The Minister of Finance and Coordinating Minister for the Economy, Wale Edun, last month hinted that Nigeria is expecting $10 billion. Consequently, the Central Bank of Nigeria (CBN) began paying a substantial portion of its outstanding matured foreign exchange (FX) forward. CHIMA NWOKOJI writes on the implications of these developments to the local currency and the economy in general.

NIGERIA expects $10 billion in foreign currency inflows in the next few weeks to ease liquidity in a foreign exchange market. This statement was attributed to the Minister of Finance Wale Edun on Monday, October 23.

While Fitch Ratings has questioned where or how the money which the government plans to use to offset forex backlogs and inject liquidity into the system will be raised, the government has hinted that part of the funds will come from its move to securitise a significant chunk of Nigeria’s future dollar cash flow, clear a yawning dollar demand backlog that has swelled since 2020.

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Recently, the Central Bank of Nigeria (CBN) began paying a substantial portion of its outstanding matured foreign exchange (FX) forward. This step was highly commended both at home and abroad as it shored up the strength of naira.

With expectations that the settlement of the FX demand backlog will continue, the Federal Government assures it will continue to ensure price stability. But sceptics in certain quarters are wondering what becomes the fate of the local currency after all the FX backlogs are cleared as well as where the Nigerian government hopes to source $10 billion from.

In providing answers to the questions, Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, said when the backlog is cleared, there would be more space for intervention in the FX market by the Central Bank of Nigeria (CBN), which will help stabilise the market and attract further inflows.

“If you clear the backlog, you will have more space (for CBN, NNPC) to regularly intervene in the FX market. Right now, most of what they have is what they are using to clear the FX backlog. If they are not clearing the backlog and they are able to intervene the way Godwin Emefiele, former CBN governor, was intervening – maybe $1 billion every month – the market will stabilise,” he said.

“For instance, investors will say, ‘Okay if I take my money to Nigeria, it will not get stuck, because at that point, there would have been an established liquidity in the FX market. It is not that we are not earning FX at all, the little we get is being swallowed by backlog and things like that.”

According to Yusuf, there is no capacity at all to intervene in the market because supply has practically dried up and because there is no capacity to intervene in the market, there is a loss of confidence in the market and those expected to bring in money are not making money available.

So the whole idea is to restore confidence in the FX market and in the economy; once confidence is restored, the situation will normalise, he stresses.

“There is a line of sight on $10 billion worth of inflow of foreign exchange in a relatively near future, in weeks rather than months,” Edun told a business conference.

He added that liquidity would also come from state oil firm crude sales and foreign firms willing to invest in Nigeria.

“These measures taken as a whole and comprehensively should lead to the flow of foreign exchange.”

 

Sourcing $10bn at all costs

There have been arguments about how good or bad the decision to use money that Nigeria will earn in the future to settle indebtedness rather than investment.

The argument arises because finance experts talk about the Time Value of Money (TVM). This is a financial concept that holds that an amount of money is worth more in the present than the same amount of money at a future date.

The reason for this is the opportunity cost of receiving money at a date in the future, as opposed to today. Money available today could be invested immediately in a business, an education, or an investment portfolio. The question is if the money is collected to settle debts or for consumption, what will the beneficiary use when that future comes?

Opportunity cost is a term in economic theory that refers to the cost of a foregone alternative opportunity, such as a higher gain that is missed or lost on one investment by choosing an alternative investment with a lower return.

The Bola Tinubu administration has decided to securitize about $7 billion of the country’s future dividends for five years from the Nigerian Liquefied Natural Gas (NLNG) to clear FX backlog. It wants to take the money meant for the future and use it not for investment but for other outstanding obligations.

A sociopolitical and economic analyst Tosin Adeoti explained that the dividend payments, which will accrue to Nigeria from its 49 percent equity in NLNG over five years, would be sourced and handed to the country by a consortium of banks led by Standard Chartered.

The bank expects to be paid a fee for the transaction, and the government will also cover the interest payments for the entire period.

Nigeria has faced chronic dollar shortages after foreign investors exited local assets during a period of low oil prices. Since then, investors have yet to return and the Central Bank has not yet settled outstanding demand for dollars from foreign investors seeking to repatriate funds or airlines seeking to send money from ticket sales abroad. As such, individuals have turned to the black market where the naira currency has hit successive record lows, widening the gap with the official rate.

NLNG is owned by several entities, with Nigeria having 49 percent, while other entities like Shell and TotalEnegies own the rest. It is one of the most finely run organisations in this country.

Analysts are worried that in the seven years between 2015 and 2021, the NLNG dividend totaled $5.3 billion to the government, according to data obtained from NlNG books. This means that it may take 10 years for the company to pay the government $7 billion in dividends with the current reality

“Isn’t this mortgaging future revenues to fill today’s gap?” Charles Robertson, head of macro strategy at FIM Partners, an asset management firm, asked about the plan.

