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De-risking budgetary borrowings

An emerging controversy over Nigeria’s deficit funding is gradually taking the centre stage as more concerns over 2016 fiscal year come up.

Last week, Fitch Ratings, one of the world’s leading economy rating agenccies indicated that the emerging fiscal and monetary policy responses to the oil price crash may lead to a further downgrade of its Nigeria rating, thereby increasing country risks for all forms of capital inflows including borrowings.

Fitch also noted that our inadequate response which failed to carry out growth-enhancing reforms and put debt levels on an unsustainable path would have a negative effect on the rating.

Our concern here is not really on the Fitch’s rating as much as the confusion and doubt as to whether the 2016 budget would be implementable.
First was the disappearance of the budget for days after which it resurfaced with an apology from the Presidency that there were errors that had to be corrected.
Alongside the negative fallouts of this incidence and the entire budget itself, we had expected that a corrected version would have addressed the issue of oil price benchmark, put at USD38 per barrel at a time the price had crashed far below the benchmark.

Prudence demands that the benchmark should be lower than the ruling oil price and very significantly too given the speed of oil price drop.

The next controversy was on deficit funding which has generally been focused on borrowings, both external and internal.

But even at that, the government is enmeshed in a controversy over whether or not it has approached the World Bank and African Development Bank for loans.

The Finance Ministry is denying media reports that it has done so but none of the financial institutions has come out to deny that they have been so approached. The Ministry was contented with the excuse that it was still at the stage of seeking legislative approvals for the borrowings which is a matter of constitutionalism and due process.

Again we are not particularly concerned with the procedure. We are bothered with the terms of borrowing. That is where we could have a problem, as the Fitch rating appears to suggest.

Fitch has warned that key provisions of the 2016 budget, particularly deficit spending and monetary policy positions on foreign exchange management, could present downside risks to Nigeria’s sovereign credit profile. Although there are mitigating factors, increased borrowing and higher interest payments would add more pressure to the fiscal burdens of Nigeria.

Without prejudice to whatever measures being put in place for the needed borrowings, government should focus effort at tidying up the loose ends of its fiscal and monetary policies. This will go a long way in optimising the loan conditions to our benefit.

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