Analysts react as CBN retains 5% cap on Ways and Means advances

The Central Bank of Nigeria (CBN) has released new guidelines confirming that Ways and Means Advances to the federal government will continue to operate within the 5 per cent threshold of the previous year’s actual revenue, a decision aimed at maintaining fiscal discipline while addressing liquidity challenges.

The announcement, which has sparked discussions across financial circles, is part of the CBN’s broader efforts to ensure economic stability and curb excessive government borrowing from the apex bank.

In Nigeria, these advances have historically been used by the federal government as a last resort to fund budget deficits when regular revenue sources fall short.

Dr. Bismarck Rewane, CEO of Financial Derivatives Company, believes the decision to maintain the 5 per cent threshold is a positive step toward reining in excessive government borrowing, but warns that it may not be sufficient to address Nigeria’s wider fiscal challenges.

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“The CBN is correct in enforcing the 5 per cent cap to limit borrowing through Ways and Means. This is crucial to avoid inflationary consequences and ensure a disciplined fiscal approach.

“However, the government still faces a significant revenue shortfall, and without substantial reforms in revenue generation and expenditure management, this limit may force the government to resort to other, perhaps more expensive, borrowing methods,” Rewane explained.

In recent years, Nigeria has grappled with rising inflation, driven in part by the expansion of monetary supply and food price shocks.

Financial analyst Johnson Chukwu, CEO of Cowry Asset Management, noted that while the 5 per cent threshold serves as an important control mechanism, the central bank must remain vigilant to ensure that other forms of borrowing don’t offset the intended effect.

“Government borrowing through Ways and Means has always carried inflationary risks, especially when it goes unchecked. The CBN’s decision to maintain the 5 per cent cap will help mitigate these risks. However, the government’s broader borrowing patterns need to be closely monitored to ensure that the overall debt profile does not become unsustainable,” Chukwu commented.

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The CBN’s new guidelines also emphasize transparency in the management of Ways and Means Advances.

This, according to experts, could foster greater accountability and ensure that the facility is used strictly as a short-term measure, rather than as a long-term solution to fiscal imbalances.

Dr. Muda Yusuf, a former Director-General of the Lagos Chamber of Commerce and Industry, applauded the emphasis on transparency but called for more robust mechanisms to reduce the government’s need for central bank financing.

“Transparency in how Ways and Means Advances are utilized is a welcome development. However, we need to see more sustainable measures in place, such as improving tax collection, reducing wasteful government spending, and stimulating private sector growth to expand the revenue base,” Yusuf said.