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Vol 63 No 25

Published 15th December 2022


It takes more than new banknotes…

Abuja is struggling with slowing growth and spiralling debt demands, and a new plan to replace old banknotes looks set to create further chaos

Ahead of February's election Nigeria's economy is flagging. Usually, governments can rely on help from their supporters for a pre-election boost, but this time it is different. Real growth of Nigeria's oil and gas revenue-dependent economy has been meagre, slowed by the pandemic and corruption in the oil market (AC Vol 63 No 20, An election umpire besieged on all sides). That is sinking the naira and driving up interest rates. Now, a new scheme could cause further confusion.

In the next few weeks, the Central Bank of Nigeria (CBN) plans to call in old currency notes and issue new ones designed with better security. It's a huge operation, involving 2.7 trillion naira (US$6 billion), 85% of all currency in circulation. Experts say that it may help prevent some corruption, but is also likely to slow the economy.

After the currency experiment plays out, whoever succeeds President Muhammadu Buhari will need to make reforms to steady the ship. These are likely to include plans on revenue raising, fuel subsidies and foreign exchange, which have been repeatedly requested by the international financial institutions.

Recent economic figures show the extent of the problem. The IMF cut its projections for Nigeria's 2022 and 2023 real GDP growth to 3%, although it expects slightly better growth next year. Nigeria's National Bureau of Statistics (NBS) said that real third-quarter growth had slowed, almost halving to 2.25%, or less than zero in per capita terms, with the agricultural sector growth barely exceeding 1% and the oil and manufacturing sectors contracting.

IMF staff completed their mission in Nigeria in November. As well as lowering growth predictions, they sounded the alarm over 'elevated fiscal deficits', hefty debt service payments and increasing national debt. They called for major policy reforms, such as the elimination of costly and controversial fuel subsidies, reduction in CBN financing of the budget deficit, and for the administration to tackle oil theft.

Nigeria's worsening debt picture may soon mirror that of West Africa's second-largest economy, Ghana, which is reeling from several ratings downgrades, surging borrowing costs, and is in negotiations with the IMF to create another programme to boost its finances and market confidence (AC Vol 63 No 21, Banking on the Fund).

Debt warning
In Nigeria, the Debt Management Office (DMO) warned that overall national debt had risen considerably by mid-year, increasing by almost one-fifth from June 2021 levels to $103bn, before accounting for additional borrowing during the second half of this year.

Nigeria's official debt-to-GDP ratio remains relatively low by African and global standards, still south of 40%. However, World Bank economists recently claimed that overall debt service payments in 2022 could exceed 100% of federal revenue.

The World Bank has also said that Nigeria's complicated multiple-exchange rate system is a significant tax on revenues. The exchange rate system affects how national and local governments are paid, and has contributed to revenues declining significantly since 2010.

 The World Bank estimates of Nigeria's debt service-to-revenues ratio only slightly exceed those of the federal government, IMF and ratings agencies. But overall, the message from senior economists is that Nigeria's fiscal capacity to pay for key domestic priorities has been heavily undermined.

The worsening external borrowing environment also means that Nigeria is increasingly having to rely on more expensive domestic borrowing, rather than borrowing on international markets.

Politicians are starting to admit to the problems. Finance Minister Zainab Ahmed's October presentation on the 2023 federal budget conceded that projected 2023 debt service payments of N6.31trn would be 71% higher than estimated debt service payments for 2022. She was speaking only days after President Buhari's October 2023 'budget of fiscal consolidation and transition' speech to Nigeria's National Assembly, which outlined cuts to areas including women's empowerment.

Ahmed's disclosure that the figure includes N1.2trn for interest payments on CBN 'ways and means' financing illustrates the outsized role that the central bank plays in covering the shortfall between budget spending needs and what the government can borrow (AC Vol 63 No 23, Spend, spend, spend).

Also sounding the alarm are ratings agencies Moody's and Fitch, which have downgraded Nigeria's sovereign debt rating by one notch each in recent weeks (to B2 'on review for downgrade' and B- 'stable outlook' respectively). They have also downgraded the ratings of several domestic banks holding significant debt issued by Nigeria's federal government, whose capacity to support local banks under pressure has declined.

Moody's warn that Nigeria's finances and external position have deteriorated considerably despite high oil prices. They blame dipping oil production, ballooning fuel subsidy costs, and capital and financial outflows.

The latest statistics from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), in its latest incarnation under the 2021 Petroleum Industry Act (PIA), suggest national crude oil production in October was just 58% (at 1.23 million barrels a day) of January 2020 levels.

Despite all this, the finance ministry's 2023 federal budget optimistically estimates that next year's fiscal deficit should come in at around 4.8% of GDP, materially below the IMF and ratings agencies' estimates of 6% or more.

There are hints that a 'supplementary budget' might be used to help massage figures, even if the official 2023 budget is approved by the National Assembly and signed into law by Buhari. But ratings agencies are warning that any restructuring of Nigeria's debts via bond exchanges could be treated as signs of distress, with ratings implications, so the margins for manoeuvre are small.

With all the chaos, it is a difficult time for a wholesale change of the country's bank notes. But Nigeria is hoping that brighter days lie just down the road.

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