Nigeria’s private sector faces an imminent funding crisis as the Federal Government plans to borrow as much as N2.188 trillion locally to fund the amended 2020 budget now put at N10.509 trillion.
The government’s review of the 2020 budget has led to a huge increase in deficit by N2.736 trillion to N4.563 trillion, and experts are concerned that the increased domestic borrowing of N2.188 trillion would crowd out private sector access to credit.
Eze Onyekpere, lead director, Centre for Social Justice, said the planned borrowing by government would crowd out the private sector as lenders would first attend to government debt instruments which have reduced risks before giving attention to private sector credit demands.
Obadiah Mailafia, former deputy governor, Central Bank of Nigeria (CBN), said the increased deficit is a great concern at this time as it has left the government with the options of either borrowing or cutting down some items in the budget, thereby reducing the deficit.
“In tackling this deficit burden, it is either we keep borrowing or we reduce the deficit. By reducing the deficit, we will have to reduce the non-essential in the capital or recurrent expenditure,” he told BusinessDay.
Mailafia further noted that the government’s borrowing is reaching an unsustainable level which is not good for the economy, especially when borrowings are being used to fund recurrent expenditures.
As contained in the revised 2020 budget, the deficit financing of the revised N10.509 trillion would be part-financed through domestic borrowing of N2.188 trillion and external borrowing of N1.984 trillion.
Patience Oniha, director-general, Debt Management Office (DMO), confirmed recently that the proposed New Domestic Borrowing of N2.188.83 trillion would be raised from the domestic market through the issuance of Federal Government of Nigeria Bonds, FGN Savings Bonds, Sukuk, Nigerian Treasury Bills and possibly, Green Bond. Apart from this, government has also indicated that the earlier N850 billion proposed borrowing from the International Capital Market would now be sourced domestically as the impact of COVID-19 pandemic on the world economy now makes commercial funds from foreign markets impossible.
“With Nigeria projected to lose about 40 percent of its revenue and oil revenue being a major part of the loss, and the fact that oil price and revenue are not rebounding to former levels any time soon, the federal budget should not contain this size of deficit,” Onyekpere said.
“Expenditure estimates, losing 40 percent of a country’s revenue and cutting expenditure by less than 1 percent is not prudent and may not be in consonance with the principles of fiscal responsibility,” he said.
According to data from the Central Bank of Nigeria (CBN), aggregate net credit to the economy grew significantly by 8.07 percent in April 2020 compared with 4.90 percent in March 2020, but remained below the indicative benchmark of 16.85 percent for the year.
Chijioke Ekechukwu, former director general, Abuja Chamber of Commerce, said that government’s plans to source funds locally would mean a bad time for local businesses which are still reeling from the Covid-19 losses. This, he said, would further result in push-up of interest rate since government often borrows at a higher rate.
“This will overheat the nation’s economic system, thereby leading to a hike in interest rate because the government will borrow at a higher rate, which will make banks want to lend more to the government, thereby reducing loanable funds to private sector,” Ekechukwu said.
“With this, we will see that instead of banks lending money to private sector, they will prefer giving money to the government because of the rate, thereby making it difficult for private sector to access credit,” he said.
For Tope Fasua, CEO, Global Analytic Consult, the size of the deficit is rather scary as revenue generation remains challenged.
“What we need is to look for ways to boost our ability to generate more revenue; this is the way out of this burden of deficit. The overall size of the budget is small compared to other countries, so our challenge is in the amount of revenue we generate,” Fasua said.
He said that while the increased domestic borrowing appears to be more feasible at this time as countries are deepening efforts to rebuild their economy, it may lead to displacement of credit in the private sector.
He explained that the focus on the domestic borrowing at this time is to enable the government raise the needed fund for the budget with less risk, adding that the funds can be got from individuals, or through issuance of bonds.
“As we know that these efforts are aimed at improving the Nigerian economy, the government at this time should build up the value of naira by creating naira bonds and build people’s confidence in the currency.
This will make it easier going forward,” he said.
Fasua said there was need for the CBN to deepen its intervention programmes to cushion the possible pressure that increased domestic borrowing by government may cause on the private sector.
“We see the effort by the CBN to reduce the MPR, and reduce all intervention cost to single-digit rate to encourage easy access to funds. However, there is need for the bank to bring in more interventions as well as ensure strict control of lending rate,” he said.
