.

“The way forward is to deepen efforts around fiscal consolidation, review and rationalise government spending, undertake reforms that could relieve the government of current fiscal burden and institute policies that would enhance revenue optimization,” he said.

Similarly, the Vice President Highcap, Mr. David Adonri disclosed that excessive borrowing especially when misused will fatally affect nation’s economy.

In his words, “Public sector debt as a component of the financial structure of government is necessary to leverage fiscal expenditure. However, its use must not be abused as is the current situation in Nigeria.

“Excessive borrowing by either the fiscal or monetary authority can severely affect the economy. It crowds out funds from the productive real sector. This can hamper productive employment.

“The over-exposure of banks to public sector debt is dangerous. Past experience shows that recovering delinquent credits from sub national governments is very problematic.

“There is also  no guarantee that a sovereign default cannot occur in Nigeria, with the reckless rate of public borrowing.”