“It feels like Nigeria is sacrificing export earnings in coming years – which will also be needed then,” Robertson was quoted as saying.

Philip Mshelbila, the current MD, was brought from the Atlantic LNG Company of Trinidad & Tobago, where he was CEO. NLNG is a regular case study in international business schools as a fine example of public-private partnerships.

In a position paper titled: Dollars and Dilemmas: Tinubu’s Fiscal Chess, Tosin Adeoti believes that it is a strange request because, according to the Budget Office, the FG is only due $2.2 billion over the next four years from its investment in the NLNG.

“How did they arrive at $7 billion? In essence, while the government is telling the public that its securitization is for 5 years unless a miracle happens in gas production, we are looking at a situation where a government is borrowing future revenue for up to 12 years. And that is without accounting for the interest on this loan.

“Why is the government doing this, you ask? Well, you saw how the naira to the dollar jumped from N800 to N1300 within a month; it’s because the country does not have enough dollars to meet the demand. And this is no fault of anyone but the government itself due to its terrible fiscal and monetary policies over the years, “Adeoti stated.

To ensure that Nigeria has enough dollars for its duties like exchanging the naira to dollar for manufacturers who want to buy foreign equipment or raw materials, or exchanging naira to dollars for those who want to study abroad, the government is trying to find ways of sourcing dollars by all means.

What the government plans to do with NLNG is being done with NNPCL, the country’s oil company. NNPCL intends to borrow $3 billion from the African Export-Import Bank (Afreximbank), implying that repayment will be from future crude oil earnings.

There is a general consensus that what other countries do is to attract foreign firms who come into the country with their dollars to invest in the local economy (FDI), or even just invest in the stock market (FPI).

However, that has not been happening for a long time due to the lack of confidence in the government’s ability to provide an enabling environment for businesses.

Recently, Morgan Stanley Capital International (MSCI) said it will remove several major Nigerian securities from the MSCI Frontier Markets Indexes, including the top nine according to the MSCI’s weights. They include Dangote Cement PLC, MTN Nigeria Communications PLC, and Guaranty Trust Holding.

“What it means for foreign investors is that the Nigerian stock market is a risky place to put their money due to an increased risk of repatriating funds from the Nigerian market.

“Again, don’t worry about the big words. These are signals to foreign investors to look twice before putting their funds into the Nigerian market.

“What the government plans to do in the coming weeks is to take the $7 billion loan based on what they plan to get from NLNG, take a $3 billion loan from Afreximbank, and then another $1.5 billion loan from the World Bank,” according to Adeoti.

Only recently, President Bola Tinubu urged the National Assembly to approve a request to borrow one $7.8 billion and another €100 million loan.

This means that Nigeria has chopped a lot of its future income and then taken some more loans, which would be difficult to pay back because the future income that would have been used to pay the loans would no longer be available.

“If you hear an individual do this, what do you think of him? If you see a country do this, what would be your reaction?

“Of course, the individual will have a lot of money now, but what happens months down the line, especially if what he is using the loans for, after converting to naira, is to build mansions for himself and his vice, buy cars for his wife, and throw some money for a fine Yacht, “ he questioned, adding that there will be respite in the forex market for now, but in the next few months, when it rains it pours.

 

Incurring debts for future generations

The country spends N617. 35 billion as an interest to service N33. 35 trillion external debt. Some of these debts are Euro bonds that are to be redeemed in 2050.

For example, there is a Eurobond that will be due on November 28, 2047 with a 7.625 percent coupon rate and another 21-Jan 2049 with a 9.248 percent coupon rate.

In the domestic bond market, repayment/redemption date ranges between 2028 and March 27, 2050. This means that by 2050, those who are alive and in power will pay the debt. Yet, “In the Long Run We Are All Dead,” as the early 20th-century British economist John Maynard Keynes (1883–1946) father of modern macroeconomics put it. Obviously, there may be temporary respite for the naira exchange rate but in the future, the naira’s strength will be put to taste.

Patience Oniha, Director-General of the Debt Management Office (DMO), said several loans have been contracted from multilaterals and bilaterals, while the federal government keeps issuing promissory notes to settle obligations for which it does not really have the revenue.

A promissory note is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms and conditions.

Nigeria’s total public debt rose to N87.38 trillion in the second quarter (Q2) of 2023, recording an increase of 75.29 percent.

This represents a N37.53 trillion increase in total public debt, compared to the N49.85 trillion reported at the end of the first quarter (Q1) of the year.

Oniha added that Nigeria had contracted several loans in the past from multilaterals like the World Bank, the African Development Bank, and bilaterals like Germany, India, China and disbursements are going on.

The debt stock is growing because Nigeria has been running a budget deficit for many decades.

“In good and bad times with oil prices, we have borrowed. We have been running budget deficitsfunded largely by 85 percent to 95 percent from borrowing, and that is cumulative, “Oniha said.

