Business
Budget deficit: FG’s borrowing plan threatens real sector growth
BY EMEKA EJERE
Plan by the Federal Government to fund the N9.05trillion 2024 budget deficit from the domestic financial market is raising fears of further increase in the cost of borrowing for the business community in general and real sector in particular.
In the proposed N27.5 trillion 2024 budget, 45 percent of the projected revenue of N18.3 trillion would be utilised to service debts, a development analysts see as having negative implications for cost of funds for businesses while also crowding out the private sector.
The new deficit financing arrangement indicated in the Medium Term Expenditure Framework (MTEF), 2024-2026, released recently is not unconnected with AC the surging cost of international borrowing occasioned by the massive fall in the value of the naira.
The country had relied heavily on Eurobond and other sources, including bilateral and World Bank/ International Monetary Fund, for its deficit financing needs for several years.
For instance, the 2023 budget deficit amounting to N11.6 trillion is being funded with just 31.9 percent domestic borrowing, while the bulk of the deficit funding at 68.1 percent was raised from foreign borrowings.
In the MTEF 2024-2026, the government indicated that over 66 percent or about N6.0 trillion of the total deficits amounting to N9.05 trillion in 2024 would be raised from the domestic market.
Giving insight into the situation, analysts at the Lagos based investment house, CardinalStone Finance, noting that deficit financing is expected largely from the domestic market at N6.0 trillion of total deficit of N9.05 trillion, stated: “The plan to increase domestic debt sourcing appears consistent with our projections of further weakness in the naira, which may bloat the cost of external debt financing”.
But the expected foreign exchange translation gain for the FG’s revenue may also face more challenges as further depreciation of the Naira with uncertainties around oil production and earnings will force the government to overshoot the already high debt service budget for 2024.
According to the analysts at CardinalStone Finance, “the government could profit from positive FX translation following the over 40.0% currency devaluation in 2023 and likely further weakness in 2024.
“However, despite likely inflows of a $3.0 billion Afrexim Bank loan and a $1.5 billion facility from the World Bank, the dollar could trade at N850.0/$ at the official window by 2024-year end. Nevertheless, we are worried that unless the government shows more resolve in curbing oil theft, the proposed 2024 oil inflows could be lower, similar to the trajectory seen in 2023”.
Responding to the planned deficit financing pattern, a professor of Macro-Economics at the Pan-Atlantic University in Lagos, Perekunah Eregha, said: “The budget would rely heavily on borrowing from domestic and multi-lateral agencies. Foreign borrowings have an exchange rate risks and would keep ballooning the cost of funds for private sector funding and SMEs.”
“The rise in borrowings would put pressure on interest rates and has consequences on rate hikes. When this happens, there would be a decline in investments and a shift of interest by investors,” he added.
More borrowings, he explained further, would also create further problems for Nigeria’s foreign reserve while putting more pressure on the volatile exchange rate.
He suggested that the government should have a proper financing strategy and not crowd out the private sector because the nation needs them.
President Bola has made a fresh loan request that will add over N7 trillion to the national debt, which stood at N87.38 trillion as of June 2023, according to the Debt Management Office (DMO). The $8,699,168,559 at the prevailing exchange rate is equal to N7, 009,268,074,728.66; while €100m equals N88, 470,654,870.00. When added to the existing total public debt of N87.37trn, the debt profile will rise to over N94 trillion.
Manufacturers in N166bn loss
Meanwhile, six out of 10 fast-moving consumer goods (FMCG) firms in Nigeria posted losses in the first nine months of this year as their borrowing costs swelled on the back of rising interest rates and naira devaluation, analysis of data from their financial statements shows.
Nestle Nigeria, Cadbury Nigeria, Dangote Sugar Refinery, Nigerian Breweries, International Breweries and Champion Breweries suffered a combined loss of N166.3 billion in the nine months of this year.
In the same period of last year, five of them reported a total profit of N83.9 billion, while International Breweries posted a loss of N2.81 billion. The other four fared better. Guinness Nigeria’s profit declined to N2.59 billion from N2.75 billion. BUA Foods and NASCON Allied Industries saw their profits rise by 53.5 percent and 281.9 percent respectively. Unilever reported a profit of N1.67 billion, compared with a loss of N348 million a year earlier.
Further analysis of the companies’ financial statements show that the six firms that reported losses saw their combined finance cost jump to N325.8 billion, an increase of 681.3 percent from N41.7 billion. Finance costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.
“A lot of manufacturers are getting more money from banks at a higher interest because of the rising inflation. Manufacturers need more working capital because of the high cost of production in order to meet the same production capacity,” said Gabriel Idahosa, the newly elected president of the Lagos Chamber of Commerce and Industry.
The Central Bank of Nigeria (CBN) increased the monetary policy rate, also known as its benchmark interest rate, for the eighth consecutive time in July by 25 points to 18.75 percent. puts more pressure on the margins of FMCG companies, already grappling with double-digit inflation rate and weak purchasing power of cash-strapped consumers.
In August, the Manufacturers Association of Nigeria (MAN) said manufacturing activities continued to suffer due to persisting scarcity of forex and further depreciation of the naira.
“Only 14.7 percent of manufacturers enumerated claim that the rate at which forex was sourced improved in Q2; 66 percent disagreed while 19.3 percent were not sure if forex sourcing had improved in the quarter under review,” it said.
The association added that the lingering FX scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare.
