The response can be both complicated and simple. But let’s use past experiences to provide some context.
History shows that the first World War was quite costly for the Germans. They had borrowed huge sums of money, banking that a victory would help them repay their debts.
But they lost the war. And instead of a victory, they were fined $270 billion (in today’s value) for causing the war. The German economy was a wreck. And to try and finance their debts and pay wages, the government decided to print money.
This was when everything changed for the worse.
The currency became worthless, Inflation rose by 10 trillion per cent in 1923. The price of bread went from 160 marks in 1922 to 200,000,000,000 marks by the end of 1923.
Germany eventually repaid debts with goods instead and despite many cancelled debts, they paid everything back in 2010 — 92 years later.
It’s not like printing money is new. Throughout history, central banks have always printed cash.
But their job is to control the money supply so that inflation does not spiral out of control like in Germany. Central banks achieve this by buying and selling short-term treasury bills, for instance.
But there are always outliers. In 1997, something changed. Someone was printing money specifically to boost their economy, not just to ensure people had enough banknotes. Japan was the culprit.
To boost the economy, the Bank of Japan (BOJ) printed money and bought billions of corporate (issued by businesses) debt and long-term government bonds. This is different from the normal buying and selling of treasury bills we discussed above.
The bank was printing new money and buying assets to reduce interest rates across the board—from government rates to business ones. When central banks buy many bonds, their demand goes up and their interest rate falls.
In Nigerian terms, it’s like the CBN saying “we are not currently concerned with what the Monetary Policy Rate (MPR) is doing. We want to print money and directly reduce the cost of borrowing for the government and businesses like Dangote cement by buying their debt”.
This was the first time this tactic, known as Quantitative Easing (QE), was deployed. So when Japan adopted this tactic in 1997, many expected that the policy would cause inflation to spiral. But it didn’t.
And so in 2007, when the financial crisis hit, central banks immediately adopted Japan’s strategy. The Bank of England, the European Central Bank, and The US Federal Reserve, all started large sums of quantitative easing programmes.
It worked, and again, inflation did not rise. And when the pandemic hit last year, central banks across the world did QE again.
However, the US and Nigeria have very different economic structures. In America, big corporations have a significant influence on the economy.
Amazon has over one million employees, and Apple has annual revenues of $260 billion improving the cost of borrowing of these firms can indeed stimulate the economy.
Nigeria, on the other hand, does not have companies that are as influential with enough employees or revenue to significantly affect the economy if the CBN decided to support.
So the CBN invented its own type of “quantitative easing”. Instead of printing money to buy corporate debt (like the US did), thereby reducing their borrowing costs, the apex bank prints money and lends it to entire sectors.
Unsurprisingly, the first area of focus was agriculture. Emefiele and team launched the anchor borrowers program (ABP) where the CBN effectively gave farmers single-digit loans instead of the 20%+ loans they faced in banks.
This policy has the same effect as if the CBN bought corporate bonds from farmers, which would have led their borrowing costs to also fall.
The initial loans for the ABP was ₦40 billion, but the CBN has now spent over ₦200 billion on loans to one million farmers.
The more they borrow, the more they have to sell loans; otherwise, the money supply would increase and cause more inflation. This can also explain why they introduced new OMO bills.
In general, the CBN has gone about disbursing loans without too much pushback. That all changed when the CBN started printing money for the government.
Estimates from the World Bank, IMF, and Fitch put the total amount the government borrowed from the CBN in 2018 at around ₦1 trillion. By 2019, over ₦3.6 trillion was printed and lent to the government.
The government is doing this to skip over the domestic borrowing limits and hurdles in our legislation. Technically, this process is known as a Ways and Means facility (WMF), and there are also rules on how it should be done.
For example, the CBN’s guidelines say that Ways and Means should not exceed 5% of the previous year’s fiscal revenues, but we reached the 80% mark last year.
It’s also supposed to be temporary, and the government has to pay it back within a year. But as you can imagine, we haven’t stuck to the guideline. Last year, the government paid back ₦912 billion—9% of the outstanding CBN debt that has accumulated.
But what is the way out of this debt?
The federal government says it plans to securitise the debt. This basically means it will repackage the loans and sell them to private investors, so the CBN is paid back, and the government will pay back the investors.
Doing this would make the loans more legitimate and ensure that the government indeed pays back. It’s a smart move, and hopefully, the government would follow through with the plan.