MARKET NEWS

Naira devaluation: 2025 budget lesser in value, economists say - PUNCH

NOVEMBER 20, 2024

Economic analysts have indicated that while the nominal value of the 2025 budget has significantly increased, it has decreased by 18.25 per cent in dollar terms compared to the 2022 estimate.

They stated this following the approval of the Medium-Term Expenditure Framework for 2025-2027 by the Federal Executive Council, which indicated a proposed budget of N47.9tn for the 2025 fiscal year.

The government pegged the exchange rate for the next year’s budget at N1,400/$, bringing it to $34.14bn in dollar terms, while the 2022 N17.126tn estimate was computed using N410.15/$ exchange rate, which translated to $41.76bn.

For the N21.83tn budgeted for 2023, the exchange rate was pegged at N435.57/$, bringing the dollar value of the budget to $50.11bn.

1.4M

393 So This Happened (EP 256) Reviews SERAP Demands For Answers Over Missing N100bn Dirty Notes, Others Next Stay

The 2024 budget, the first under President Bola Tinubu’s administration and signed on January 1, 2024, was N28.78tn at a dollar rate of N800/$, bringing its dollar value to $35.97bn.

“The proposed budget is about N47.9tn, which sounds very huge but it is among the least in the last five years. It is a very small budget. I think it is smaller than the 2022 budget. Why? Convert it to dollars. That budget is about $28bn (at the current market rate of N1652.25). Do you know the reason? Devaluation,” the Chief Economist and Partner at SPM Professionals, Paul Alaje, told The PUNCH.

The Minister of Budget and Economic Planning, Atiku Bagudu, after the FEC meeting, revealed that the government had pegged the crude oil benchmark at $75 per barrel, with an oil production target of 2.06 million barrels per day.

The budget also aims for a gross domestic product growth rate of 6.4 per cent.

“The fiscal objectives were conservative because we want to ensure that we study the course much as we believe the projections will be exceeded. The budget size that was approved for presentation to the National Assembly in the MTEP is N47.90tn, with new borrowings of N9.2tn to finance the budget deficit in 2025.

“We need to sustain the market deregulation, commendable market deregulation of petroleum prices and exchange rate, and to compel the Nigerian National Petroleum Corporation Limited to lower its oil and gas production cost significantly, and even to consider the need to amend the relevant sections of the petroleum industry act 2021 to address the significant risk to Federation.

“The Federal Executive Council approved the Medium-Term Expenditure Framework and the physical strategy paper, and it will be submitted to the National Assembly. This is in addition to bills that are already at the National Assembly, the economic stabilisation bills, and tax reform bills, which we believe will have a very, very strong growth in 2025,” the minister stated.

Meanwhile, Alaje said, “What we had with FEC should have been done in August or September at the latest. This is the process: a mid-year review of the current budget. That review, along with other documents, will be used for MTEF, and from MTEF we are going to have a 2025 budget, which will be taken to FEC for approval.

“When the FEC approves, it will be taken to the National Assembly, that is the MTEF. From that document, we will know in the next three years how much should we be borrowing and what kind of investment should we be making. Then the review of the current budget would tell us what we should be doing for the year-end and what the next year’s budget should look like.

“It is when we put those together that it would be sent to the National Assembly, not later than October so that the lawmakers can have time to look at the budget before they go on recess in December. I fear that we might have another if you are in support, say aye, if you are not in support, say nay’ session.’ No comments and we pass the budget.

“Along the line, we start asking questions because due diligence has not been done. That is why I’m calling on civil society and well-meaning Nigerians to prevail. The budget is our largest fiscal document, we cannot take it with levity.

The NASS must become more thorough in perusing the budget. How will the National Assembly do justice to the appropriation bill in the few weeks we have left this year?”

He added that while the budget looked bigger than the last, it was smaller in dollar terms due to the naira devaluation.

However, the Head of Financial Institutions Ratings at Agusto & Co., Ayokunle Olubunmi, dismissed the assertion, saying that the legal currency in Nigeria was the naira.

