Moody’s and Nigeria’s quest for economic prosperity - PUNCH
BY Oludare Mayowa
moody’s Investors Service, a global credit rating agency, last week downgraded Nigeria’s sovereign rating due to what it described as the increasing fragility of the country’s public finances as regards to the dependence of the Federal Government on the Central Bank of Nigeria’s ways and means to finance its operations.
From the rating agency’s point of view, Nigeria in the past three years has largely depended on the CBN to raise funds to bridge the gap in revenue and its expansionary spending and this is seen as inimical to the economic stability of the country.
Moody’s also noted the increased vulnerability of the economy to an adverse change in capital flows in light of Nigeria’s increasing reliance on foreign investors to fund its foreign exchange reserves.
Simply put, the agency is concerned that Nigeria is not earning enough, nor saving from its foreign exchange earnings to the extent that the country is currently depending on capital importation by offshore portfolio investors to shore up its forex reserves.
The report is a negative blip on the country’s financial management capability and could dent its ability to successfully raise funds in the international market next year. The report would definitely have a negative impact on Nigeria’s proposal to tap the international debt market next year as its perception by foreign investors will always be guided by such reputable credit rating agencies’ outlook on the country.
Analysts at the FSDH said the downgrade by Moody’s should give Nigeria reason to worry about what lies in the future.
They said both fiscal and monetary authorities will need to assess the impact of the rating outlook downgrade, to its likely return to the international debt market in 2020.
Already, the country’s external reserves are down to more than 22 months’ low as the CBN consistently injects dollars to prop up the local currency.
The country’s foreign exchange reserves stood at $39.65bn by December 4, 2019, this was significantly lower than $42.40bn in the same period of last year. Though the present forex reserves could fund up to nine months of import bills of the country, there is a cause to worry because of the danger posed by the possible impact of capital flight by offshore investors as a result of lower yields on our debt instruments.
Capital importation figures for the third quarter as released by the National Bureau of Statistics are not cheering either. The data from the NBS showed that capital inflows into the country in the third quarter declined by 7.8 per cent in the third quarter of the year to $5.36bn. The bulk of the inflows are what can be termed hot money, which can be recalled from the economy at anytime by the importers.
Last week, the World Bank also warned that Nigeria could slide back into recession if crude prices fall by 25 percent to $50 a barrel, and asked policymakers to act to revive economic growth and lift employment. The Bank said in its 2019 Nigeria Economic Update Report that outlook for the country is bleak as Nigeria may become home to 25 per cent of the world’s poor if urgent reform is not carried out by the government.
From all indications, the Federal Government intends to approach the International Capital Market next year to raise money to plug the gap in its budget and also finance infrastructural projects across the country.
From the figure approved by the National Assembly last week, out of the N10.59tn approved budget spending for 2020, a total of N2.18tn deficits were built-in with the intention of raising the shortfall through external and local debt markets.
The deficit is put at 1.52 per cent of the estimated GDP of Africa’s biggest economy, while about N2.7tn is set aside for debt servicing during next fiscal year.
Early in the month, President Mohammadu Buhari sent a request to the National Assembly for approval to borrow about $30bn from external sources to finance infrastructural projects across the country.
Although the parliament has yet to discuss the request, it was expected that the lawmakers would soon give its approval to the President’s proposal given the smooth relationship between the two arms of government in recent time.
Though Nigeria did not tap the international debt market this year, due to what the finance minister Zainab Ahmed described as lack of time,
it is apparent that Nigeria is in short of the needed funds to finance its budget in view of the frequent shortfall in revenue target and would have to rely on external and domestic borrowings to cover the gap.
In the last four years, the country has not been able to meet revenue targets either from the oil sector or the non-oil sector; this has pushed the government to resort to huge borrowing to fill the gap.
As of June 2019, the country’s total debt stood at N25.70tn consisting of N8.32tn of external debt and N17.37tn domestic borrowing.
Analysts anticipated further increase in the country’s debt stock in the near term considering the uncertainty in the oil market and weak capacity of government agencies to generate sufficient revenue internally.
The question that readily comes to mind is, what value have we derived from the huge borrowing in the last four years?
Nigeria’s government should take urgent steps to carry out the much-needed reforms to return the country to the path of growth.
The recent GDP figure released by the NBS may have come like good news to those in government and their supporters, but when juxtaposed with the population growth rate and the rising inflation figure, then it would be obvious that the economy is not really doing well as such.
The GDP figure for the third quarter stood at 2.28 per cent, that’s below the nation’s 2.6 per cent population growth rate. Equally, inflation has peaked at 11.61 per cent in October and expected to rise further in the coming months.
It is important that the government realises that the economy is not expanding rapidly as it should be to provide good life to the teeming population.
The unemployment rate is growing with a huge number of Nigerian youths without any means of livelihood. The World Bank in a report early in the year said about half of Nigeria’s almost 200 million people live in poverty, while the country has already overtaken India as the country with the largest number of people in extreme poverty.
In spite of the seeming fight against corruption in the country, there are still leakages that need to be plugged, while the cost of governance remains one of the highest among the country’s peers in the emerging markets.
The government should reduce bureaucracy, cut down on its appointees that contribute little or nothing to economic growth; the National Assembly should be reformed and pruned to save cost for developmental purposes.
A lean government will enable Nigeria to deploy much of its resources to develop critical infrastructure that is hindering growth and development, create employment and reduce poverty in the country.
The CBN should reduce its direct intervention in the economy and concentrate on managing price stability and ensure that the banking system is strong and capable of supporting growth by playing its financial intermediation role effectively. Beneath the interventions is huge imprudence, apart from being a distraction to the core functions of the bank, which could sink the regulatory bank if care is not taken.
Extensive reforms should be carried out at the nation’s oil behemoth, the Nigerian National Petroleum Corporation, to curb endemic corruption that has denied the country from benefiting sufficiently from its major oil resources.
More importantly, the political system needs urgent overhauls to enable Nigerians enjoy the dividends of democracy. Currently, the way the country’s political system is structured does not give room for the emergence of competent hands as leaders at whatever level. Our politics has become a ‘do or die’ affair with the power equation tilted in favour of the highest bidders or the stooges of political godfathers.
President Buhari is well positioned, since he will no longer be running for any election, to help the country to achieve political independence and stability.
- Mayowa is a Lagos based international financial journalist and author