The Federal Government should look at other alternatives sources to increasing income outside borrowing. Debt service is also gulping a large part of income for the country. Possibility of more Public-Private Partnership (PPP) projects and unification of the naira are expected to define business operations in the second half of the year, writes COLLINS NWEZE.
Over two years ago, Finance Minister, Zainab Ahmed, defended the Federal Government’s borrowing spree. Her defence of excessive borrowing by the government was that while the government borrows to deliver on its promises, it is also mindful of rising debt burden, which eats up over 25 per cent of the country’s yearly earnings.
By April 2019, when Mrs. Ahmed put up that defence, Nigeria had an external debt stock of about $24.27 billion as of December 31, 2018.
According to Debt Management Office (DMO) data, Nigeria’s total external debts stood at $33.34 billion as at December 31, 2020.
A breakdown of the debt profile showed that Nigeria is indebted to the International Development Association (IDA) $11.12 billion; Eurobonds ($10. 8 billion); IMF ($3.53 billion) and Exim Bank of China ($3.26 billion), among others.
The World Bank spokesperson said the World Bank is focused on helping Nigeria lift 100 million people out of poverty by supporting the government in its efforts to promote growth, job creation and shared prosperity sustainably.
The debt statistics is much higher than the last December figure.
Euro bonds, loans from World Bank Group, China and Africa Development Bank Group make up over 80 per cent of Nigeria’s debt stock.
Ahmed said in spite of warnings by the IMF and World Bank, the country was not in any way near a debt crisis.
“The World Bank and IMF are cautioning us on the rate at which we are borrowing. They are also cautioning us on the need to build fiscal buffers because the global economy is going to be facing some risks and we agree with that,” she said.
But analysts have said that for Nigeria to thrive in the second half of the year, it must put a stop to excessive borrowings that is raising debt service costs.
The immediate past Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, expressed concern over excess borrowing by the Federal Government in the midst of dwindling revenue. He said the problem with Nigeria’s debt is that a large part of the country’s income is used to service debts.
He also observed that a large portion of the domestic borrowing was through ways and means which has serious implications for inflation.
Yusuf said the borrowing spree of the Federal Government was hurting the economy as it escalates the already high rate of inflation.
He said the facility usually comes at a huge cost to the taxpayer as the government paid N480 billion interest on the N1.8 trillion facility granted to it through the ways and means window between January and May 2021.
He said Nigeria will do better in the second half if it cuts borrowings and debt service costs.
He expressed concern that government’s excess borrowing has put pressure on the apex bank to exceed the “5 percent ceiling of actual government revenue for the preceding year”, specified in the Central Bank of Nigeria (CBN) Act.
According to him, the fast rate of money supply has adverse effects on the people’s standard of living which has become a source of worry to Nigerians.
“It has inflationary implications; it is not healthy for the economy because inflation erodes the value of people’s income and affects their standard of living. The value of a currency has a lot to do with poverty and welfare. We must be worried about the fast rate of money supply because inflation triggers poverty,” he said.
He added: “Inflationary environment elevates production costs with adverse impact on corporate profitability, thereby making it increasingly difficult for businesses and corporates to meet their debt obligations to lending institutions. This translates into a significant increase in credit loss provisions with adverse impact on banks’ profitability.
“We need to caution the government against being too dependent on the CBN for financing deficits because of the high inflationary impact. Inflation is a terrible thing. When people complain about hunger and poverty, it is because the money they have in their hands cannot buy anything much.”
Yusuf advised the government to prioritise its borrowing in the light of dwindling revenue, noting that up to 90 percent of the nation’s revenue is committed to debt servicing which he said should be a major concern to the Nigerians.
He suggested rationalisation of spending as a way out of excess borrowing, noting that borrowing to fund recurrent expenditure is inimical to economic development.
He advised the government to consider private partnership in funding projects that require huge capital outlay as well as selling idle assets to raise funds for building infrastructure.
On foreign exchange volatility, the immediate past LCCI boss noted that the foreign exchange market faced liquidity constraints in the first half of 2021, and that forex was inadequate to meet rising demand.”
“The supply of foreign exchange was inadequate to meet rising demand. The rate premium between the Nigerian Autonomous Foreign Exchange Rate (NAFEX) and the parallel market rate averaged around 20 percent.
“Several businesses and corporates encountered difficulties in sourcing foreign exchange at the formal segment of the market and were forced to source the greenback at the parallel market.
“Foreign exchange illiquidity aggravates investment risk which could negatively impact asset quality in the banking system. Foreign currency-denominated loans account for about between 30 percent and 35 percent of bank’s loan book. Foreign exchange volatility is associated with risks relating to asset quality and financial stability.”
He said financial service institutions need a conducive business climate to create more avenues for investment and that more profitable asset classes are needed for profitable investments to take place.
