• Costs Of Projects To Skyrocket Amid Inflation
• CBN Must Deepen Trust For Its Policies To Gain Root – Abubakar

Despite the appreciation in the value of the naira against the dollar lately, the N16,099,490,084,691 provision for debt financing as well as debt servicing and sinking fund required to service Nigeria’s debt in 2024 may rise by 48.38 per cent. 

 
Rising inflation and depreciation of the naira to slightly above N1,000 to the dollar may pose an implementation challenge to the 2024 Appropriation Act. The 2024 Appropriation Act was predicated on the N800 exchange rate.
 
In the 2024 budget, there is a provision for a debt service/sinking fund of N8,270,960,606,831. A sinking fund is an account containing money set aside to pay off a debt or bond. Sinking funds may also help to pay off debts at maturing or assist in buying back bonds on the spot market.
 
Then there is another provision of N7,828,529,477,860 for debt financing. Cumulatively, the amount involved in debt settlements comes to N16,099,490,084,691 only. On the flip side, it is not all glooming as the Federal Government’s expected revenue, which was pegged at N19,598,473,687,947, will likely rise to a figure that is close to N30 trillion courtesy of the devaluation of the naira as it is now reflected in the  
Federal Account Allocation Committee (FAAC) allocation, which has resulted in substantial rise in the amount that is allocated to states and local councils.  
  
Again, capital expenditure that got N9,995,143,298,028 in the appropriation will likely rise to more than N14 trillion to achieve the expected impact on the people. Also, the rising inflation is likely going to increase amounts that are meant to execute projects, especially roads, bridges, hospitals, houses and other planned procurements.
 
As the nation awaits a new inflation figure that is likely to be released by the National Bureau of Statistics (NBS) tomorrow, Monday, April 15, 2024, there may not be good news on the inflation rate decelerating. It is believed that the upward movement of the naira against major currencies in the last few weeks may not be reflected in the March inflation figure as data used for the compilation are those of March.
 
In February 2024, the Nigerian headline inflation rate rose to 31.70 per cent, up from 29.90 recorded in January. Comparatively, on an annual basis, February’s inflation rate was 9.79 per cent higher than the 21.91 per cent recorded in February 2023.
  
Going by the inflation rate recorded in the first two months of the year, there is no sign that costs of goods and services will recede any time soon. 
As of August 1, 2023, when the figures for the 2024 budget were expected to have begun, the exchange rate was N758.52 to the dollar while it ended the month with N774.20 to the dollar.  
  
Then as of September 31, 2023, the dollar was N770.50 and then on October 30, 2023, it came down slightly to N768.68.  Then on November 11, 2023, the naira crossed N800 as it exchanged for N803.42 to the dollar. On December 29, 2023, it weakened to N896.64 to the dollar.
 
However, the naira has been on an upward trajectory exchanging for N1,187.742 as of yesterday (April 13, 2024). So, going by the exchange rate, the 2024 budget benchmark, which is N800 to the dollar, is short of N387.
 
By implication, therefore, the figure earlier budgeted for debt financing and servicing is expected to rise by 48.38 per cent in the current year.
While defending the fundamentals of the budget upon presentation, the Minister of Budget and National Planning, Atiku Bagudu, had argued that arriving at the figure was aimed at avoiding basing the foreign exchange benchmark on the 2024 budget on a spot rate, to avoid eventualities and uncertainties.
  
Bagudu said: “For budgeting purposes, you don’t use the spot rate of anything. Oil prices can go to 120 today, maybe there is a shortage, or maybe there is a collision between two ships that will block a channel. It would be foolish to use that as a reference price. I should take a period of maybe six months to one year and say let me observe this average behaviour; so you don’t use spot prices. So even with the exchange rate, it is like that.”
 
At the N1,187 exchange rate currently, the Federal Government may be considering tampering with the fundamentals of the budget, especially as the costs of projects have since moved more than double.
 
In the budget for the Ministry of Works, N987,289,797.899 was budgeted for capital projects but the figure may now be able to execute half of the project as the price of cement has risen by more than 100 per cent. When the budget was prepared around October 2023, the price of cement, which is a major ingredient for road construction, was around N4,000 for a bag. But that has since changed as the price of a bag of cement has moved to between N8,000 and N9,000 per bag depending on locations.
 
A financial analyst, Abubakar Umar, said though a possible review of the 2024 budget is dicey, he does not believe the government should present a new budget, saying a revised budget would lead to a further inflation spike.
 
He explained: “The challenge around the budget is for the government to try and cap their spending according to the appropriation. This budget, as it is, will not be enough for the government considering the high prices of goods, but opportunity can be used from such a situation to tame government spending. Government spending drove inflation. Therefore, reducing such spending can bring moderation and not necessarily reduce inflation.”
 
He noted that when inflation is growing month-on-month, the first step to be taken is to stop the growth, make it steady over a period and then begin to hit harder on reducing it.  He maintained that exchange rate volatility is one of the major drivers of inflation in the country.
 
“In the past three weeks, the rate has been stable. If the government can maintain that stability, it will be the first step in reducing inflation. Stability in the FX rate leads to stability in prices of goods and services. Instability in FX rate leads to panic and uncertainty in the market, thereby real market prices will be volatile,” he added.
  
Abubakar believes that various feeding programmes introduced by some state governors, especially in the northern part of the country, and increment in FAAC allocation are the twin developments that may likely lead to price increment.
 
On the implications of the Central Bank’s Monetary Policy Committee (MPC), which jerked up the interest rate by an additional 200 basis points to 24.75 per cent, Abubakar said the aim is meant to encourage Foreign Portfolio Investors (FPIs) to invest in the Nigerian economy through bonds.
 
He held that though the monetary authorities could be seen to be doing all they can to jumpstart the economy, the fiscal side seems asleep with no direction on how to generate enough inflow to bolster the efforts of the monetary side.
 
Abubakar stressed the need for the Yemi Cardoso-led CBN to deepen trust within the system, saying, “there is still a trust deficit and it will affect any effort the CBN is making if such trust deficit is not closed.” He further maintained that the ‘real’ prices of goods and services will take time to reduce especially if the market sustains a stronger naira.  
  
“Traders and importers do not trust the stability of the FX rate, which is why it will be very difficult for prices of goods and services to come down,” he added. Another analyst, Olumide Adesina, said: “The CBN introduced several policy reforms to improve liquidity in the FX markets in the short, medium, and long term. However, the Federal Government must complement these efforts to sustain the stability of the FX market.”
  
An economist, Kelvin Emmanuel, cautioned the Federal Government against reintroducing petrol subsidies as energy costs are on the rise. He noted that the cost of petrol is not a true reflection of the landing cost. He added that the Nigerian National Petroleum Company Limited (NNPCL) has stepped back to assume 100 per cent control of the downstream Premium Motor Spirit (PMS) market through the Petroleum Product Sharing Agreement (PPSA), stressing that it means the government is still paying subsidy, which will impact considerably on the ability of the government to use the gains from exchange rate differentials to reduce the deficit financing component of the budget. 
  
He stated that the revaluation losses from naira devaluation on external loans that have a 62 per cent multilateral and bilateral creditor’s component would impact the debt servicing and refinancing component, especially its ratio to capital expenditure 
  
Emmanuel added: “While it appears that the FX differentials might impact positively on the revenues generated from tax and non-tax sources, these gains are going to be quickly wiped off by revaluation losses on external loans, pendency on fixed income instruments from falling yields, and the impact of inflationary forces on the apex bank’s rate position in the credit markets. I think this is a call on the government to raise revenues aggressively while significantly cutting costs.”