The Federal Government’s excessive borrowing from the Central Bank of Nigeria through the Means and Ways Advances window can have adverse effects on the apex bank’s monetary policy and subsequently harm domestic prices and exchange rates.
This was disclosed in the monetary policy category of the CBN’s Frequently Asked Questions page.
Under the sub-section, titled ‘Can the Federal Government frustrate the Central Bank of Nigeria from pursuing its monetary policy?’, it was stated that there were certain distortions or surges in the monetary base due to the central banks financing deficits.
The response read in part, “Yes, when the Federal government exceeds its revenue, the CBN finance government deficit through Ways and Means Advances subject (in some cases) to the limits set in the existing regulations, which are sometimes disregarded by the Federal Government.
“The direct consequences of the central bank’s financing of deficits are distortions or surges in monetary base, leading to adverse effect on domestic prices and exchange rates i.e macroeconomic instability because of excess liquidity that has been injected into the economy.”
Ways and Means Advances is a loan facility by the central bank to finance the government during temporary budget shortfalls subject to limits imposed by law.
The Federal Government’s rising borrowing from the CBN has been a source of concern to economic experts and stakeholders