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Nigeria’s Debt Burden to Hit N19.3tn by December

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  • Nigeria’s Debt Burden to Hit N19.3tn by December

Analysts have cautioned the government against plunging the nation into another debt trap, even as there are plans to raise funds from external sources to finance critical infrastructure.

If the federal and state governments continue to rely heavily on debt instruments for the financing of the country’s infrastructure needs, then, Nigeria’s total debt burden will be hitting the N19tn mark by the end of this year.

Based on figures obtained from the Ministry of Budget and National Planning, the country’s total debt stock is expected to rise by N6.72tn this year from the 2016 figure of N12.58tn, making the total debt liability to rise to N19.3tn by the end of 2017.

The frequency of borrowing by the federal and state governments has become a source of worry to many analysts, who sound a note of caution that the country may be heading for another debt trap if restraint is not exercised.

According to the Economic Recovery and Growth Plan, Nigeria’s public debt has increased in recent years as the Federal Government has increased borrowing to finance budget deficits owing to declining revenue.

The country’s domestic debt profile is expected to rise by N2.34tn to N12.43tn this year from N10.09tn in 2016, while the foreign component is being projected to increase by N4.38tn from N2.48tn to N6.86tn.

The document stated that the focus of the government’s debt would be shifted from domestic borrowing to foreign sources, as loans from international financial institutions are cheaper and have longer repayment periods.

For instance, the ERGP stated that while the proportionate share of foreign financing would increase from the current level of about 28 per cent to almost 72 per cent in 2020, that of domestic financing would decrease gradually from about 54 per cent in 2016 to about 26 per cent by 2020.

The Federal Government is currently seeking $29.96bn in loans from the World Bank, African Development Bank and Japan International Cooperation Agency.

The other international financial agencies the government plans to borrow from are the Islamic Development Bank and China Exim Bank.

Some of the projects to be funded by the loans are the Mambila hydroelectric power, $4.8bn; railway modernisation (Calabar-Port Harcourt-Onne Deep Seaport segment), $3.5bn; Abuja mass rail transit project (phase two), $1.6bn; and Lagos-Kano railway modernisation project (Lagos-Ibadan segment, double track), $1.3bn.

The rest are Lagos-Kano railway modernisation project (Kano-Kaduna segment, double track) $1.1bn; ‘others’, $6bn; Eurobond, $4.5bn; Federal Government Budget Support, $3.5bn; social (education and health), $2.2bn; agriculture, $1.2bn; and economic management and statistics, $200m.

The Budget and National Planning ministry said with the shift in focus to more foreign borrowing, the domestic financing sector would be more available and accessible to the private sector, thus avoiding crowding out.

This, it added, would provide the private sector with a leading role to drive economic growth, create jobs and reduce the rate of poverty in the country.

The ministry noted that the projects that would be financed with external loans would be those that would support non-oil exports, and/or reduce import-dependence such that there would be no risk of external debt overhang.

Reacting to the development by the Federal Government, some financial analysts, who spoke to our correspondent, said borrowing might be a last resort by the government to survive its revenue challenges.

They said there was a need for the government to urgently begin a readjustment of its fiscal position in a way that would enable it generate more revenue from taxes.

The Director-General, Institute of Fiscal Studies of Nigeria, Mr. Godwin Ighedosa, said the expenditure of the government needed to be reduced in a manner that would reflect the rate of revenue decline.

He stated, “We have so much relied on oil revenue in the last 45 years and with the decline in oil revenue, time has come now for us to review our fiscal position.

“There is a need for reform of the country’s tax administration system to enable the Federal Government to raise more revenue from Capital Gains Tax. Our tax to Gross Domestic Product ratio is one of the lowest in the world and we need to address that.”

The Registrar, Chartered Institute of Finance and Control of Nigeria, Mr. Godwin Eohoi, said the need to get the economy back again might have influenced the decision for huge borrowing.

He stated that while borrowing in itself was not a bad economic strategy, the way in which such borrowing was being used was important.

Eohoi said, “I am not worried about borrowing because debt is a leverage, but it depends on what the loan is used for. It must be used for productive purposes and not to finance recurrent expenditure.

“Oil prices are just beginning to bounce back and so I see the borrowing as a last resort to prevent the total collapse of the economy since we had a serious revenue shortfall. When you have a decline in revenue, you have to resort to borrowing.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Nigeria’s Rigid Forex Policy Discouraging Investors, Fueling Inflation – World Bank

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The World Bank has blamed the Central Bank of Nigeria’s rigid forex policy for the drop in Nigeria’s capital importation and rising inflation rate.

The bank disclosed in its November report, Nigeria Development Update.

Explaining modalities for its position, the World Bank stated that there had been constant pressure on the Nigerian Naira with the current forex policy, forcing the central bank to consistently increase its nominal official exchange rate in an effort to ease some of the pressure.

This, it blamed on the rigid foreign exchange management system of the Central Bank of Nigeria, saying the system has also been responsible for the rising inflation rate in Nigeria.

The report read in part, “The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.

“Pressure on the naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 per cent in March 2020, five per cent in August 2020, and seven per cent in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation.”

The World Bank further stated that the central bank foreign exchange system needs to be more flexible to withstand external shocks, especially given Nigeria’s mono-product nature. It added that the NAFEX rate does not reflect the true market rate but the central bank managed rate.

It read in part, “While the CBN supplied an average of $2.5bn to the Investors and Exporters forex window in the months just prior to the COVID-19 crisis, it only supplied an average of $0.5bn in the months thereafter.

