Nigeria’s Mega-Budget Falls Behind 2019 Spending Plan in Dollar Terms on Naira Value Erosion
Nigeria’s 2020 budget has been dubbed the country’s biggest since at least its return to civilian rule but a recent currency adjustment means the true value of country’s spending plan is lower than was earmarked for 2019.
Analysts at Lagos-based business advisory firm SBM Intelligence say the real value of Nigeria’s N10.8trn is $25.087bn, 13% lower than in 2019 based on the average parallel market rate of 430.5/$ this year.
Using the official average official rate of 430.5/$, the budget stands at $29.916bn, 11% lower from last year.
“Nigeria maintains a peg for converting the naira to the dollar, which in relative terms represents true value,” said SBM.
Faced with dwindling oil sales that threatened dollar inflows, the Central Bank of Nigeria (CBN) had in March adjusted the commodity-based naira from N307/$1 to N360/$1 at the official window.
As a result, the real value of the year’s budget, which has been revised upward in naira terms, has fallen to $139 per head from $160, assuming a population of 180 million.
The declining value of the budget reflects wider erosion of the real value of wealth – and spending – by household and firms in the country caused by the reoccurring plunge in the naira rate.
Since February 2014 the naira has depreciated from around 164/$1 to 360/$, a swing that has synchronized the commodity bust that depressed the crude oil market.
With the economy still dependent heavily on foreign markets for raw materials, inflation has remained above the CBN’s preferred maximum of 9%. Both high inflation and the costly dollars have a negative impact on wealth as they undermine any increase in the naira value of assets.
For the government, dollar-based loans become more expensive to repay especially in the face of lower oil sales. This makes future borrowings more problematic.
Experts including the International Monetary Fund (IMF) have advised that a lasting solution to the weakness of the naira would require a more flexible and unified exchange rate system for Nigeria.
The Economic Sustainability Committee (ESC) headed by Vice President Yemi Osinbajo has advised the country to “Unify exchange rates to maximise naira returns to FAAC from foreign exchange inflows” and “Manage the exchange rate in a sustainable manner.”
According to experts, by unifying the windows and allowing market-driven pricing, there will be a scope for increased capital inflows into Nigeria and a boost in dollar liquidity.
The case of Egypt that utilized the 2016 oil crash to float its pound and the consequent inflow of investments into its economy could be an indication that Nigeria is in the right direction.
CBN’s intervention has seen the country’s foreign reserves which stood at $38.07bn at the end of 2019 tank to $34.9bn at the end of the first quarter of 2020. The depletion in external reserves rode on the back of FX sales to Bureau De Changes and Import & Export window as well as dwindling oil receipt.