 

Implications

Managing Director/CEO, Financial Derivatives Company Limited, Bismarck Rewane and his team of analysts, said the naira is expected to remain volatile on lingering forex supply concerns. The dollar dearth means speculative buying is likely to continue, with an increasing number of market participants taking long positions on the dollar while shorting the naira.

However, the receipt of the expected $10 billion could provide some respite by year-end as the CBN and FG see the true value of the naira at N650-750/$, the finance expert

Moreso, JP Morgan estimates that the official rate will close the year at N850/$. Although the issue of inadequate FX supply continues to pose challenges, there is a possibility of improved market sentiment if sustained momentum in foreign exchange (FX) reforms is maintained.

The forex market is currently being reformed. On June 14, 2023, the CBN adopted a “willing-buyer-willing-seller” model thereby scrapping the multiple exchange rate system.

Some of the exchange rate determinants are balance of payments, capital inflows and trade balance.

In the first half of October, the naira traded within a band of N799/$ – N846/$ at the Investors and Exporters (I&E) window. It appreciated marginally by 0.11percent to N799/$ on October 13 from N799.9/$ on October 3 as the average FX turnover increased by 39.81%lpercent to $108.12million from $77.33million in the first half of September.

Meanwhile, it depreciated by 4.19 percent to N1,049/$ from N1,005/$ at the parallel market due to persistent currency pressures amid heightened demand. Today, the currency is down 25.63 percent year to date (YTD) to trade at N1,030 per dollar at the parallel market.

“However, the receipt of the expected $10 billion could provide some respite by year-end as the CBN and FG see the true value of the naira at N650-750/$, “ FDC stated.

The naira’s continued depreciation will intensify producer and consumer price pressures in the near term. As consumers’ real income falls, many more Nigerians will slip below the poverty line, with the likelihood of are increased price resistance and weak demand (compared to pre-pandemic levels) ahead of the festive period according to FDC.

 

The mounting fiscal problem

A herd of analysts believe that the key to the stability of the naira lies in value-added productions and not on a federation of feeding bottles where everyone relies more of FAAC allocations and petrodollars.

A lot of Nigerian states are unproductive; they simply rely on crumbs from the master’s table, the federal government FAAC account. Governors and their accountants wait earnestly for the phone call to report to Abuja for their FAAC allocation

Most analysts believe that there is a deeper problem with the way Nigeria is run. All these debts are incurred and used mainly for consumption and not infrastructure investment.

Earlier, the Socio-Economic Rights and Accountability Project (SERAP), asked a Federal High Court in Lagos to stop the lawmakers from taking delivery of the SUVs pending the hearing and determination of the applications for injunction filed by the organisation.

The group’s applications for interim and interlocutory injunction followed reports that members of the House of Representatives are set to procure and take delivery of SUVs valued at N57.6 billion. According to reports, each of the SUVs would cost about N160 million.

The former President of the Senate, Ahmad Lawan, in 2021, revealed that “The average office running cost for a senator is about N13million, while that of a member of the House of Representatives is N8million.”

Analysis of this amount show that N13 million office running cost for a senator amounts to N52 million per annum, while the N8 million for a member of the House of Representatives amounts to N32 million in a year.

Another worrisome fiscal irresponsibility or avenue of mismanaging Nigeria’s income is the sharing of revenues in an non-productive economy.

For instance, after admitting that Nigerian roads are bad, absence of good health and educational systems which are evidence of federal and state governments’ neglect/carelessness, the country still gives state governors huge sums of money as the Federation Account Allocation Committee (FAAC) allocation to play around it.

The FAAC shared a total of N1.1 trillion in August 2023 as Federation Account Revenue to the Federal Government, States and Local Government Councils, the Office of the Accountant General of the Federation said recently.

The funds comprised distributable statutory revenue of N357.398 billion, distributable Value Added Tax (VAT) revenue of N 321.941 billion, Electronic Money Transfer Levy (EMTL) revenue of N14.102 billion, Exchange Difference revenue of N229.568 billion, and Augmentation of N177.092 billion.

According to the communique, total revenue of N1.48 trillion was available in the month of August 2023.

Similarly, that 36 states of the federation, in the first half of 2023 (January-June), received a total of N1.51trillion, as allocation from the Federal Account Allocation Committee (FAAC), Nigerian Extractive Industries Transparency Initiative (NEITI) report reveals.

According to the report, the N1.51 trillion shared among the states represents 34.5 percent of the N4.37 trillion shared by the three tiers of the government between January and June 2023.

A breakdown of the report showed that the states received about N817.79 billion from the N2.32 trillion total distributable allocation in the first quarter and N688.2 billion of the N2.04 trillion allocation in the second quarter.

Apart from the share of the statutory allocations, the report showed that the nine oil-producing states, including Abia, AkwaIbom, Anambra, Bayelsa, Delta, Edo, Imo, Ondo and Rivers, received additional allocations as their share of the 13 percent derivation revenue to bring their total receipts to about N869.09 billion.

 

 

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