Analysts have said the 2024 budget proposal would be difficult to implement due to FX volatility; BENJAMIN UMUTEME re-examines that perspective.
Presenting the N27.5 trillion 2024 budget proposals before the joint session of the National Assembly, President Bola Ahmed Tinubu had christened it, ‘the Budget of Renewed Hope’ saying it “will go further than ever before in cementing macro-economic stability, reducing the deficit, increasing capital spending and allocation to reflect the eight priority areas of this Administration. The budget we now present constitutes the foundation upon which we shall erect the future of this great nation.”
For the president, the proposed budget seeks to achieve job-rich economic growth, macro-economic stability, a better investment environment, enhanced human capital development, as well as poverty reduction and greater access to social security.
“A stable macro-economic environment is important to catalyse private investment and accelerate economic growth. We have and shall continue to implement business and investment-friendly measures for sustainable growth,” he said.
Key assumptions and macro-framework used for the budget are: oil benchmark at $77.96 per barrel; oil production at 1.78mbpd; inflation at 21 per cent; and exchange rate at N750 per dollar.
According to data from the Budget Office of the Federation, the federal government is proposing an aggregate expenditure of N27.5 trillion for financial year 2024. Out of that amount, non-debt recurrent expenditure will gulp N9.92 trillion while debt service is projected to be N8.25 trillion and capital expenditure N8.7 trillion.
FX market
There have been knocks and commendations; the question on the lips of many is with the volatility in the foreign exchange, how is the government going to cope?
The demand for the greenback at both the official I&E Window and the parallel market have been enormous. At the parallel market on Thursday, the Naira exchanged at N1210 to the dollar.
Analysts fear that predicating the exchange rate at N750 to a dollar by the federal government is playing the ostrich. According to them, with pressures for the dollar continuing to build, there are fears that the exchange rate may further rise.
The CBN had removed the restriction placed on access to foreign exchange for 43 items.
FX volatility
Analysts have said that predicating the exchange rate at N750/$ makes a mockery of the entire budget.
In a chat with Blueprint Weekend, Prof. Uche Uwaleke said foreign exchange volatility would pose a major hindrance to the smooth implementation of the 2024 budget.
Uwaleke, a professor of finance and the capital market at the Nasarawa State University Keffi, said “despite the promise the 2024 budget proposal holds, the likely distortionary impact of the new FX regime would determine its outcome.”
According to Uwaleke, the N750 to the dollar rate used for the 2024 budget is a tall order.
“It’s most likely the exchange rate will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations.
“This is particularly so in respect of the dollar-denominated component of the budget much of which can be found in the over N3 trillion proposed defence spending as well as in recurrent debt expenditure.
“A volatile and high exchange rate will increase the cost of servicing external debt and further widen the budget deficit.
“In my view, a well implemented and corrupt-free dual (not multiple) exchange rate regime (one official including for debt service and another tier for other transactions) helps to bring certainty in government procurements and short term planning in general,” he said.
Corroborating Uwaleke’s stance, renowned economist, Bismarck Rewane, said the decline in the dollar value of the federal government’s budget would limit its ability to stimulate economic growth.
Rewane, the managing director of Financial Derivatives Company Limited, noted that the proposed 2024 budget which stands at $23.71 billion, down from $33.59 billion and $27.29 billion for those of 2022 and 2023 respectively meant the federal government would spend less in terms of dollar value.
“Nigeria is spending less in dollar terms. Fiscal budget of N27.5 trillion [for 2024] is $23.71 billion in dollar terms, 13 percent lower than the dollar value of the 2023 budget: $27.29 billion, limiting the government’s ability to stimulate growth,” he said.
Nigeria’s debt is becoming unsustainable as the country serviced its debt with 99 per cent of its revenue in the first half of this year, according to Rewane.
He said the debt burden would be exacerbated by high interest rates in 2024.
“Efficient use of borrowed funds is crucial for its debt sustainability. The federal government must spend on productive sectors to boost revenue sources.”
For political economist Adefolarin Olamilekan, the inability of the previous government to monitor the foreign exchange market is responsible for the FX distortion that the country is currently facing.
According to him, while N750/$1 is not a bad projection by the government, it should ensure it properly the market in order to rein in speculators and round tripping activities.
He said, “For us the earlier we understand that the FX market volatility is caused by shortfall in dollar supply alone. Many at times, FX market problems are associated with activity of unscrupulous people that abuse the system through insiders dealing, hoarding of dollars, speculating and round tripping of dollars they buy to subsidise official rate resale at black market price.
“The FX market unification is not yielding the desired result as expected, so there is an urgent need to review the policy. Reason has been that the objective of FX market unification is to eliminate certain activities that bring about multiple FX rates.
“Sadly that is yet to be achieved. Rather we are still confronted with rate instability because multiple FX markets still exist in the system. In this way the government will either end all forms of parallel or black market, as well as close down the BDC operator shop.”
Further borrowings
He also talked about the likely impact the mode of financing the over N9 trillion budget deficit may likely have on the cost of capital for firms and the stock market.
“Unlike in previous budgets where the amount voted for new borrowings were split fairly equally between domestic and foreign sources, this time around domestic borrowing is taking up a huge chunk at about 78% (N6.1 trillion out N7.8 trillion provisioned for new borrowings)
“This can have the effect of crowding out the private sector, hiking interest rates, increasing cost of funds and depressing the equities market as investors migrate to fixed income securities. The outcome will be a further weakening of the productive sector.
“In this regard, the government is advised to explore more opportunities for concessional project-tied loans from multilateral and bilateral sources. This will help to boost forex reserves and stabilise the exchange rate.”
On domestic borrowing, he said, “With respect to borrowing domestically, it’s important that emphasis should be placed on the use of the right instruments such as infrastructure bonds as opposed to FGN bonds that are inflationary.”
Adefolarin, who also doubles as a development researcher, told this reporter that the federal government needs to rethink the manner of borrowing to fund the national budget.
He said, “The borrowing plan of the government is captured in the Medium Term Expenditure Framework (MTEF) and Fiscal Strategic Policy (FSP), together with the External Borrowing Plan. All these are tied to national budget drafting serving as motivation that breeds debt,”
“What we are saying is that our proclivity for loan to fund our budget is a major reason for the fear expressed over uncertainty in our FX market space.
“The government must be serious about alternative measures to earn more revenue apart from crude oil sales and tax that the current government is so particular about. These are good, but not enough on the basis that we are earning more dollars. That is why it is critical for the Tinubu government to consider export oriented economic diversification. With this government would pride itself in reengineering the local production not just towards local consumption but the urgency of export of goods to fetch us more foreign currency.
“Lastly, the challenge of corruption in the system cannot be overemphasised. In this light corruption and maladministration in our economic governance space need to be tackled headlong. If this is not done, the issues of volatility in the FX market would not go away, in addition is to seriously address the bureaucratic gaps in budget implementation.”
Re-jigging FX market
Adefolarin said, “Sadly, this has been the practice if we consider a moderate Economic and budgetary process of the nation since 1999. And we must tell ourselves the truth: this has not helped the country in achieving its goal tied to the national budget.
“Again the manager of our economy and budgetary process must rethink the essentiality of FX market, the time has come for us to review all the item process that make up of our budget is drafted, this include our MTEF/FSP, External Borrowing Plan, FX market, and role of bureaucracy in budget implementation.
“If the budget is not guarded by a principle that envisages goals achievement in correspondence to outcome in implications, our budget would remain ceremonious.”
