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Lukman Otunuga, a senior research analyst at FXTM, says it is unclear where Nigeria will borrow the N5.2 trillion needed to fund the 2021 budget deficit.

The nation’s stats office announced on Saturday that Nigeria slid into its worst economic recession in almost four decades, following a 3.62 percent contraction in the third quarter of 2020.

Based on lessons from the 2016 recession, the Buhari administration employs expansionary policies to spend its way out of recession — but that may be challenging in 2020 as most lenders are battling the fallout of COVID-19.

Considering the fact that Nigeria recently pulled $3.4 billion, 100 percent of its quota, out of the International Monetary Fund (IMF) under the Rapid Financing Instrument (RFI), getting money from the fund may be challenging.

Asked where Nigeria would get N5.2 trillion in loans to fund the 2021 budget deficit, Otunuga said there is a lot of speculation on that, but no clear direction yet.

Otunuga stated that dollar debt will expose Nigeria and increase the country’s debt-to-GDP.

“Nigeria is set to borrow [N5.2 trillion] in 2021. I think this is an ongoing question many people are asking. Is Nigeria going to issue Eurobonds, are they going to go to the World Bank, are they going to IMF?” he said.

“Things are quite difficult right now, and honestly, these are all speculations. But what I can say is, the fact that Nigeria continues to borrow is going to increase the country’s GDP ratio which remains a major risk because if the debt-to-GDP continues to rise, this is going to make it more difficult for Nigeria to borrow.

“It is going to make the repayments really expensive, and given how most of these loans are going to be in dollars,  the high dollar-denominated debt is gonna expose Nigeria especially if the dollars continue to (appreciate) in 2021.

“I think this is an ongoing question, is it going to be the IMF, World Bank or is it going to be from the issue of Eurobonds, this is mere speculation, we have to see how things play out in 2021.”

Zainab Ahmed, minister of finance, budget and national planning, told the house committee on finance that the federal government would be borrowing $1.2 billion from Brazil to fund a part of 2021 budget.

This led to a massive outcry among Nigerians, who opposed the plan and said Nigeria may soon borrow from poorer countries like Niger Republic.

It has been over 140 years since the world last witnessed this type of mass recession across the globe, making it difficult for nations to secure funds from their bilateral partners who are also in a recession.

In an interview with TheCable, Bill Gates, the co-chair of the Bill and Melinda Gates Foundation, called on Nigeria to prioritize its spending, if borrowing from other countries or institutions becomes a challenge.

The naira-dollar relationship has been at the heart of Nigeria’s economic conversation for decades

Otunuga who spoke on how Nigeria can avoid a prolonged recession, said if oil prices remain depressed as we say in 2020, the Central Bank of Nigeria (CBN) may be forced to devalue the naira again.

He said a free float of the naira will adversely impact consumers in the local economy, suggesting the naira may take a quick and steep fall.

“I think what the CBN is doing is defending the naira based on foreign exchange reserves. I think it is going to get to a stage where foreign exchange reserves are going to deplete below certain level, where it may become increasingly  difficult for the CBN to defend the naira against external and domestic risks.

“The naira’s outlook would be heavy influenced by global price of crude. If oil prices remain depressed like what they are trading right now, and  foreign exchange reserves drops below certain threshold,  the CBN may be forced to devalue naira to accommodate for this.”

Speaking about the sustainability of defending the naira, Otunuga, said if Nigeria deploys a system that “allows the natural forces of supply and demand to really determine the equilibrium value of the naira… nobody knows how quick or how sharp the naira would devalue”.

"Such outcome is probably gonna hit consumers, it is going to result in inflation process really  rising out of control. If we have a case where inflationary pressures ends up hitting consumer purchasing power, allowing the naira to freefloat may actually do more damage than good at this point in time.”

Otunuga called on the CBN to be more transparent about it’s foreign exchange policy. He said the opacity around the FX market is adversely impacting foreign direct investment.

NSE has gained 24% this year

Speaking on the activity of the Nigerian Stock Exchange (NSE), the forex market analyst, said the bourse has been impressive this year, compared to the rest of the world.

“If you look at the Nigerian Stock Exchange all share index, it is actually up from almost 24 percent YTD, and when we compare it to other stock markets across the world, that’s quite impressive,” he added.

“I think a lot of people are scratching their heads because you see the stock market performing so well, but there is a lot of gloom around Nigeria’s economy. But when we dig deeper into this, you do see a valid point.

“If you look at Nigeria’s fixed income market, it’s actually posting negative yields, something rarely seen in Nigeria and other emerging market. So what is happening is that investors looking for yield are probably banking their cash into the local stock market to get profit in the medium to longer term.

“The reason why the fixed income market is posting negative yields is inflation and interest rates. So, in a short term, Nigeria’s stock market unlikely to push higher based on external factors that are supporting the index.

“In the medium to long term, I think the local shares would be heavily influenced by the nation’s macroeconomic outlook.

“If Nigeria continues to struggle to recover or continues to show signs of being exposed to domestic and external risks, those gains that we saw in the all share index are likely to be capped leading towards 2021.”

Otunuga said as far as the economy is concerened across the globe, the “grass is not necessarily greener at the other side,” stating that the US GDP contracted by over 30 percent in Q2, while South Africa saw a 51 percent contraction in output over the same time.

He said a Joe Biden presidency in the United States could bring an improved, even stronger bilateral relations to Nigeria and the rest of the African continent.