Hit by oil price collapse, Nigeria readies for long-delayed reforms
…seeks to converge exchange rates …to securitise CBN loans to FG …oil price benchmark revised down to $30 per barrel
Nigeria’s Federal Government appears to be days from the implementation of some of the long-awaited economic reforms made more urgent today by the unprecedented collapse in the price of oil, the country’s major revenue and foreign currency earner.
BusinessDay learnt last night that three reforms recommended by teams appointed by the government, including naira exchange rates convergence which will put more cash in the treasury of all tiers of government, a cut in the oil benchmark for the budget to $30 a barrel, as well as the acknowledgement and securitisation of the Federal Government’s borrowing by ways and means via the central bank, may have received the nod of President Muhammadu Buhari.
The measures are meant to soothe an economy reeling from policy misalignment as well as the collapse in global oil prices, according to sources familiar with the matter.
On Tuesday, the president met with his economic advisory council chaired by the well-respected economist Doyin Salami. Also present at the meeting were the vice president, the governor of the central bank as well as the finance minister. Today, there will be a crucial meeting of the National Economic Council chaired by Vice President Yemi Osinbajo at which state governors will be briefed on the urgent steps to be taken to avert a collapse of the Nigerian economy.
The government already announced the decision to adjust its budget oil price benchmark Wednesday with the announcement of other decisions to be made in the coming days, according to the sources.
“The reforms are well overdue and seem to have been forced down the throat of the government by the abrupt plunge in oil prices,” a senior investment banker said.
For one, “the convergence in fx rates will be a welcome boost to the economy in terms of investment inflows as it offers better clarity around our exchange rate policy,” the person said. “Investors have long clamoured for an end to the confusing multiple exchange rates for a long time.”
The International Monetary Fund (IMF) had also urged an end to the practice to build investor confidence and unfreeze investment flows.
As winds of a severe economic meltdown swirl around the world, leaders have come under intense pressure to strengthen national economies and offer relief to their people. But Nigeria appears to face an even more severe fallout given that its economic buffers are hugely depleted.
“Nigeria’s economic buffers are non-existent or at best very weak,” said economist Keith Halloway, a senior researcher and investment analyst at London based Brentworth Research. “So the Nigerian economy is in a far more vulnerable position today than what you will find elsewhere.”
Halloway added, “The solution to the problem in Nigeria will require significant reform of the economy to allow the country to tap into the massive liquidity out there in the world. This cannot happen with the perception investors have of the way Nigeria headed and also how the country manages its currency.”
A convergence of Nigeria’s exchange rates would imply higher allocations to the three tiers of government including the states and local governments at a time when revenues are constrained.
Allocations have been made at N306 per dollar despite the market rate being much weaker at above N360.
The securitisation of CBN loans to the Federal Government which surged to a 20-year high of N4.4 trillion as at August 2019 will help repair the CBN’s troubled balance sheet which has taken a hit from the increased funding of the Federal Government via ways and means in response to lower revenues.
Sources familiar with the matter say the loans will now be securitised and sold to private investors. The securities would be created and sold by the Debt Management Office (DMO). Demand for the securities is mostly anticipated to come from the pension funds and other non-bank local investors who have been banned from buying Open Market Operations (OMO) bills.
The N4.4 trillion, which is the net sum of outstanding CBN overdrafts to the FG minus the government’s treasury single accounts (TSA) deposits with the CBN, went into plugging a higher-than-expected government budget deficit in 2019 as well as some carry-over obligations from the last two years.
As at the end of December 2018, the CBN had net financed the Federal Government to the tune of N400 billion, less than 10 percent of the recent figure.
“This will help free up the CBN’s balance sheet and help it stay within the limits of the CBN Act which caps how much the apex bank can lend to the Federal Government at 5 percent of revenues,” a senior banker who did not want to be quoted told BusinessDay.
The third reform to reduce the oil price benchmark will likely reduce the N10.59 trillion 2020 budget by as much as 14 percent to N1.5 trillion and increase the budget deficit to over N3 trillion.
The government’s response team which was chaired by Finance Minister Zainab Ahmed had briefed the cabinet meeting on the current state of the economy as a fall-out of the coronavirus pandemic and crash of crude oil price.
A statement by the presidency on Tuesday said the PEAC had expressed concern over possible weakening economic growth as a result of the coronavirus and recommended the revision of the 2020 budget to prioritise spending on health care, infrastructure and basic needs.
The Council had painted sobering scenarios of what could happen to the Nigerian economy if the Covid-19 pandemic lasted for too long.
Nigeria, Africa’s biggest oil producer, relies on crude oil exports for more than half of government revenue and 80 percent of dollar earnings.
The Council also forecast an oil glut, trade imbalance, drop in foreign reserves, and rise in unemployment and advised the government to curtail recurrent expenditure and mobilise private capital.