In the twilight of his administration, former President Muhammadu Buhari hastily sought and got the National Assembly’s approval to convert a N22.7 trillion ($49 billion at the time) borrowing from the Central Bank of Nigeria (CBN) into bonds.
Borrowing a sum that huge from the bank violated the law that limits the advance the Nigerian government could take from the CBN to five per cent of its previous year’s revenue and requires the cash to be repaid within the same year.
The move raised Nigeria’s debt by half to N69 trillion as of that time. The Debt Management Office put Nigeria’s debt service-to-revenue ratio at 73.5 per cent in June 2023 less than a month after Mr Buhari’s successor Bola Tinubu took office. It suggests the latter had limited elbow room to borrow to fund the spending ambitions of his government.
That debt level “exceeds the recommended threshold of 50 per cent due to low revenue, which means that there is a need to significantly increase government,” the debt office said in a report titled Market Access Country-Debt Sustainability Analysis 2022.
With borrowing not offering a lot of prospects, the government’s attention shifted to alternative means of growing the economy, including attracting foreign direct investments and expanding the tax revenue base.
The government plans to strengthen the foreign exchange market and, by extension, the economy “by raising revenue, by looking at other sources of investment funding, by attracting investment funds, equity funds, not debt from those around the world interested in investing in the Nigerian economy,” Wale Edun, the minister of finance and coordinating minister of the economy, told lawmakers during his screening last August.
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“If you have fiscal and monetary tools, the one that works faster is monetary tools,” Paul Alaje, chief economist at the economic development firm, SPM Professionals, told PREMIUM TIMES.
“Monetary authorities can quickly change MPR, change CRR, change liquidity ratio and adjust asymmetric corridor. All those are simple. You can do that and start seeing the impact in six months.
Trade and Investment
A flurry of deals reached with domestic and international investors, particularly in the first seven months, makes trade and investment one of the strongest points of achievement for the government in its first year.
Following talks with various Indian investors in September, President Tinubu secured pledges of $14 billion investment in sectors including steel, petrochemicals, power generation and military equipment manufacturing.
In November, President Tinubu inked a couple of investment deals with the Saudi Arabian government during the Saudi-Africa Summit in Riyadh. One involved providing a foreign exchange support to boost liquidity in the Nigerian currency market. Another was a commitment that would allow Saudi oil giant, Aramco, to provide part of the capital for the overhaul of Nigeria’s four state-owned oil refineries.
Later in the month, Nigerian and Germany companies struck two investment deals, including a renewable energy agreement and a gas export arrangement totalling $500 million, while the president was attending a G-20 conference in Berlin.
Monetary Policy/Inflation
In a mark of its strong resolve to tame bloated price levels, the CBN has hiked the benchmark interest rate by 775 basis points since the start of the Tinubu administration, with 600 of that delivered in the first quarter of 2024 alone.
As interest rate raced to record 26.3 per cent from 18.5 per cent within the first 12 months of this administration, borrowing costs continued to strain the operating expenditure and, in some cases, the direct costs of businesses.
Many had no option on that score but to pass the costs on to customers to keep their operations going. In turn, that has made finished goods pricier, further stoking inflationary pressures.
Mr Cardoso has said the CBN under his watch would turn its gaze towards fighting inflation rather than money control, which was a massive distraction for his predecessor, considering that consumer price levels must be kept stable to achieve steady economic growth.
An unbroken string of upward rate adjustments since the onset of the Tinubu administration, nevertheless, hasn’t brought any month-on-month decline in inflation levels.
It implies that consumer inflation in Nigeria, irrepressible for 16 months in a row now, touching its crest of 33.7 per cent in nearly three decades in April, requires much more than merely deploying monetary policy tools to tame.
The drivers have been jumps in the costs of every day essentials like food, energy and transportation, which sharp reverberations from fuel subsidy removal and, to some extent, higher rates of exchanging the naira for the dollar, have turned into pain points for consumers.
“The balance of risks suggests further tightening of policy to build on the benefits from previous hikes,” Mr Cardoso said on 21 May at the end of a monetary policy meeting in Abuja, hinting that the pace of increase in price levels is not as high as it was.
Perhaps, the weight of the cost of living crisis on households is most felt in the affordability of food after a fast-diminishing purchasing power steadily weakened disposable income, leaving families with less to spend on what to eat.
According to April inflation data, food inflation rate for that month soared to 40.5 per cent relative to 24.6 per cent a year earlier.