“The NAFEX rate, which is now the guiding exchange rate for the economy, continues to be managed and is not fully reflective of market conditions. The parallel market premium over the NAFEX rate reached 29 per cent in August 2021 after the CBN cut off its weekly supply of $20,000 per bureau de change. The CBN has intermittently supplied forex to BDCs since 2005, providing ample opportunities for currency round-tripping.”

The institution however advised that Nigeria adopt a more predictable, transparent and flexible foreign exchange management system in order to attract and sustain private investment flows.

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Nigeria’s Non-oil Revenue Now N1.15 Trillion – Minister of Finance

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Mrs. Zainab Ahmed, the Minister of Finance, Budget and National Planning, has said that Nigeria’s non-oil revenue is now N1.15 trillion, representing 15.7 percent above the country’s target. This, she claimed, was a result of the federal government’s efforts at diversifying the nation’s economy.

Mrs. Ahmed disclosed this at the Institute of Directors (IoD) 2021 Annual Directors Conference which was held on Wednesday in Abuja.

According to the News Agency of Nigeria (NAN) the event with the theme: “Creating the Future: Deepening the Corporate Governance Practice through Multi-Sectoral and Multi-Generational Collaborations,” was meant to discuss economic development.

Mrs Ahmed added that the recent development was in line with President’s commitment to further diversifying the Nigerian economy which is heavily dependent on oil. She observed that Nigeria was showing resilience in recovery from recession from coronavirus (COVID-19) pandemic which intensely affected global economies.

The minister said the federal government alongside the private sector had implemented a wide range of monetary measures to stimulate economic recovery, growth and development, job creation and improved standards of living.

She also explained that the government was doing everything to improve and diversify Nigeria’s revenue generation.

Nigeria was quickly able to exit recession and is on her way to path of sustainable growth and we are intensifying efforts to grow and diversify our revenue sources to grow revenue from the current 8 per cent.”

“Our non-oil revenues have grown to N1.15 trillion, representing 15.7 per cent above set target. We are working on the 2021 finance bill and it’s nearing completion. Also, the recent approval of the medium-term national development plan is an important milestone of Buhari’s commitment to delivering sustainable growth and we require strong support and monitoring during implementation,” she said.

Mrs Ahmed reinforced the government’s decision to do something about infrastructure and reduce the cost of production for businesses in the country.

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Intra-Regional Trade Potential a Key Focus in New Report

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A new focus report, produced by Oxford Business Group (OBG) in partnership with the African Economic Zones Organisation (AEZO), shines a spotlight on the continent’s rapidly developing industrial sector, which is poised to become a key driver of broader economic growth as regional integration increases.

Titled ”Economic Zones in Africa – Focus Report”, the report was launched at the AEZO’s 6th Annual Meeting II, which took place on November 25 at the African Continental Free Trade Area (AfCFTA) Secretariat office in Ghana, with participants also able to attend remotely. The meeting was held under the banner “Connecting African Special Economic Zones (SEZs) to Global Value Chains at the era of the AfCFTA” and explored a range of topical issues relating to SEZs, from their potential to boost trade to the impact of Covid-19 on the continent’s supply chains.

The focus report examines the wealth of benefits that the AfCFTA is expected to deliver to both Africa’s economic zones and the businesses located in them, which range from greater market access to a reduction in trade barriers and lower production costs.

The disruption that the pandemic brought to supply chains and the opportunities emerging from the health crisis for businesses to become part of nascent regional value chains across a more closely connected continent are a key focus.

The report also charts the digital transformation taking place in many of Africa’s economic zones, as businesses make the move away from traditional segments to high-tech processes and digital services, adding value to their offerings in the process.

In addition, it provides in-depth analysis of the drive evident among many SEZs to put environmental, social and governance principles and sustainable business practices at the heart of their strategies, at a time when ethical investment and alignment with the UN Sustainable Development Goals are high on the global agenda.

The report includes in-depth case studies and viewpoints by representatives from key industry players namely: Tanger Med; Polaris Parks; Lagos Free Zones; Ghana Free Zones Authority; Misurata Free Zone; and Sebore Farms.

It also includes a contribution from Ahmed Bennis, Secretary General, AEZO, in which he highlights the role that SEZs are playing in the continent’s industrial transformation and the importance of supporting their development.

“Economic zones can play a game-changing role in Africa’s diversification and inclusion by providing end-to-end solutions and services that support industrial upgrades and increase countries’ attractiveness for investment,” he said. “With the implementation of AfCFTA and the post-Covid-19 recovery that the world is beginning to experience, we believe that real investment opportunities exist in Africa at this moment, which can translate into job creation and social and economic development. Africa has resources that need to be developed and economic zones can play a key role in this.”

Bernardo Bruzzone, OBG’s Regional Editor for Africa, added that while African economic zones had experienced production problems during the pandemic due to global supply chain disruptions, ongoing remedial action, including new infrastructure and human capital development, would help provide resilience against future external shocks.

“Africa’s real GDP growth is forecast to reach 3.4% in 2021, with an increase in intra-regional trade and improved connectivity among the facilitators of economic recovery,” Bruzzone said. “Looking ahead, we see economic zones as having a key role to play in helping the AfCFTA achieve its potential through the development of new strategies that will lead to a more diverse, higher-value range of exports.”

The study forms part of a series of tailored reports that OBG is currently producing with its partners, alongside other highly relevant, go-to research tools, including a range of country-specific Growth and Recovery Outlook articles and interviews.

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