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Economists challenge N1400/$ benchmark in 2025 budget - PUNCH
By Oluwakemi Abimbola
As the naira struggles to gain stability amid projections of depreciation, the Federal Government in the recently released Medium Term Expenditure Framework pegged the local currency at N1400 to a dollar, an assumption dismissed by analysts as mere optimism, OLUWAKEMI ABIMBOLA reports.
Economists and financial market analysts have dismissed the Medium Term Expenditure Framework which proposed a 2025 budget of N47.9tn as impossible to achieve.
The Federal Executive Council recently approved the MTEF which contains some very ambitious targets. Economists likened it to the $1tn economy goal by President Bola Tinubu by the end of the decade.
In the proposed budget, the naira was pegged at N1400 to the dollar and the crude oil benchmark at $75 just a few weeks after Donald Trump emerged as the next President of the United States of America.
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Trump’s stance on increasing local production portends a likely drop in the price of oil globally and a stronger dollar likely to have a lulling effect on the naira in the short to medium term.
According to Bloomberg, the naira pegged for years at an artificially high level against the dollar, has since lost about 70 per cent of its value as of September.
The foreign exchange rate in Nigeria had been managed for years to give the naira a fighting chance and provide stability in the market. However, in mid-June 2023, the Central Bank of Nigeria announced the harmonisation of the segments of the FX market which led to a significant slide in the naira value.
Before then, President Tinubu announced the scrapping of fuel subsidy at his inauguration. The two policy reforms have exerted significant pressure on the Nigerian economic landscape.
By the end of 2023, Bloomberg said that the naira had fallen by 55 per cent to N1,043 per dollar at the official market making it the third worst-performing currency in the world behind the Lebanese pound and the Argentine peso.
It was projected that the naira would depreciate further in 2024 and it did. Throughout 2024, the naira has struggled to stabilise against the dollar amid ongoing market volatility.
In early April, the naira briefly crossed below the N1,100 mark, even closing the second week at N1,002.
On April 20th at the World Bank/IMF Spring Meetings in Washington DC, United States, the Governor of the CBN, Olayemi Cardoso, said that the foreign exchange reforms are paying off.
He said, “April saw the naira emerge as the best-performing currency globally, supported by bullish sentiment from leading international investment institutions. Our FX market is experiencing robust activities with turnover reaching levels not seen in over seven years.”
At the meeting, Cardoso also asserted that the decline in external reserves was not due to the apex bank defending the naira rather the decline was due to debt repayments and other standard financial obligations.
“The shift you see in our reserves has little or nothing to do with defending any naira and that is certainly not our objective. What you see in the shifts in our reserves is the shift you will find in any country’s reserve situation where for example debts are due and certain payments need to be made and they are made because that is also part of keeping your credibility intact,” Cardoso said.
Despite the positive outlook of the apex bank, the naira has taken a beating in the foreign currency market. It has steadily weakened, reaching N1,668.97 by the end of September.
FMDQ Exchange, which houses the Nigerian Autonomous Foreign Exchange Market, revealed that the naira depreciated against the dollar in October 2024 as volatility in the forex market was sustained.
In its monthly report, FMDQ said, “In the FX market, the Naira depreciated against the US Dollar, with the spot exchange rate ($/N) increasing by 2.38 per cent ($/N38.82) to close at an average of $/N1,631.71 in October 2024 from $/N1,592.89 recorded in September 2024.
“Further, exchange rate volatility continued into October 2024 as the Naira traded within an exchange rate range of $/N1,552.92 – $/N1,675.49 compared to $/N1,539.65 – $/N1,6667.42 recorded in September 2024.”
FMDQ data indicated that the naira closed trading for October at N1,675.49/$ well above N1600 despite the efforts of the Central Bank of Nigeria to strengthen it.
In November, the CBN fiat continued to trade above N1600/$ at both parallel and official markets.
As the naira fights for stability, a global rating agency, Fitch Ratings, said Nigeria’s foreign exchange market has yet to stabilise despite several initiatives by the CBN, a view which contradicts a report by the International Monetary Fund, which suggested that the naira was showing signs of stability, owing to recent interest rate hikes and CBN efforts to address outstanding FX obligations.
Fitch’s latest rating of Nigeria suggests a more cautious outlook. The rating agency commented, “The Central Bank of Nigeria is initiating several measures to address FX liquidity challenges and formalise FX activity to support the currency. These include plans to introduce an electronic FX matching platform for all FX transactions effective December 1, 2024, to provide intra-day prices in real-time and enhance transparency.
“The CBN has also raised the monetary policy rate five times by a cumulative 850bp to 27.25 per cent since February 2024. However, Fitch believes that the FX market has yet to stabilise, and the ongoing flexibility of the exchange rate remains to be tested.”
Stears Business in their Exchange Rate Forecasts: 5-Year Outlook for Key African Economies published in September, revised its previous projection for the naira on the back of the evolving macroeconomic landscape, which is characterisedby elevated inflation risks, fiscal policy uncertainty, social tensions, weak investor sentiment, debt sustainability concerns, and sluggish output growth.
