Fiscal policy hobbles CBN battle to save naira

BY EMEKA EJERE

Intensified efforts by the Olayemi Cardoso-led Central Bank of Nigeria (CBN), to put a stop to persistent slide in the value of the naira against the U.S dollar is not yielding the desired result, at least for now, due to poorly coordinated fiscal policy of the Federal Government.

Nigeria’s annual inflation rose in September to its highest level in about two decades at 26.72%, while the naira has continued to depreciate against the dollar at the parallel and official sections of the foreign exchange market.

The September inflation rate rose for a ninth straight month from August’s 25.8%, the National Bureau of Statistics (NBS) said, with millions of Nigerians impoverished due to the impact of President Bola Tinubu’s reforms.

Tinubu has been under pressure to ease economic hardship after scrapping a decade-old petrol subsidy that tripled prices and allowed the naira to depreciate more than 50%, sending prices surging in Africa’s top oil producer.

Last week, the CBN pledged to intervene in the country’s foreign exchange market occasionally to boost liquidity, after ending an four-year restriction on 43 items, including rice, poultry and cement, from accessing foreign exchange on the official window.

But the situation is getting even worse, with the naira on Thursday dropping to a new low of N1,170 per dollar at the parallel market, depreciating by N105 or 9.8 percent compared to the N1060 reported on Wednesday.

However, President Tinubu has defended his policy reforms and vowed not to go backwards despite strong opposition from labour unions, who say they have hurt the poor and should be reversed.

Notwithstanding the volatility of the foreign exchange market, the Federal Government last week, benchmarked its 2024 budget on a crude oil price of $73.96 per barrel and an exchange rate of N700 to the dollar, while projecting N26 trillion for the fiscal year.

The Minister of Budget and Economic Planning, Atiku Bagudu, who spoke after the Federal Executive Council (FEC), meeting presided over by President Tinubu at the Council Chambers of the Presidential Villa, Abuja, said the council also approved the Medium-Term Expenditure Framework/Fiscal Strategy Paper for 2024-2026.

“The aggregate expenditure is estimated at N26.01tn for the 2024 budget, which includes statutory transfers of N1.3tn, non-debt recurrent expenditure of N10.26tn. Debt service is estimated at N8.25tn as well as N7.78tn being provided for personnel pension cost,” he said.

Explaining the increased debt service, Bagudu said it was, “Because N22.7tn Ways and Means was securitised, meaning it became a Federal Government debt at 9 per cent.”

Bagudu also said the Federal Government would present a supplementary budget given its growing obligations since the removal of petroleum subsidy. “Yes, there would be a supplementary budget because there are continuing obligations and there are responses to security, which can be immediate,” he said.

This is just as the Federal Government approved an application for $1.5 billion in financing from the World Bank and another $80 million financing from the African Development Bank (AfDB).
According to the Minister of Finance, Mr. Wale Edun, the funding will be provided through the International Development Association, known for its virtually interest-free loans. He explained that in a world grappling with high interest rates to combat inflation, Nigeria’s efforts to restore economic balance and prudent financial management have garnered support from multilateral development banks.

Edun noted that the World Bank was willing to provide $1.5 billion in concessional financing, which is not only affordable but also disbursed relatively quickly.

“Nigeria has been able to make the kind of macro-economic moves and take the tough decisions to restore balance in the economy that has garnered and elicited support from the multilateral development banks”, he said.
More sustainability questions

Nigeria’s total public debt, according to the Debt Management Office (DMO), rose to N87.38 trillion at the end of the second quarter of this year. This represents an increase of 75.29 per cent or N37.53 trillion, when compared to the N49.85 trillion recorded at the end of March 2023.

Data from the DMO further show that Nigeria’s total domestic debt is N54.13 trillion, while its total external debt is N33.25 trillion. In its 2022 Debt Sustainability Analysis Report, the DMO warned that the Federal Government’s projected revenue of N10 trillion for 2023 could not support fresh borrowings.

According to the office, the projected government’s debt service-to-revenue ratio of 73.5 per cent for this year is high and a threat to debt sustainability. It noted that the government’s current revenue profile could not support higher levels of borrowing.

However, the International Monetary Fund (IMF) has said Nigeria’s N87.3 trillion ($113.4 billion) total public debt position is manageable and does not pose any urgent risks to the economy.

During the presentation of the Economic Outlook for Sub-Saharan Africa at the IMF/World Bank Annual Meetings in Marrakesh, Morocco last week, Abebe Selassie, Director of IMF African Department, emphasised that Nigeria’s primary concern regarding its debt position is the escalating cost of debt servicing.

He pointed out that Nigeria struggles to generate sufficient tax revenue for debt servicing and essential infrastructure investments, clarifying that the IMF did not know about any ongoing debt discussions, debt profiling, or debt restructuring in Nigeria.

Ambitious but realistic

Director of the Centre for Economic Policy Analysis and Research (CEPAR), University of Lagos, Prof. Ndubisi Nwokoma said with more money in the hands of the government following the subsidy removal, there was the need to raise the budget. According to him, the oil benchmark of $73.96 per barrel as well as the forex projection is realistic.

Nwokoma said: “At face value, the benchmark is realistic because with what is happening in Gaza, which may not end immediately because Hezbollah might also join, I don’t know and as such, there is volatility in the oil market and definitely it would be in favour of oil exporting countries just like it happened in 1973 during the Arab/Israeli war.

“Currently, it is about $90 per barrel. With what is happening in the Middle East, one expects that $73 is realistic. I think the benchmark is realistic. The increase in the total budget is also realistic because the government is now going to get more naira because the exchange rate that was about N461 before is now about N700.

“So definitely, the government will have more money. Money that used to be in the hands of people would now be in the hands of the government by virtue of the fuel subsidy removal and also harmonisation of the exchange rate.

“With more money, the government can handle the extra debt service obligations, whether for ways and means as well as the capital and recurrent expenditure. So it makes sense because if they don’t increase the budget when they have more money, it would raise some questions.”

Foreign investor apathy

Meanwhile, some experts have expressed concerns that foreign investors may continue to avoid Nigeria into 2024 due to currency instability and other economic concerns, both internally and globally.

This projection was shared at the 2023 African Economic and Capital Markets Conference themed ‘From geopolitics to geoeconomics: Navigating uncertainties across Africa’ organised by Vetiva Capital Management Limited on Wednesday.

In his review of the capital markets in the West African sub-region, Head of Research, at Vetiva Capital, Luke Ofojebe said, “So far this year, the markets have been dominated by local investors as foreign investors are not looking at coming in due to currency instability. Looking at the performance of the market, we have seen declining margins as a result of high operating costs due to the removal of the fuel subsidy and high energy costs due to the hike in electricity tariffs leading to inflationary pressure.

“However, the hawkish stance of the Central Bank of Nigeria has resulted in higher interest income for banks. We expect this trend to continue into 2024 as the CBN is expected to sustain the fight against inflation.”

He added, “Also, we are now seeing that the U.S Federal Reserve will continue its rate hike into the first half of 2024, so we will see capital flight. Currency weakness is still a major concern. We will see a downward trend till the first half of 2024, until a dovish move from the U.S Fed in the second half of 2024, and then we may begin to see an appreciation.”

On ways to shore up the value of the naira, Ofojebe said, “If the government wants foreign investors to come into the market, it needs to solidify the source of forex receipts, which is oil in this case. The government needs to ramp up oil production to about 1.8mbpd to strengthen the Naira.”