Report: Increased Borrowing May Trigger Structural Reforms in Nigeria

Peter Uzoho

As Nigeria is projected to raise $3 billion this year meet its infrastructure needs, which is expected to

increase its public debts, the situation will force the country’s policy makers to implement structural reforms, the Chief Executive Officer, Financial Derivatives Company (FDC), Mr. Bismarck Rewane has stated.

He stated this in his latest Lagos Business School’s executive breakfast meeting presentation, a copy of which was obtained at the weekend.

The April 2021 edition of the monthly report, entitled “Oil Illusion and Financial Delusion,” was a review of the economic performance of the country in the just ended first quarter of 2021 and a peep into the second quarter performance.

He said the depth of recession experienced in 2020, would leave a large fiscal and debt hangover for most African countries and would reduce the scope for policy makers to respond with stimulatory measures, citing Zambia as the first country in the region to default in its Eurobond repayment.

The report notedd that several African countries, including Nigeria, Kenya and South Africa were planning to borrow from the international capital markets. Ghana recently successfully issued $3 billion Eurobond.
“Nigeria will raise $3 billion in 2021. Increased borrowing to meet infrastructure need will force Nigerian policy makers to implement structural reforms,” Rewane wrote in the report.

For Sub-Saharan Africa (SSA), the FDC CEO said pro-business policies and structural reforms would help bolster economic activity over the longer term, stressing that policy initiatives to address lagging productivity, skills and infrastructure would progress slowly.

On the kind of recovery expected in SSA, he forecasted an inverted V-shaped recovery, noting that recoveries were diverging across and within countries.

He projected that SSA economy would expand by 3.4 per cent in 2021 and four per cent in 2022, while Inverted V-shaped recovery was expected to occur in Nigeria and South Africa.

However, the FDC boss said the informal sector was going to spur the projected recovery, predicting that unemployment in the formal economy would decline slowly.

He added that while jobs in the informal sector will rebound faster as restrictions eased, inflation was projected to average 8.1 per cent in 2021, before edging down to eight per cent in 2022.
“From our perspective, we can say that Nigeria will experience an inverted V-shaped recovery while battling persistent inflation.

“Institutional and domestic investors are jittery as they attempt to make sense of ambiguous pronouncements and conflicting data,” he stated in the report.
Noting that the International Monetary Fund (IMF) and World Bank, at their spring meetings in Washington, expressed optimism about Nigeria’s economic recovery, he argued that the upward review of their projections on the West African country, rests heavily on optimal vaccine rollouts and stronger oil prices.

The IMF last week revised its 2021 Gross Domestic Product (GDP) growth projection for Nigeria to 2.5 per cent from one per cent, this, Rewane said was “a confidence boost for the much needed investment inflows.”
He warned, however, that the snares of insecurity, hyperinflation and policy uncertainty in the country could force investors to take their funds elsewhere.

On exchange rate policy, the FDC boss argued that the nuanced interpretation of flexible or floating exchange rates by policy makers, made investors wary and was seen as a missed opportunity to embark on a unified exchange rate system.

He added that exchange rate convergence remains the sole objective of the Central Bank of Nigeria (CBN).
He, however, said the forex rationing has continued and that the I&E window was still controlled, pointing out that limited forex supply has forced manufacturers to source over 90 per cent of forex from the parallel market.

FDC stated that forex intervention in the I&E window fell throughout March to an average of $66.63 million, indicating a preference for reserves accretion at the expense of exchange rate alignment, adding “So it is neither a yay nor nay situation…we take it as it is and hope for the best”.
“In all of this, the Nigerian consumer remains financially embattled. Disposable income is flat but discretionary income is sharply lower due to rising food prices, transport costs and electricity bills. Many state governments owe salary arrears and labour is on a warpath.”