‘Weak Naira, FX Volatility May Impede 2024 Budget Execution’ - INDEPENDENT
…Analysts See Further Widening Of Budget Deficit
…Worry Over Increase In Cost Of Servicing External Debt
Though analysts said 2024 budget holds a lot of promise for the economy, they also agree that its implementation may be hindered by the continued weakening of the naira and the unbridled volatility in the foreign exchange market.
The naira exchanged for N1,165/US$ on Friday, December 1, 2023, at the parallel market, losing N425 each or 57.43 percent year-to-date from the N740/$ it traded in the same market on Friday, December 30, 2022. At the end of December 2021, the naira sold for N422/US$.
Prof. Uche Uwaleke of the Nasarawa State University agreed that a naira float in the face of weak supply and strong demand with its attendant forex market volatility introduces uncertainty in budget implementation.
“This is why I consider the N750 to the dollar benchmark used for the 2024 budget as a tall order,” he said in reply to a question by Daily Independent at the weekend.
For him also, “It’s most likely the exchange rate will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations.
“This is particularly so in respect of the dollar-denominated component of the budget much of which can be found in the over N3 trillion proposed defence spending as well as in recurrent debt expenditure”.
Uwaleke noted that the bulk of defence budget is in foreign currency, a situation that is likely to raise the cost because of the volatile and high exchange rate, which likely also will increase the cost of servicing external debt and further widen the budget deficit.
“In my view, a well implemented and corrupt-free dual (not multiple) exchange rate regime (one official including for debt service and another tier for other transactions) helps to bring certainty in government procurements and short term planning in general.
“A related issue has to do with the mode of financing the over N9 trillion deficit and its likely impact, such as crowding out domestic borrowers from the financial market.”
Already, he said, the Central Bank of Nigeria (CBN) is tightening monetary policy with treasury bills already being offered at 17 percent.
This, he continued, will attract banks as they would rather lend to government at such rate than the private sector borrowers who may now be forced to pay higher interest rates.
Unlike in previous budgets where the amount voted for new borrowings were split fairly equally between domestic and foreign sources, this time around domestic borrowing is taking up a huge chunk at about 78% (N6.1 trillion out N7.8 trillion provisioned for new borrowings).
This can have the effect of crowding out the private sector, hiking interest rates, increasing cost of funds and depressing the equities market as investors migrate to fixed income securities. The outcome will be a further weakening of the productive sector.
In this regard, the government is advised to explore more opportunities for concessional project-tied loans from multilateral and bilateral sources. This will help to boost forex reserves and stabilise the exchange rate.
With respect to borrowing domestically, it’s important that emphasis should be placed on the use of the right instruments such as infrastructure bonds as opposed to FGN bonds that are inflationary prone.
Speaking later as keynote speaker at the annual Conference of the Capital Market Correspondents Association of Nigeria (CAMCAN) in Lagos, Uwaleke, a former Commissioner of Finance in Imo State, said the 3.76 percent GDP growth target of the Federal Government in next year’s budget has made the projected achievement of growing Nigeria into a US$1 trillion economy by 2030 a fluke.
“Leveraging capital market in financing the national development plan,” he argued that for the country to achieve the ambitious target set by President Bola Tinubu, the country’s GDP must grow at the rate of 16 percent yearly over the next seven years.
Cyril Ampka, an economist, said the choice of building a robust economy is feasible if the government is ready to play its role adequately.
He said, “Before now, we have seen the Federal Government abandoning its fiscal role, and that is why we are where we are. I will call on President Tinubu to issue a work plan for the implementation of the budget.
“It is one thing to have a budget, it is another thing to be ready to implement it. Nigeria has been so unfortunate with the kind of leadership we have seen in the last two decades”.