Credit to government rises by N8.4 trillion in May 2024, dwarfs private sector credit growth

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Credit to the government surged by N8.4 trillion in the month of May 2024, dwarfing private sector credit growth by 6x within the same period.

This is according to the latest money and credit stats data of the  Central Bank of Nigeria (CBN) for May 2024.

The CBN data also shows that credit to the government accounts for 86% of fresh domestic credit as the government continues to rely more on local borrowing to fund its expenditures.

What is the data saying

On a monthly basis, credit to the government rose by 30%, from N19.98 trillion in April 2024 to N28.38 trillion in May 2024.

  • However, on a year-no-year basis, there was a decrease of 8% in the credit to the government from N30.71 trillion in May 2023 to N28.38 trillion in the same month this year.
  • While the credit to the government rose by 30% in one month, credit to the private sector increased by 2% from N72.92 trillion in April to N74.31 trillion in May 2024.
  • However, on a year-no-year basis, credit to the private sector rose at a higher rate of 66% from N44.79 trillion in May last year to N74.31 trillion in the same month in 2024.
  • In addition, net domestic credit rose by 36% from N75.5 trillion in May 2023 to N102.69 trillion by May 2024. On a monthly basis, net domestic credit rose by N9.8 trillion or 10% from N92.89 trillion in April 2024.
  • This means that out of the N9.8 trillion fresh domestic credit, the government got 86% at N8.4 trillion.

Whilst the central bank did not provide details explaining the reason for the surge in May, the rise may not be unconnected with the government’s increased borrowing channelled towards financing various projects, managing debt obligations, or covering budget deficits.

However, this trend also raises concerns about crowding out the private sector, where access to credit is crucial for business growth, job creation, and economic diversification.

The private sector’s relatively lower credit growth, albeit positive, suggests a cautious lending approach by those in the sector in a high-interest environment.

What you should know

The Bola Tinubu administration has relied mostly on the domestic debt market, especially treasury bills, to fund short-term obligations, a huge departure from the Muhammadu Buhari administration, which relied mostly on the Central Bank’s Ways and Means Advances.

The government has faced a significant shortfall in its fiscal revenues, meaning it has to rely on public debts to meet government expenditure obligations.

Meanwhile, Nigeria’s central bank has relied on higher interest rates as a cornerstone of its forex policy while also adopting multiple rate hikes to combat inflation. Under CBN Governor Yemi Cardoso, the interest rate has been hiked by about 750 basis points from 18.75% to 26.25%.

The strategy seems to be working, as fixed-income savvy investors continue to oversubscribe T-Bills in nearly all the auctions tracked by Nairametrics.

However, critics continue to point to the rising cost of servicing Nigeria’s domestic debt especially Treasury Bills with true yields closer to 30% per annum.

Nairametrics earlier noted that Nigeria has a total Treasury Bills (T-Bills) debt of N10.4 trillion, a 60% rise in just three months, according to data from the Debt Management Office (DMO).

While the higher interest rate makes government securities attractive, it makes it more expensive for the private sector to take loans.

The Lagos Chamber of Commerce and Industry (LCCI) recently lamented the effect of high interest rate of CBN’s Treasury bill noting that it is drying up funds from the private sector into government’s treasuries.

The Director-General of the Centre for the Promotion of Public Enterprise (CPPE), Dr Muda Yusuf, called on the CBN to expedite the window of development finance for businesses to mitigate the effect of the high monetary policy rate in the country. He noted that businesses need the single-digit interest rate to drive the Nigerian economy.

Also, the President of the Dangote Group Industries Ltd, Alhaji Aliko Dangote stated that no economic growth will happen unless the bank interest rate at 30% decline. He further called for the protection of local industries, especially in manufacturing, across the country.

Despite concerns around the impact of rising interest rates, Global credit ratings agency, Fitch Ratings, has projected further hike in monetary policy rates by the CBN in the second half of the year. This was disclosed in its recently released credit outlook for Nigeria where the country’s sovereign credit default outlook was raised from stable to positive on the back of recent reforms in the monetary policy and oil and gas sector.

Olayemi Cardoso, the Governor of the CBN earlier emphasized the necessity of maintaining higher interest rates to address the persistent inflation issues plaguing the Nigerian economy. Cardoso stated that tighter monetary policy accompanied by higher interest rates was at their disposal to solve the challenges of high inflation.

Cardoso also mentioned that while inflation had accelerated sharply at the beginning of 2024, there had been a noticeable deceleration in the past three months.

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