Exchange Rate Reform: Incoming President to Change CBN Governor
The Naira debacle is expected to top incoming Nigeria’s president agenda in what appears as, head or tail, a pro-market leader would assume the top seat in Abuja in June 2023.
The Central Bank of Nigeria (CBN) has drawn bad blood due to its improperly implemented naira redesign policy that has thrown Nigerians into economic darkness in broad daylight.
Godwin Emefiele, the CBN governor with a political interest has been accused of fighting back with the new naira notes policy after he failed to secure a ticket to forward his presidential ambition. Other issues include alleged N89 trillion stamp duties misappropriation.
Despite weakening local currency, the CBN has maintained a stance not to devalue the local currency, though analysts believe that Nigeria’s external reserve is healthy as a buffer for its market intervention to keep the exchange rate stable.
In contrast to laid down rules and procedures enshrined in CBN Act 2007, the apex bank has allowed the government to access some N24 trillion from its ways and means window.
In a commentary, Fitch Ratings said the prospects for exchange-rate reform will be influenced by the outcome of the presidential election and could increase under a new central bank governor. However, it added that while the incumbent’s term ends in 2024, an incoming administration could push for earlier change.
It said a more flexible exchange-rate regime would likely be a long-term positive for Nigeria’s credit profile, although the initial economic adjustment could present macro-fiscal risks.
Nigeria faces major economic challenges ahead of elections due on 25 February and policy choices by the incoming administration could have a significant impact on the country’s credit profile, Fitch Ratings says.
The Nigerian Supreme Court’s suspension of a 10 February deadline for exchanging old banknotes into new notes eases, at least temporarily, the risk of intensifying cash shortages. However, it said the demonetisation drive is still likely to be disruptive in the near term.
Associated cash shortages may hit consumer spending and boost demand for foreign currency, aggravating foreign-exchange shortages. It is unclear whether there will be offsetting longer-term economic benefits, such as greater use of the formal banking system or enhanced use of digital payment systems.
The country faces numerous other challenges to its fiscal sustainability, external finances and economic outlook, Fitch said after the rating firm downgraded Nigeria’s rating to ‘B-’ from ‘B’ in November 2022, with a Stable Outlook, reflecting continued deterioration in debt servicing costs and external liquidity.
“Our base case assumes that the subsidy on petrol, a key drag on the public finances, will be reduced in 2023, but phased out more gradually than in the government’s latest budget.
“We consider the next administration is likely to face pressure to continue it and concessions on this front could make consolidating the public finances more difficult”.
Fitch however indicates that it expects some improvement in crude oil production to help offset lower oil prices in 2023.
Data show that output in the fourth quarter of 2022 was 15% higher than in the third quarter and rose further in January to 1.26 million barrels a day (mb/d). However, it was still well below Nigeria’s budgeted 1.69mb/d for 2023 and its OPEC quota of 1.8 mb/d.
This partly reflects security issues that we believe will continue to hamper production, according to the firm. Nigeria’s fiscal profile will remain weak in the medium term, Fitch ratings said, noting that general government interest/revenue is extremely high at 47% in 2022, according to its estimates.
“…we expect it will remain so given constraints on revenue mobilisation, increasing debt and high-interest rates”, the rating firm maintained.
It said structurally low non-oil revenue, spending pressures and weak economic growth imply substantial fiscal financing needs. The government faces external debt amortisations of USD2.5 billion in both 2023 and 2024, an increase on recent years, although the majority is bilateral and multilateral debt service.
“We stated in November that increased financing constraints or signs of difficulty in meeting debt servicing costs could lead to negative rating action”.
The government last year confirmed that Nigeria did not intend to seek a debt restructuring. Fitch does not consider a restructuring or forced debt exchange likely in the near term, but there is a risk the next administration could take a different stance.
In November, Fitch said that the significant intensification of Nigeria’s external liquidity pressures, illustrated by a rapid decline in international reserves, could lead to negative rating action.
“Our base case assumes that international reserves will edge down further and that foreign-exchange liquidity will remain constrained”.
Fitch assumes that the official exchange rate will be permitted to depreciate modestly over 2023-2024, but that it will remain overvalued, hampering economic activity.
It said the prospects for exchange-rate reform will be influenced by the presidential election’s outcome and could increase under a new central bank governor.
The incumbent’s term ends in 2024, but an incoming administration could push for earlier change. A more flexible exchange-rate regime would likely be a long-term positive for Nigeria’s credit profile, although the initial economic adjustment could present macro-fiscal risks.
