Report: Increased Fiscal Spending Required to Catalyse Growth

Nume Ekeghe
A report by CardinalStone Partners Limited has stressed that increased fiscal spending is required to catalyse and strengthen growth in the country.

The report also envisaged that rise in crude oil price as well as stability in the forex market may result to readmission of Nigeria into JP Morgan Bond Index.

The firm stated this in its monthly report for August titled, ‘Navigating the Tide,’ was obtained by THISDAY on Monday.
On the rising debt level in the country, the report stated, “In line with the federal government’s expansionary fiscal stance, the anticipated fiscal deficit for the 2018 budget is at N1.96 trillion ($6.4 billion), representing a 17 per cent decline, compared to the 2017 figures.

“The government plan to finance the deficit mainly by borrowing N1.64 trillion ($5.4 billion) of which 51.7 per cent will be from foreign sources, while 48.3 per cent will be locally sourced.
“The balance of the deficit will be financed by proceeds from privatisation and sale of non-oil assets amounting to N311 billion ($1.0 billion).

“Already, authorities have announced plans to raise $2.8 billion dollars in Eurobonds later this year. As at March 2018, Nigeria’s debt stood at N22.7 trillion ($74.3 billion), though, at 21 per cent, Nigeria’s debt to GDP is low compared to that of other Sub-Saharan African countries.”

It further states, “Instead, concern mounts over the sustainability of its debt service as capacity to pay will be severely constrained if debt continues to rise and revenue fails to meet expectation.

“This is understandable given that debt service to revenue in the approved 2018 budget is 30.8 per cent (2017 estimate: 32.7%). In our view, other than high borrowing costs, we also think the challenge lies in low revenue generation which at 6.2 per cent of GDP is still considerably low compared to Sub-Saharan Africa average of 17 per cent. “This necessitates the federal government’s drive to aggressively mobilise non-oil revenues.”

Therefore, the report noted that given the current state of the economy, increased fiscal spending was required to catalyse and strengthen domestic growth.
Hence, it pointed out that increased borrowing was required, saying in a bid to curtail the consequent debt service costs, the federal government had started to channel its debt stock more towards foreign borrowings which are cheaper compared to local debt.

It added, “However, we stress that the national leadership must do more to achieve its revenue targets which have consistently underperformed projections.”
Also, on the readmission of Nigeria into JP Morgan Bond Index, it said it was imminent factoring to the stability in the exchange rate, liquidity and upward trend in crude prices.

In 2015, Nigeria was removed from the JP Morgan Government Bond Index Emerging Market (GBI-EM) on the ground of poor liquidity and lack of transparency in Nigeria’s foreign exchange market.

However, following the rally in crude prices and the stability of foreign exchange rates at the Investors and Exporters (I&E) window, with about $45 billion exchanging at hands at the window in 2017, “it could suffice to say that Nigeria might be readmitted into the GBI-EM soon.”
“In the event that Nigeria is eventually re-included into the GBI-EM in the coming months, we expect positive demand for local Treasury instruments to follow,” it added.

Also, applauded the performance of the Investors and Exporters’ forex window.
“Since inception, the window has provided improved accessibility and enhanced liquidity in the forex markets.
“Over the first half of2018, turnover averaged $243.6 million (versus $170.9 million in second half of 2017), indicating an increase in trading activity.

“Furthermore, the Central Bank of Nigeria has been able to sustain its supply of weekly auctions amounting to $210 million to the retail and wholesale markets which has helped support naira stability.”