“The average annual rate of food inflation for the 12-month ending April 2024 over the previous 12-month average was 32.74 per cent, which was a 9.52 per cent points increase from the average annual rate of change recorded in April 2023 (23.22 per cent),” the National Bureau of Statistics said.
Exchange Rate
One of the biggest policy shifts made by President Tinubu after taking office was to heed the long call by multilateral organisations and analysts for the unification of Nigeria’s multiple exchange rates which, after several years of orthodoxy, had been left vulnerable to diverse pressures across multiple foreign exchange videos.
Harmonising the foreign exchange rates was key to drawing foreign investors into the economy and boosting the supply of the dollar whose flow had started running dry since pre-pandemic days.
In a bid to liberalise the currency market, the Central Bank of Nigeria (CBN) collapsed the multiple exchange windows into one as it shifted away from a managed float regime to enable the naira to trade more freely and achieve price discovery.
Since the start date of the administration, the local currency has endured two devaluation rounds and countless other pressures.
Barely a fortnight after the government was inaugurated, the central bank allowed the naira to weaken by 36 per cent against the US dollar on the official market. As of 14 June, naira exchange rate had crashed to N750 to a dollar compared to N460.72 on 29 May.
The local unit ended 2023 at 1,041 to a dollar, making it the world’s third worst-performing currency, only better than the Lebanese pound and Argentina’s peso of the 151 currencies tracked by Bloomberg for the year.
The impact of a fast-depreciating naira was sweeping on multinationals and local businesses that depend on imports for the bulk of their operations all through the year.
On account of the perennial dollar crunch, Procter & Gamble, GlaxoSmithKline Consumers, Bayer AG and Sanofi AG exited the economy last year. The likes of Nestle, PZ Cussons and MTN Nigeria incurred losses so overwhelming that threw their balance sheets into the red at year-end.
In January 2024, the naira underwent a second devaluation in seven months, causing it to fall by 31 per cent, with the local currency exchanging at 1,413 to a dollar on 30 January.
One big feat by the CBN in the first quarter of the year was clearing a backlog of overdue foreign exchange obligations initially estimated at $7 billion before an audit found that $2.4 billion of that amount were invalid claims. The overhang, the central bank said, had left the naira vulnerable to exchange rate pressures for quite a long time.
To attract dollar inflows, the CBN issued one-year treasury bills in February, which were more than twice oversubscribed, helping bring more than $1 billion into the economy.
As of 8 March, foreign portfolio investment so far in 2024 stood at $2.3 billion, according to the apex bank, compared to the $3.9 billion reported for the whole of the preceding year. Closing the gap between the monetary policy rate and yields on short-term securities made short-term sovereign debt attractive to foreign investors, boosting inflows. Inflows were also partially strengthened by a rise in remittances from diasporan Nigerians, which climbed to $1.3 billion in February from $300 million the previous month.
Such supplies bolstered liquidity in the market, and the grounds gained by currency against the dollar afterwards, notably from the middle of March till about a month after, were as significant as 34 per cent, making it the world’s best-performing currency by Bloomberg’s rating.
Those gains were soon to be eroded.
With the availability of dollar beginning to dwindle, the CBN was impelled to intervene in the market but that support was itself limited at best. The CBN’s extent of intervention in the open market continues to arouse analysts’ scepticism as to how committed it is to running a willing buyer, willing seller market where activities are driven by the forces of demand and supply rather than stepping in to intervene with funds from external reserves.
“The central bank is not supposed to appoint someone to sell dollar to them in the case of BDCs. It’s an aberration in a free-float economy,” Mr Alaje said.
“I’m supposed to raise my dollar and say I want to sell it for N2,000. It’s either you want it or not. That’s free float. So managed float means we are deliberately creating benchmark in order to achieve some targets. It’s actually a targeted exchange rate we are practising.”
By 17 May, the local unit had slid to its near-two-month low of 1,534 against the dollar.
Stock Market
By reason of a couple of investor-friendly reforms including subsidy removal announced by President Tinubu, Nigerian stocks reacted largely positively within days of the new administration, with the momentum sustained for the greater part of the year.
Pension funds and institutional investors were the biggest drivers of activities, as trade recorded volumes and values last seen during pre-pandemic days.
Between the beginning of the administration and 22 May, Nigerian stocks had yielded 85.2 per cent according to Nigerian Exchange Limited data.
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