Related News

“While this assertion is right to an extent, what we spend in Nigeria is naira and also, you must realise that it is not enough to budget but how much of the budget can you implement effectively. If you look over the years, budget implementation, especially the capital expenditure side, has been very poor. They only implement the recurrent side. What is the purpose of budgeting a lot when you know that you cannot achieve it?

“When you look at the performance of the 2024 budget, it has not been great, especially in terms of government revenue. How much you budget for is a function of how much you have in terms of revenue and how much you can borrow. So, you cannot say that because you want to increase your budget in dollar terms, turn it into something you cannot even achieve.

“If you look at the 2024 budget, if you look at the assumptions, some of them are optimistic. You cannot be saying that you expect the dollar-to-naira rate to be N1400. That is not possible. We all know that Trump has promised to lower fuel prices, so there is a high probability that oil prices will be lower next year and even raising those revenues, I think will be very difficult,” he expounded.

Since the harmonisation of the different segments of the market in June 2023, the naira has struggled against the dollar and was ranked among the worst-performing currencies in the sub-Saharan Africa region by the World Bank in October.

Amid projections of a weaker naira, economist, Bismarck Rewane, projected that the naira would strengthen further in January 2025.

Speaking during a recent presentation at Lagos Business School, Rewane, who is also the Managing Director of Financial Derivative Company, affirmed, “There is no economic justification for the naira to be trading at less than 30 per cent of its fair value in less than twelve months.”

He expressed a strong belief that the naira would recover some of its losses in January for four reasons.

“The differential between the parallel market and the official market rate has virtually disappeared. This was responsible for a minimum of 30 per cent of the value erosion due to speculative round-tripping; The supply of dollars into the market, which is a function of oil production and prices; The CBN should and we believe will announce a programme of dollar sales to the market similar to the T/Bill auction. This will help reduce market uncertainty; the forex market structure will be more transparent,” he said.

Meanwhile, BMI Research, a subsidiary of Fitch Solutions, had predicted that the naira would slide to as low as 1,993/& by 2028, severely impacting Nigeria’s pharmaceutical industry to import medical devices.

Reacting to the proposed budget, analysts flagged the dollar peg as not only unrealistic but also a business-as-usual fiscal document with no bite.

Analysts at Afrinvest Research described the MTEF as an ambitious document that sets the tone for “fiscal business as usual in 2025”.

In their weekly market report, the analysts commended the Federal Government for its efforts towards preserving the January to December fiscal cycle.

“That said, we believe the fiscal authorities’ expansionist stance on driving expenditure may be at odds with the monetary authority’s efforts to curb inflation. Ideally, a coordinated fiscal response should focus on streamlining expenditures, narrowing the budget deficit, and ensuring sustainable debt management to complement monetary tightening effectively.

“Beyond the policy mismatch, we are concerned about the realism of assumptions driving expectations for 2025. For instance, the crude oil production forecast of 2.06mbpd may be overly optimistic considering that average production including condensates in 2024 has plateaued at 1.52mbpd as of September, after dropping from a peak of 1.64mbpd in January. Also, there is a weak historical basis for the optimism considering that production has faltered since the pandemic; 2020 (1.83mbpd), 2021 (1.62mbpd), 2022 (1.38mbpd) and 2023 (1.47mbpd).

“Similarly, macroeconomic projections, including the 4.6 per cent GDP growth rate, maybe daunting without dramatic and sustained growth in the oil sector. Additionally, inflation and exchange rate targets of 15.75 per cent and N1,400/$, respectively, diverge significantly from consensus expectations, which account for ongoing structural challenges.”

They also highlighted the lower capital expenditure in the proposed budget, evidenced by the decline of allocation from 42.3 per cent in 2024 to 34.4 per cent of the total budget in 2025, while debt servicing, MDA personnel costs, and MDA overhead costs as a share of total spend are expected to increase.

The analysts expressed concern that the fiscal deficit (projected to be N16.0tn by 2024-end) could rise even further in 2025 owing to overarching pressure from growing expenditure bills over the weak revenue base of the Federal Government.