Coronation Merchant Bank Report Foresees Opportunities to Unlock New Economic Growth

Dike Onwuamaeze

Coronation Merchant Bank (CMB) has advised the federal government to accelerate its revenue-based fiscal consolidation efforts while strengthening its expenditure and debt management frameworks.
This, it stated was necessary to enable it fund its N21.8 trillion 2023 national budget, wherein it had estimated deficit of N11.1 trillion.
CMB stated this in its Nigeria Economic Research publication for January 2023, titled, “Baton Hand-Off: Economic Headwinds and Expected Resilience – Economic Review and 2023 Outlook.”
It also forecasted that the federal government would rely largely on ways and means advances from the Central Bank of Nigeria (CBN) to fund its N21.8 trillion 2023 budget.

The CMB projected that the CBN would devalue the naira to N505/ dollar on the NAFEX/I&E window in the second half of 2023.
It added: “Given our expectation of an average oil price of $92/barrel, a moderate improvement in oil production to between 1.4-1.6 million barrels per day (mbpd) and the removal of petrol subsidy by the end of first half (H1 ’23), there is hope for improved oil revenue for the federal government and remittances into the external reserves by NNPC. This could boost forex liquidity and lead to a moderate appreciation of the naira.

“However, there is also the possibility of devaluation of the naira in H2 2023 on the back of liquidity constraints. In our view, for a significant devaluation to be meaningful, it needs to be followed by a substantial increase in forex supply and flexibility in the forex framework.
“Accordingly, we expect that the existing demand patterns in the parallel market will continue. In our base case scenario, we see the FX rate at the NAFEX/I&E window at N505/ USD by end-2023.”

The CNB further stated: “The 2023 budget is designed to achieve the strategic objectives of the National Development Plan 2021-2025 and ensure a smooth transition for the incoming administration. Considering the current global and domestic economic environment, it is imperative that the federal government accelerates its ongoing revenue-based fiscal consolidation efforts, strengthens expenditure and debt management frameworks and creates an enabling environment for businesses to thrive.

“We expect the federal government to continue to utilise the ways and means advances from the Central Bank of Nigeria (CBN).”  
The CMB also advised state governments to diversify their revenue base to avoid overreliance on FAAC distributions and ensure more resilience against future shocks.
It predicted that the sub nationals would continue to struggle with generating internal revenue, therefore, resulting in overdependence on the Federation Account Allocation Committee’s (FAAC) monthly payout while unemployment and underemployment would continue to cost states billions of Naira in forgone revenue through payment of income taxes (PAYE).

But, “to avoid overreliance on FAAC distributions and ensure more resilience against future shocks, state governments need to diversify their revenue base.
“To boost IGR, states must provide incentives for the private sector to exploit the export potential within each state and across different sectors. This combined with increased FAAC allocation, if PMS subsidy payments end by end-Q2 ’23, would bode well for job creation and improve state government finances.
“Furthermore, given the relatively weak fiscal space in which states are operating, deploying innovative Public-Private Partnership (PPP) models can further assist in delivering critical infrastructure projects and programs.”

The report noted that the Senate was still considering the president’s request to securitise the ways and means advances, currently estimated at N23 trillion as a 40-year bond at 9.0 per cent interest.
“It is important to highlight that the inclusion of the CBN’s ways and means would raise the total public debt stock to N66.7 trillion, equivalent to 38.4 per cent of 2021 nominal GDP,” it said.

The CMB noted that Nigeria’s debt-to-GDP ratio at 25.4 per cent as at end of September 2022, was relatively low when compared with other African economies such as Egypt’s 87 per cent; Ghana’s 82 per cent); South Africa’s 69 per cent and Kenya’s 68 per cent.
“However, the country’s debt service-to-revenue ratio stood at 80.6 per cent as at November ’22, one of the highest in Africa.”
The CMB observed that constraints such as IOCs’ divestments and the impact of infrastructure decay would ensure crude oil production remains at a sub-optimal level in 2023.
“In our base case scenario, we see average Bonny Light at USD92 per barrel and production at between 1.4mbpd to 1.6mbpd for 2023,” it said.

It also projected that inflation would moderate in 2023 at 18.3 per cent y/y for end 2023, “the reason could be partly attributed to positive base effects and the MPC’s current stance on the policy rate. However, persistent supply shocks on the back of the on-going Russia-Ukraine crisis as well as structural issues impacting the cost of doing business such as insecurity and other logistical challenges would likely keep inflation elevated.”