Nigeria took a step closer to stimulating its struggling economy hit by collapsing oil prices as President Muhammadu Buhari yesterday asked lawmakers in a speech in Abuja, to approve the country’s biggest ever budget.
Buhari outlined plans for the government to spend N6.08 trillion ($30.8 billion) in 2016, an increase of about 20 percent from this year.
The deficit will more than double to N2.2 trillion, or 2.16 percent of gross domestic product (GDP) and will be plugged with N1.84 trillion of borrowing, N900 billion of which will come from international debt markets, Buhari said.
“Indeed Nigeria can spend its way out of a slump or a supposed recession. The core is channeling the spending to sectors or areas with positive repeal effect on economic growth and development,” Abiodun Keripe, head of research and strategy at investment firm Elixir Investment Partners Limited, said in response to questions.
“Clearly fuel subsidy has to go and the current climate in the global oil market makes a strong investment case for its removal. With the elimination of fuel subsidies, pressure in the FX environment may reduce, particularly if local refining picks up significantly. In turn, the CBN can relax FX controls. Even as we speak, there’s a looming concern over a devaluation or not.”
President Buhari yesterday hinted for the first time that he would consider a devaluation of the naira, spurring speculation it may take place early next year when the local market reopens for trading The Central Bank of Nigeria (CBN) is fine-tuning the management of foreign exchange and will introduce “some flexibility” that will encourage additional inflows, Buhari said in his speech.
“I am aware of the problems many Nigerians currently have in accessing foreign exchange for their various purposes,” the president said.
“These are clearly due to the current inadequacies in the supply of foreign exchange. We are carefully assessing our exchange-rate regime, keeping in mind our willingness to attract foreign investors, but at the same time managing and controlling inflation to a level that won’t harm average Nigerians.”
The currency of Africa’s biggest oil producer and economy has been all but fixed at 197-199 per dollar since early March, with the Central Bank governor, Godwin Emefiele curbing foreign-exchange trading and introducing import controls after the naira fell to a record low as crude prices plunged.
“Yes, you can take this as signaling for 2016 and we will be looking at that direction,” a senior Central Bank official told BusinessDay last night.
According to him, “we achieved a 21 per cent devaluation sometime ago and now we are in a demand management mode. We have to protect local industries, promote import substitution and when and if we feel we have to make changes, we will do that. Nothing is cast in stone or iron.”
The tight grip on the naira has caused foriegn investors to sell naira bonds and stocks in anticipation of a devaluation, which would cause losses on their holdings, slowed the country’s growth and pressured private firms from manufacturers to the nation’s banks.
Declining oil prices and the unwillingness of the government/Central Bank of Nigeria (CBN) to devalue the naira amidst constrained reserves continue to worsen the FX liquidity position of the Nigerian banks, Renaissance Capitals banking analysts, led by Adesoji Solanke, said in a Dec 21 report.
“With the CBN struggling to provide sufficient FX to meet importers’ FX demands and banks prevented from accepting FX deposits, not only have importers been unable to repay their obligations, they have also struggled to keep afloat – among them import-dependent manufacturers. The banks have therefore significantly slowed the issuance of new letters of credit (LCs), further hurting the general commerce and manufacturing sectors,” Solanke said.
Nigeria’s growth has slowed down markedly between 2014 and 2015 to about 3 percent per annum from above 6 percent last year.
An all-out effort is needed to diversify Nigeria’s fiscal base away from oil in the context of an economic downturn, through fiscal reforms, especially a rise in the rate of VAT, to create a more stable revenue base, which will be necessary for long-term sustainability, according to Razia Khan, the London-based head of Africa research at Standard Chartered Plc.
“Lower oil prices should also provide an ideal backdrop to deal with the fuel subsidy regime. Subsidies benefit the rich (who consume more fuel) disproportionately,” Khan told BusinessDay.
The president’s change of tone regarding a possible loosening of the tight naira-dollar peg means devaluation and loosening of currency-trading restrictions may take place about Jan. 4, when the central bank reopens the interbank market, which has been shut since Dec. 18 for the Christmas holidays, according to Khan
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