The new Nigerian Government headed by Muhammadu Buhari could fund its proposed N8 trillion proposed budget, of which a $25 billion (N5 trillion) infrastructure fund is embedded, from a mix of four possible means.
A presentation made by Vice President Yemi Osinbajo last week to the cabinet during a two-day retreat, proposed a wider deficit projection in an effort to boost Africa’s -biggest economy while introducing safety nets for the nation’s poor.
The budget could be funded by getting concessionary loans from Development Finance Institutions (DFIs), floating a new Eurobond, tapping the domestic bond market and imposing new taxes and fines on businesses, BusinessDay’s analysis shows.
“It is glaring that the country currently suffers significant cash crunch. We however believe that dependency on international grants, FDI inflows, domestic and external debts and public private partnerships (PPPs), might be some of the different measures the government will engage in reviving and developing the Nigerian infrastructural space, ” Ayodeji Olabisi, an analyst with Meristem Securities said in response to questions.
Nigeria currently faces an output gap (difference between potential and actual growth) in the neighbourhood of 7 percent, so deploying the funds should in theory not be inflationary, especially if most of it goes to badly needed infrastructure, analysts say.
Helping to spur the Federal Government growth plans are Central Bank Governor, Godwin Emefiele, who is loosening monetary policy, leading to falling borrowing costs.
Emefiele said at the last Monetary Policy Committee (MPC) meeting that: “weakening economic growth is traceable to the waning aggregate demand following diminished government expenditure.”
Yields on Nigeria’s bonds fell sharply across maturities yesterday, as liquidity surged on the interbank money market, as Nigeria’s 2017 bond fell the most, down 110 basis points, to 6.9 percent, a level last seen more than five years ago.
The 10-year benchmark bond shed 72 basis points to 10.25 percent.
Overnight lending rates traded between 0.5 and 1 percent on Tuesday, as banks’ balance on the interbank market stood at a credit of N850 billion ($4.3 billion), traders said as the CBN’s measures to promote excess liquidity led to collapsed yields.
The proposed 2015 budget is up 81 percent from the N4.4 trillion budgeted for this year.
The Buhari government could fund the extra N3.6 trillion ($18 billion), through $3 bn of concessionary loans from DFIs (such as the African Development Bank Afdb, the China Development Bank Corporation (CDB), the Islamic Development Bank and the European Bank for Reconstruction and Development (EBRD), a further $5bn could be borrowed from the Eurobond market (at yields of between 6 and 9 percent), while $10 billion (N2 trillion) could be raised from the domestic bond markets.
Analysts speaking on condition of annonymity say the CBN could participate in such offers in theory if domestic funds and banks require higher yields and fail to take up all issuances by the treasury.
Another means of raising funds which is by higher taxes and fines is already in motion through the regulatory fines on a slew of firms, including MTN Nigeria ($5.2 billion), Stanbic IBTC (N1 billion), FBN Holdings (N1.87 billion), UBA (N2.9 billion ), and Skye Bank (N4 billion).
The government may however see the fine option as the least attractive means of raising funding, due to the negative implications and risk to private sector businesses.
“The outsized fines are unlikely to do anything to boost Nigeria’s image as a place to do business. Combined with an already-slowing economy and difficulties sourcing FX, it could serve to discourage more FDI to Nigeria, ultimately costing the economy much more in growth and job opportunities forgone,” Razia Khan Standard Chartered Bank’s chief economist and head of Africa global research, said in response to questions.
Nigerian stocks represented by the NSE all share index which is down -16 percent year to date are waiting for details on the proposed spending plans before they mount a rally, analysts say.
The budget deficit for next year may print at close to 5 percent up from 2 percent in 2014.
PATRICK ATUANYA