He further stressed the need to address the structural, policy, institutional, and regulatory constraints in the business environment which would also result in a reduction in non-performing loans in the sector.
Head of Research, Coronation Asset Management, Guy Czartoryski explained that before the unification of the official and the Nigeria Autonomous Foreign Exchange (NAFEX) rates in May, this year, the limited interventions in the I&E window and the restriction of access to foreign exchange (FX) for the 45 items on the CBN’s restricted list created a surge in demand for FX in the parallel exchange market. This was estimated to cater for nearly 90 per cent of manufacturers’ forex needs.
He said the existence of these rates (official, NAFEX and parallel) negatively affected investor confidence and created opportunities for speculation and arbitrage.
“While the CBN’s official rate has been merged with the I&E Window rate and the NAFEX rate (all three are around N411/US$1), and this was lauded by the World Bank, it was clear that it would not be enough to solve all FX challenges. The unofficial cash parallel market rate stands at N503/US$1,” he said
For him, in the medium term the World Bank expects that the priority is to merge all exchange rates.The World Bank believes that flexibility is the key to driving this, for example by allowing oil companies to sell Forex receipts to I&E window bank participants.This would strengthen the dollar interbank market, making banks go beyond taking buy/sell orders to act as market makers, while the CBN would only intervene at times of large forex fluctuations.
2021 Supplementary Budget
The National Assembly has passed the 2021 Supplementary Budget. It makes provision for vaccine procurement and security-related expenditures. Lawmakers have endorsed the move to raise $6.1 billion via the issuance of Eurobonds.
Yusuf said improvement in vaccination rate is expected to improve economic and business activities in the country, which is positive for the sustenance of growth recovery.
“Inflation is expected to decelerate in the second half of the year on account of base effects and expectations of modest harvest, barring further exchange rate adjustment”.
“With the deceleration in inflation rate, monetary policymakers would be further encouraged to keep policy parameters at current levels. Relative stability is anticipated in the foreign exchange market as CBN sustains its intervention efforts,” he said.
The World Bank said a sudden rise in sovereign borrowing costs could instigate financial pressures in some countries and high debt burdens and fiscal pressures could become more acute.
“At the same time, the pace of vaccinations could surpass expectations, restoring consumer and business confidence and strengthening the recovery. A stronger-than-expected rally in metal and oil prices could boost revenue,” it said.
The bank said growth output in Sub-Saharan Africa shrank an estimated 2.4 per cent in 2020 as a result of the COVID-19 pandemic, a milder-than-expected recession.
“Growth has gradually resumed this year, reflecting positive spillovers from strengthening global economic activity, including higher oil and metal prices, and some progress in containing COVID-19, especially in Western and Central Africa. The pandemic has contributed to wider budget deficits and a spike in government debt, heightening the risk of debt distress in some countries,” it said.
The bank said activity in the three largest economies-Angola, Nigeria, and South Africa-has partially recovered. Many industrial and agricultural commodity exporting countries experienced deep contractions last year.
“In tourism- reliant countries, international arrivals have been at a near-halt, and tourism is likely to remain slow until wider vaccination permits safe reopening to international travel. Despite improvement, COVID-19 has continued to have adverse impacts on health, schooling, investment, and economic growth,” it said.
“In some countries (Angola, Nigeria), accommodative monetary and fiscal policies, currency depreciations, and rising food and energy prices have stoked inflation. Elsewhere (Kenya, South Africa), subdued demand has kept inflation in check. Foreign direct investments in the region have been resilient, recouping about nine- tenths of their pre-pandemic levels, and workers’ remittances to the region have held up better than expected,” it added.
GDP to grow by 1.8 per cent
The World Bank says Nigeria’s economy is expected to grow at 1.8 per cent in 2021 and edge up to 2.1 per cent next year.
The World Bank June 2021 Global Economic Prospects released in Washington D.C, indicated that achieving such growth rates will be dependent on higher oil prices, structural oil sector reforms, and market-based flexible exchange rate management.
“Elsewhere in the region, growth in industrial commodity exporters excluding Angola, Nigeria and South Africa is expected to pick up to 2.4 per cent in 2021 to 22. In agricultural commodity exporters, growth is forecast to resume at a faster pace of 4.5 per cent a year on average in 2021 to 22, the bank said.
The bank also pegged global economy growth at 5.6 per cent in 2021, although many emerging market and developing economies continue to struggle with the COVID-19 pandemic and its aftermath.
World Bank Group President, David Malpass, said that while there were welcome signs of global recovery, the pandemic continues to inflict poverty and inequality on people in developing countries around the world.
He said that globally coordinated efforts were essential to accelerate vaccine distribution and debt relief, particularly for low-income countries. “As the health crisis eases, policymakers will need to address the pandemic’s lasting effects and take steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability.”