10 reforms to turn tide of Nigeria’s worst-ever Moody’s rating

There are at least 10 swift and audacious reforms that can convert Africa’s biggest economy from its worst-ever credit rating to macroeconomic stability, human capital development, and widespread sectoral reforms, findings by BusinessDay show.

On Monday, Moody’s downgraded Nigeria’s credit rating to its lowest credit rating since 2006, saying the government’s fiscal and debt position was expected to continue to deteriorate.

To change the narration, analysts at Afrinvest have identified ten medium- and long-term policy actions or reforms that can arrest Nigeria’s current fiscal deficit.

Within zero to three months, Afrinvest advised Nigeria’s next president to end subsidy payments on Premium Motor Spirit (petrol), improve monetary policy communication to the market, and strengthen security strategy in the oil-producing areas to aid improved output level.

In the medium term (6-12 months), Afrinvest recommended the elimination of multiple exchange rates, the phasing out of capital control measures, the cutting down on non-essential recurrent expenditures and the commencement of strategic reform of the public sector for efficacy and transparency.

On the long term (beyond 12 months), Afrinvest advised the termination of ways and means deficit financing, pursuant of a 15 percent to 20 percent annual increase in non-oil export earnings, the institution of zero-based budgeting and complete adoption of a cost-reflective power tariff regime.

Lukman Otunuga, a senior research analyst at FXTM said Nigeria’s ballooning debt profile is a perfect example of how excessive government spending can place an economy in an unfavourable position, despite its mission to stimulate growth.

“This remains a major talking point across international institutions as the country’s rising budget deficit threatens its long-term outlook,” Otunuga said.

For many years, Africa’s most populous nation has struggled to meet its revenue target in its budget and the variance keeps getting wider ever since the 2014 global collapse in oil prices that sent the oil-dependent nation to its first recession in a quarter of a century.

Nigeria plans to spend N21.8 trillion against revenue of N10.5 trillion. This leaves a budget deficit of N11.34 trillion for 2023 representing 5 percent of GDP, according to the budget signed on January 3 by President Muhammadu Buhari, who will leave office on May 29.

According to budget documents, the budget deficit is to be financed mainly by borrowings made up of domestic sources of N7.04trillion, foreign sources of N1.76trillion, Multi-lateral/bi-lateral loan drawdowns of N1.77billion, and privatisation proceeds of N206.18 billion.

The borrowing plan would make it impossible for the government to avoid loans from the Central Bank of Nigeria (CBN) this year, according to some analysts.

The CBN loans to the Federal Government, otherwise known as Ways and Means Advances, have jumped by more than 20 folds since 2015, going from under a trillion naira to N22 trillion.

The sheer amount of the loans is a violation of the laws guiding the CBN which states that the federal government can only borrow 5 percent of its earnings from the previous year.

Between 2021 and 2022, the CBN’s loans to the government went from N17.5 trillion to N22 trillion which means some N4.5 trillion was added in 2022. That’s almost at par with the total revenues earned by the government for the whole year when the figure should not exceed five percent of public revenue.

The president is seeking approval from lawmakers to securitise the N22 trillion worth of CBN loans and convert them into 40-year bonds and the process is stalling.

Analysts at CardinalStone Research have posited that 2023 will be mostly transitional, with gradual policy rollouts, while the strategic priorities of the new administration would likely be more pronounced in 2024.

“With few weeks to the general elections, the economic outlook remains uncertain,” CardinalStone said.

Economists are also forecasting that the country could record unprecedented revenue underperformance this year.

Read also: 2023 economic outlook for Nigeria

“Although almost all the key revenue lines underperformed relative to the budget, one of the primary sources of the revenue shortfall was the FGN’s independent revenue,” economists at FBNQuest Capital said in a note sent to BusinessDay.

This February, Africa’s largest democracy is witnessing what many consider as a three-man presidential race. The key candidates are Atiku Abubakar of the main opposition Peoples Democratic Party, Bola Tinubu of the ruling All Progressives Congress, and Peter Obi of the Labour Party.

On Monday, Atiku Abubakar, PDP’s presidential candidate blamed the Muhammadu Buhari administration for the recent downgrade of the nation’s credit rating.

In a series of tweets, Abubakar said he would steer away the course of the Nigerian economy from the gloomy direction it is headed towards robust fiscal sustainability if elected in the February 25 presidential election.

He expressed reservations about the capacity of the present administration to generate and enforce ingenious ideas to solve various national challenges and help the government to deliver on its mandate.