Burden Of External Loans Increases As CBN Adopts Market-led FX Rate

The burden of external debts on the country could worsen, as the Federal Government would need more amount of Naira than previously required for servicing or liquidating existing loans and others being processed.

The increase is occasioned by the adoption of the market-led Nigerian Autonomous Foreign Exchange (NAFEX) window as the country’s official exchange rate by the Central Bank of Nigeria (CBN).

The apex bank, yesterday, replaced the official exchange rate with the NAFEX, otherwise known as the Investors’ and Exporters’ (I & E) window. The action came over a week after the monetary authority yanked off the CBN rate from its home page, a decision interpreted as an indication of the adoption of NAFEX rate.

Whereas the now-rested CBN exchange rate was N379/$, the fluid NAFEX window dances around N410/$. The differential of the two markets is over five per cent. And if the Central Bank withdraws its historic intervention to allow for equilibrium, experts said it would inch close to the parallel market window, which currently trades at N485/4.

Yesterday, Vice Chairman of Highcap Securities Limited, David Adonri, insisted the most expedient option is a full liberalisation of the market, a policy stance that would allow a natural market clearance as obtained in other comparative African economies such as South Africa.

The CBN Governor, Godwin Emefiele, last year, disclosed the apex bank’s intention to pursue the harmonisation of the different rates around the I & E window.

Recently, the Minister of Finance, Budget and National Planning, Zainab Ahmed, also hinted that official transactions, including monthly monetisation of government earnings, would be done using the market rate.

With the adjustment of the official exchange, the Federal Government will get more naira in exchange for the same earnings in dollars. This suggests that more money would be available to the Federation Accounts Allocation Committee (FAAC) for monthly disbursement to the three tiers of government.

But for Godwin Owoh, a professor of applied economics, that is how far it goes.

“What we need is not more earnings but judicious use of what we earn. What difference does an additional earning that would end up in the pockets of politicians make?” Owoh, an expert in debt management, asked.

It has pushed up the burden of dollar and other foreign currency-denominated loans in terms of servicing and outright liquidation. It also implies that Nigeria’s existing external loans have increased by over five per cent in naira term.

Whereas federal and state governments closed last year with a total external debt of $33.348 billion, the naira equivalent of the loan has increased from N12.67 trillion to N13.64 trillion. And as the exchange increases as obtained in NAFEX, the differential could be much higher in the coming months.

Besides debts, the adjustment would have affected all dollar-dominated official contractual arrangements with multilateral and bilateral organisations as well as private entities.

Considering the huge proportion of government spending that is denominated in foreign currencies, Owoh noted, the net value of the adjustment could have been motivated by the craving for more earnings.

On how the decision would attract the much-needed investment, the professor said: “Capital is fungible. It goes where there is confidence, security and sustainability. High returns as an autarky does not sustain genuine investment. However, hot money may come in regardless, but only on escapist considerations. The investment climate is most volatile today in Nigeria. Only those having access to the public office that controls the public purse smile to the banks. Trading and having access to trade in Naira has suddenly become the most attractive form of investment.”

Owoh insisted it is time to “conduct a currency census” and have the Federal Executive Council (FEC) to inject new energy and enthusiasm into the system. He added that government, at all levels, must purge itself of the old thinking and begin to invest in strong cash flow projects like other parts of the world.

In his contribution, the CEO of Economic Associates, Dr. Ayo Teriba, described the decision as long overdue but noted that it would not address the supply shock and clear the market to achieve the much-required equilibrium. The economist said government would need to address the challenges “responsible for illiquidity as well as the huge supply and demand gap” to achieve equivalent.

According to him, while the adoption of the NAFEX for official business was a good starting point, the authority would need to bridge the gap between the official and parallel market, otherwise, the currency crisis would persist.

Adonri also insisted that full liberalisation, and not the adoption of the NAFEX rate, was the ultimate solution to long-term market stability, noting that the decision will not achieve resource allocation efficiency if the CBN continues to discount FX for activities considered as “special purposes”.

Noting that the market is extremely wary of inefficiency, he warned that the sustenance of FX discount to non-productive sectors would continue to send a wrong signal to the investment circle, insisting that FX should be treated like every other market, where demand and supply interplay to set the prices.

Dr. Bongo Adi, an economist researcher at the Lagos Business School, said the adjustment is a journey back to the days of the Structural Adjustment Programme (SAP), which many attribute the persistent currency crisis to.

He noted that the challenges that scuttled the implementation of the programme and set the stage for Nigeria’s macroeconomic crises were yet to be addressed.

MEANWHILE, the Director General of Institute of Fiscal Studies, Godwin Ighedosa. has expressed worry over rising national debts, stressing that government may not be able to meet its debts obligations very soon.

Ighedosa said: ‘’For me, the essential issue is relating to rising debt stock. At the moment, our debts stock has almost doubled in the last six years, this raises a lot of concerns, especially when you consider our ability to service our debts. But when you ask government officials, the response is for them to always ask you to look at the debts to revenue ratio and compare that to some international indicators but they failed to know this is not the appropriate way to look at debts issues.’

He said government ought to consider its debts servicing in relation to government revenues.

‘’When you look at it from this angle, you will see the country is far behind and people have continued to tell government the trend cannot sustain the level of the debts,” he added.

Also yesterday, the Monetary Rate Committee (MPC) retained the country’s monetary rate regime at 11.5 per cent alongside other parameters surrounding the rate.

Briefing the media at the end of the two-day meeting, the CBN governor raised the alarm over burgeoning debt level and advised fiscal authorities to float a diaspora bond to pool remittances sent by Nigerians abroad for specific investments, rather than continuing with offshore borrowing sprees.

In the thinking of Emefiele, the Diaspora bond option is cheaper and comes at a minimal cost compared to outright loans and it is more suitable at this time of declining receipts from oil mineral resources.

Nigeria’s total public debt grew from N12 trillion in 2015 to N32.9 trillion last December.

The decision to retain the Monetary Policy Rate (MPR), the rate that determines commercial interest, according to Emefiele, was to give more impetus to sustain the moderate drop in inflation. Headline inflation fell from 18.17 per cent in March to 18.12 per cent in April.

The MPC also maintained an asymmetric corridor charge of +100/-70 per cent around the MPR; the cash reserve ratio (CCR) at 27.5 per cent and the liquidity ratio (LR) at 30 per cent.

Emefiele’s concern about rising external loans came a day after the Bureau of Public Enterprises (BPE) disclosed the search for private sector funds for the financing of infrastructure.

A public finance expert and capital market professor at the Nasarawa State University, Uche Uwaleke, welcomed MPC’s decision, saying: “I think a hold position was the most expedient decision to take given the prevailing economic condition of the country. The CBN’s monetary policy stance will be dictated by the need to strike a balance between tackling inflation and supporting economic growth.

“Against the backdrop of elevated inflation, a reduction in MPR or other policy parameters, though persuasive, would only worsen forex pressure and exacerbate the inflationary trend. On the other hand, given weak economic growth and the need to support an economy still reeling from the impact of the COVID’19 pandemic, tightening monetary policy via an increase in MPR is capable of rolling back the modest progress being made.”

An economist and banker, Dr. Rislanudeen Muhammad, aligned with Uwaleke, saying the MPC option was the best.

“Notwithstanding the relatively lower debt to GDP ratio, our debt to revenue ratio is very high and of great concern. Alternative means of funding projects like a public-private partnership (PPP) need to be explored,” he said.