Nigeria unveils fiscal road map for 2017

Kemi Adeosun, Nigeria’s Finance minister unveiled a fiscal roadmap for 2017 on Monday, and heavy on her strategies to revive the country, headed for its first full year economic contraction in 25 years, are lifting a 16-month old dollar restriction on a list of 41 items and creating a promissory note program to manage domestic debt.

The ten point strategy also outlines plans to mobilise private capital to complement government infrastructure spending, restructure the Export Expansion Grant (EEG) to spur exports and rebalance public debt portfolio with increased external borrowing.

Catalysing the Micro, Small and Medium-scale Enterprises (MSMEs) by increasing business awarded to them from government contracts and improving their access to finance also made the list.

These plans are good on paper and can underpin Nigeria’s economic recovery, according to Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.

“Although lifting the restriction on the 41 items banned from accessing dollars at the official market may not bring short term respite, it would in the long run,” Ibrahim said. “Extending the maturity profile of the country’s debt portfolio will give government some breathing space for debt servicing in 2017.”

Ibrahim however noted that the plans may fail to yield desired results if they are not complemented by an early passage of the 2017 budget.

Nigerian president Muhammadu Buhari is expected to present a N6.8 trillion budget for approval by the Senate on December 14, today. The previous budget was not passed until after five months into the year (May 6) and analysts argue it is one of the reasons the economy slumped into recession.

Muda Yusuf, the director-general of the Lagos Chamber of Commerce and Industry (LCCI) also commended the fiscal plan, even as he identified critical factors that could undermine it.

“If exporters are still forced to sell their export proceeds at lesser rates at the inter-bank market, compared to the parallel market, then resuscitating the EEG alone may not boost exports significantly,” Yusuf said by phone.  While he cautioned that government borrowing costs were too high for a country in recession.

The spread between the naira’s official value (N305/$) and the amount at which it exchanges for the dollar at the parallel market (N480/$) is as high as N175/$. But to bring more liquidity into the official market, monetary authorities compel exporters to sell their dollar earnings at the official market.

The yields on government one-year treasury bills are as high as 22 percent. But Adeosun noted that increasing external borrowing would help government avoid the high domestic borrowing cost.

“Increasing external borrowing or extending debt maturity is not enough, these costs must be reduced because there is no room to take on higher debt servicing costs,” Yusuf said. For every N1 earned, Nigeria earmarked 35 kobo for debt servicing in 2016.

Manufacturers are upbeat about the road map especially where it relates to lifting the dollar embargo on 41 items, a policy that has lasted 16 months.

Frank Jacobs, chairman of the Manufacturing Association of Nigeria (MAN) had said in September that the embargo led to the fold-up of about 272 manufacturing companies and fed into job loses. About 780 raw materials needed by the sector were affected by the restrictions placed by the CBN, according to Jacobs.

“The policy reversal will bring relief to manufacturers, many of whom have had to source dollars to import critical raw materials at exorbitant costs at the black market,” said Robert Kretschemer, a local manufacturer and managing director of Kablemetal Nigeria Ltd.

The manufacturing sector’s output has now contracted in three quarters of 2016 but Kretschemer is optimistic that the policy re-modification will soften the woes of manufacturers and “could mean recovery is in sight.”

The sector contracted by 5.49, 9.53 and 12.2 percent in the first, second and third quarters of 2016 respectively.

The blacklisted items include rice, steel sheets, wooden doors, glass, palm oil and textiles.

The dollar restriction policy, introduced by the Central Bank of Nigeria in August 2015, sort to curb imports and ease the pressure on dollar demand in the face of plunging petrodollars.

While the policy has been a boon to local companies like Okomu and Presco Oil, it has hurt majority of manufacturers, as about 16 of the total items on the list are critical raw materials for intermediate goods produced in the country.

Finance minister Adeosun also stated that government would actively partner with the private sector to infrastructure development through the Road Trust Fund, which would develop potentially toll-able roads, and the Family Homes Fund, which is an on-going PPP initiative for funding of affordable housing.

LCCI’s Yusuf says the foreign exchange challenge in Nigeria must be resolved to attract private capital.

In addition, issuing promissory notes and debt certificates to unpaid contractors is a welcomed development, according to a private contractor who did not want to be named.

“Not only do we get assurances that we will be paid, it boosts confidence in the government and shows they are committed to bridge Nigeria’s infrastructure deficit,” the contractor said.

Nigeria’s core stock of infrastructure is only 20-25 percent of GDP, leaving an infrastructure deficit of $300bn, according to the Africa Development Bank (AfDB). This compares with 70 percent in middle-income countries.

A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.

The note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note’s payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.

The Federal government owes local contractors as much as N1 trillion for 200 on-going road projects.  While power companies are owed about N400 billion, according to industry data obtained by BusinessDay.

Nigeria slumped into recession in 2016, as falling crude production weighed on output.

The International Monetary Fund (IMF) forecasts the economy to contract by 1.7 percent by year end.

Ayodeji Ebo, an investment banker at Afrinvest says the fiscal road map has been much anticipated by investors uncertain of Nigeria’s economic direction.

“Now that we have a plan out there, investors can key into it. Although the FX situation remains the elephant in the room,” Ebo said.