“From the initial projection of crossing the N1,500/$ mark by 2028, we now predict that the naira’s official rate will surpass N2,000/$ by 2027. Notably, the naira’s annual average depreciation rate over the next five years (10.29 per cent) will be slower than 15.61 per cent five years prior.
“A significant country risk we factored in our analysis is the potential escalation of Nigeria’s debt situation. We anticipate the gross public debt (% of GDP) surpassing the 50% IMF threshold amid weak government revenue due to sluggish oil production and export earnings, leading to a credit rating downgrade over the forecast period.
“This downgrade will negatively impact the currency’s performance, offsetting any gains that could emanate from a weaker US dollar as the global monetary policy environment is expected to loosen over the 5Y forecast timeframe,” their projection said.
The market intelligence firm, however, said that it will reassess and consider a more favourable outlook for the naira if oil production consistently exceeds the OPEC+ benchmark of 1.5 million barrels per day if the capital importation mix shifts towards more stable foreign direct investments, and if government spending becomes more impactful, with a positive multiplier effect on the real sectors of the economy to boost productivity.
Meanwhile, BMI, a division of Fitch Solutions, expects the local currency to weaken to N1,993/$ by 2028.
The last Business Expectations Survey released by the Central Bank indicated that respondents expect the naira to depreciate in the current month (October), the next, and the next three months but appreciate in the next six months.
Going against the projected further weakening of the naira was economist Bismarck Rewane, who anticipates that the naira will strengthen in January 2025 compared to its current weak trading position.
Speaking during a presentation at the 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.”
Rewane added that the exchange rate is the major cause of inflation in Nigeria, noting that a partial recovery of the naira will not only help reduce inflation but will curb money supply saturation in the money market.
Amid these projections, the 2025-2027 MTEF/ Fiscal Strategy Paper, the framework for economic planning showed the 2025 budget proposals by the federal government with total expenditure pegged at N47.90tn, higher than the N28.7tn initially approved 2024 budget which was later increased due to supplementary approval to N35.06tn and extending a trend of rising government’s spending plans amidst dwindling revenues.
According to Cowry Research, the 2025 proposed budget is not only ambitious but risky.
“The sustained increase in recurrent expenditure over capital spending, with a ratio of 1.04x, raises concerns about inefficient allocation and inflationary pressures, particularly with inflation currently exceeding 30 per cent (approximately 33.88 per cent). The government’s inflation projection of 15.75 per cent appears overly optimistic given the current trends.
Moreover, the aggressive revenue targets seem overly ambitious, particularly given Nigeria’s historical challenges with revenue underperformance. Between January and August 2024, aggregate revenue was N12.7tn, raising doubts about achieving the projected N34.82tn for 2025.
“The assumptions underpinning oil production and pricing also carry risks. While the $75 per barrel benchmark appears reasonable, downside risks include weak demand from China, rising global supply from the US, Canada, and Brazil, and the potential easing of OPEC+ production cuts.
“Similarly, the oil production target of 2.06 mbpd seems overly optimistic, as current production levels hover around 1.3 mbpd (excluding condensates), according to official data,” the analysts said in their weekly report.
Head of Financial Institutions Ratings at Agusto & Co., Ayokunle Olubunmi, echoed similar sentiments about the optimistic assumptions saying, “If you look at the assumptions, some of them are optimistic. You cannot be saying that you expect the dollar-to-naira rate to be N1400. That is not possible. We all know that Trump has promised to lower fuel prices, so there is a high probability that oil prices will be lower next year and even raising those revenues, I think will be very difficult.”
Economist Marcel Okeke, in his comments, dismissed the N1,400/$ peg.
“The N1,400 is not realistic. If they have pegged it at N1600, where we are now, it can be accepted but N1,400 is too optimistic. And the pegged price of oil is neither here nor there.”
Okeke who is also a sustainability expert added, “Talking about debt, we are putting ourselves into a bottomless pit in terms of borrowing and piling up debt. Some people are already asking, how do you pay back? They just keep borrowing, and the national assembly is just there to say go ahead. Also, the more the naira depreciates, the more the volume of debt and the burden of debt servicing and you know how the naira has been going down in the past year and from what I see now, there is nothing to make it strengthen.”
The Lagos Chamber of Commerce and Industry reacting to the budget said that the N1,400 foreign exchange rate projection in the proposed 2025 budget is unrealistic.
LCCI Director-General, Chinyere Almona, urged the government to reassess the assumptions for the 2025 budget due to the challenges posed by high inflation and the exchange rate.
“The approved 2025 – 2027 MTEF proposed that the federal government will spend N47.9tn to run the economy in 2025. A review of the key parameters and assumptions on which the 2025 budget is being proposed appears to be too optimistic in the face of current realities as recorded in the economic and social indicators.
“Particularly, the assumption of an exchange rate at N1,400 is too fragile to work with against the current average of above N1,600 to a Dollar in both the official and parallel markets. Assuming an inflation rate of 15.8 per cent does not reflect the unabating factors pushing up both the headline and food inflation. With inflation rising to 33.88 per cent as of October 2024, it is unrealistic to assume a steep 51 per cent crash within a year,” a statement from the LCCI said.
Whether the National Assembly which has yet to deliberate on the MTEF will adjust these assumptions is yet to be seen but adjustments to the proposed budget are almost certain given their historical tendencies.