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CBN, DMO disagree over government borrowing

By Babajide Komolafe
Is government borrowing blocking credit to private sector?  The Central Bank of Nigeria (CBN) says yes, Debt Management Office (DMO) says no. Babajide Komolafe, hereby presents the arguments of the two government agencies.

The Central Bank of Nigeria (CBN) believes that government borrowing is crowding-out (blocking) credit flow to the private sector. The Debt Management Office (DMO) said this is not true. The CBN said there is need for restraint on debt-financed government spending to curb inflation; the DMO disagrees, saying that government borrowing is needed to counter the negative effect of the global financial crisis.

The above summarised the exchange that occurred last week between the two key government institutions over government borrowing in recent times.

In 2010, government borrowing from the  domestic credit market debt rose by 40 per cent or N1.32 trillion to N4.5 trillion from N3.2 trillion in 2009. More half of the borrowing (63.7 per cent) is through FGN bond issued by the DMO

Prior to last week, there have been apprehensions over the borrowing and spending activities of the three tiers of government. Rising government spending was pointed out has the source of new pressures on the inflation rate, the increased government borrowing to finance the increased government spending, especially at a time when there is increased revenue from oil, and when the country should be accumulating savings was also criticised as injurious to the economy.

The increased government borrowing, it was argued is blocking credit flow to the private. But most of these concerns had been from economic experts and operators, with the apex bank occasional expressing measure concerns.

But last week, on Tuesday specifically, the Monetary Policy Committee MPC of the CBN, unequivocally said that government, through its borrowing activities is crowding out the private sector in the flow of credit. In its review of  the economy in 2010, the  MPC  noted that while credit to the three tiers of government grew  by 67.83 per cent, credit to the private sector contracted by 4.92 per cent.

“The growth in credit to the three tiers of government against the backdrop of the decline in private sector credit is a reflection of the fact that government borrowing had to some extent crowded out private sector credit”, it stated.

But the Committee did not stop there, it went further to call for restraint on debt-financed government spending, saying such spending is a major barrier to the effort of the apex bank to keep prices stable and achieve  single digit inflation in the country.

“The Committee noted that although inflation (which is rate of increase in prices of goods and services) has been trending downwards, the single digit benchmark was not achieved in 2010, despite the relatively good harvest, improved supply of petroleum products and lower growth in monetary aggregates. This, according to the Committee underscores the need to address both supply and demand side factors that determine inflation dynamics in Nigeria.

“One of the ways to keep aggregate demand in check is to restrain Debt-financed government spending in the medium-term. This calls for a review of subsidies and other recurrent expenditure categories that constitute a drain on the national budget as well as improving the revenue base. For this reason, the MPC believes that the risk to price stability posed by fiscal operations will need to be constantly monitored if inflation is to be brought down to single digit levels in the short to medium term. However, the Committee noted that the general thrust of fiscal policy pronouncements is in the desired direction”.

The DMO fired back on Thursday. At a retreat for financial journalists organised by the DMO in Kaduna. Director-General, DMO, Dr. Abraham Nwankwo said it is not true that government is crowding out the private sector. The contraction in lending to the private sector, he said is the fallout for the global financial crisis and the recent increase in government borrowing was inevitable to counter the impact of the recession generated by slow down in private sector credit.

He said what happened was that the financial crisis caused banks to stop lending to the private sector, and this led to a recession. “To counter the effect of this recession on the economy,  governments over the world increased borrowing to increase spending. And that was what happened in Nigeria  was responsible for the increase in the domestic debt between 2008 and 2010.

According to Nwankwo, in a situation where credit to private sector declines  due to crisis of confidence due to the global financial crisis, government has to step in to increase spending to save the economy from biting effect of recession.

He that while in every economy there is the potential for government to crowd-out the private sector, that potential has not materialised in Nigeria. He said the MPC observations and statement that government borrowing is crowding-out private sector,  like similarly ones by some economic experts,  were taken out of context. He advised that any comments on government borrowing should be holistic, vis-a-vis other development in the economy and the many contributions of such borrowing to the development of the bond market and appetite for long term borrowing in Nigeria.

He also countered the comments that government borrowing is used to finance wasteful spending, pointing out that most of the proceeds of the bond issued by the DMO were used for capital projects or to stimulate growth of critical sectors of the economy. This he said include the N200 billion Agriculture Fund, the N200 billion intervention fund for the textile industry, the Abuja Airport road expansion and the rehabilitation of the nation’s railway. Last year, the DMO raised N926 billion for the federal government through FGN bonds.

He however said on the other hand,  government is aware  that it must not crowd-out the private sector and hence intends to strategically  reduce borrowing to creating space for the private sector”, he explained. He said for example the debt to GDP ratio for the 2011 budget was reduced to 3.6 per cent, from 6.6 per cent in 2010, adding that this indicates that government appreciates the need to roll back borrowing. He said the tax break for income on corporate bonds is also another indication that government is creating space for private sector in the flow of credit.


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