World Bank to decide on Nigeria’s $1.5bn budget support August 6

The World Bank’s Executive Board will decide on $1.5bn budget support for Nigeria on 6 August, BusinessDay has learnt. Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, Standard Chatered Bank, disclosed this in a note seen by BusinessDay.
Khan said unlocking budget support will likely require faster FX harmonisation and greater FX flexibility. While Nigeria’s retail FX rate has recently repriced higher, official appetite for more comprehensive reform remains uncertain for now.

Zainab Ahmed, minister of finance, budget and national planning, had in a Citi Bank Investor update call with Nigerian government in June disclosed plans to raise a total of $3 billion for the Federal Government and the States.
“The amount we are raising in the first instance is $1.5 billion for FG and around September October we are hoping to close out on the facility meant for states and the amount is meant to be $1-1.5 billion,” Ahmed said.

Analysts at FSDH research said the support of the World Bank is part of the wider dialogue between the FG and multilateral development banks and international financial institutions including AfDB and the IMF to cushion the budget deficit and provide short-term support to enable FG continue to spend on priority programmes like healthcare and infrastructure development.
“It is therefore necessary and timely but should not be viewed as an alternative to sustainable development financing for economic growth.

“Federal Government will need to ensure adherence to fiscal discipline including improving tax administration,” the analysts said.
Khan said for now, the the Central Bank of Nigeria (CBN) prefers to monitor the impact of earlier easing, having cut its MPR by 100bps in May.
“However, the more cautious stance (the committee voted 8-2 to be on hold) could reflect an intention to harmonise Nigeria’s different FX rates around the current Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate.

“The CBN kept its monetary policy rate (MPR) unchanged at 12.5% in July. “Given our projection of an outright economic contraction for 2020 (we see -4.3%y/y; the authorities predict a shallower decline of about 1.0% in Q2-2020 only), we had expected 50bps cuts at the July and September meetings. We now expect these cuts in November 2020 and May 2021, with potential FX harmonisation plans possibly arguing for a more cautious easing approach near-term,” Khan said.

June 2020 Consumer Price Index (CPI) accelerated to 12.6% y/y, a two-year high. “In our view, this likely reflected pressure on Nigeria’s parallel-market FX rate, where a faster pace of Nigerian naira (NGN) depreciation may be causing more rapid passthrough into inflation. While the parallel market lends itself to overshooting, given its illiquidity and small transaction sizes, it has traditionally been used as a pricing reference at times of weak FX availability through official channels,” she noted.