As a mono-economy that relies heavily on oil revenue to carry out its activities, Nigeria might just be carrying more burdens with the US Fed hike of its interest rates; BENJAMIN UMUTEME reports.
It is often said that ‘when America sneezes, the world catches cold.’ And that is the situation Nigeria’s fiscal authorities seem to find themselves in at the moment.
As the effect of the Russia-Ukraine war continues to destabilise global economic equilibrium, and in the process driving inflation figures upward in a way not seen for decades. Even the Federal Reserve in the United States in response to the situation had to hike interest rates.
In February, 20222, the US Federal Reserve raised interest rate by half in a percentage point for the first time since 2000 in a bid to combat soaring inflation. There are fears that there could be further hikes in the coming months.
Head of US Fed, Jerome Powell, said it was essential that inflation be brought down. According to him, more than half-point interest rate hikes would be “on the table at the next couple of meetings,” but that a three-quarter point rise is not under consideration. US stocks rose sharply following Powell’s comments, with the S&P 500 jumping up 1.7%.
The increase in the Fed’s key rate brought it up to a range of 0.75% to 1%, the highest point since the start of the pandemic two years ago.
The bank also announced plans to reduce its $9 trillion (€8.5 trillion) balance sheet to deal with rapidly rising prices — in other words it intends to start selling off government bonds and other assets it previously purchased in a bid to spur inflation and growth, and drive up returns on these investments.
A statement from the bank’s policy-setting Federal Open Market Committee (FOMC) noted the “highly uncertain” impact of external factors such as Russia’s invasion of Ukraine, which are ‘creating additional upward pressure on inflation and are likely to weigh on economic activity.”
“Covid-related lockdowns in China are likely to exacerbate supply chain disruptions,” which could increase inflation,” the FOMC said.
Central banks in several countries are tightening borrowing costs in an effort to cushion businesses and consumers from inflation. But there are also concerns such moves could hamper economic growth and even push major economies into recession.
Prices are soaring at a time when many countries, still reeling from the pandemic, are facing added pressures from supply chain disruptions caused by the war in Ukraine.
Nigeria feeling the heat
The implication of Fed’s rate hike has once again thrown up a challenge for Nigeria’s currency as analysts fear that this may be bad news for Nigeria.
In a chat with Blueprint Weekend, the managing director of SD&D Management Limited, Gabriel Idakolo, said that the rate hike in the US was bound to increase the cost of debt servicing and other effects on the economy.
“Definitely, increased interest rates in the US will affect the cost of borrowing by Nigeria and also increase debt-servicing by the government which is about 98% of revenue presently.
“This could also affect our foreign reserves and reduce FDI (Foreign Direct Investment) into the country as investors would prefer a safer climate with more attractive returns,” he said.
Similarly, a political economist, Adefolarin Olamilekan, said recent events in the US were bound to adversely affect Nigeria due to the import dependent nature of its economy.
According to him, with the Naira weak against the dollar, more burdens are being heaped on authorities to pay more to service the country’s debt.
He said, “The recent uncertainties around the US inflation surge is transcending into a global financial shock that import market dependent economies like Nigeria with huge foreign debt would hardly escape its negative impact.
“It is very unfortunate that Nigeria’s rising debt and servicing of the debt at this point is retrogressive to our economy, chiefly, as the naira continues its abysmal performance.
“Regrettably, the increasing revenue from crude oil sales, in the long run, will end up being used to satisfy our debt servicing obligations to creditors. Instructively, the nation development project meant for the citizenry will suffer paucity of funds and eventual abandonment.”
For the chief executive officer, Financial Derivative Company Ltd., Bismarck Rewane, higher interest rate would see reversal in capital inflow and increase in cost of debt services.
Speaking at the Lagos Business School breakfast session, Rewane noted that higher rates will put pressure on the naira and also lead to bearish sentiment in the stock market.
He explained that with higher interest rate costs of domestic borrowing would increase, there will be possible slowdown in economic activities, adding that imported inflation is likely to rise as currency pressure persists.
Highlighting the impact of higher interest rate on business in the country, he said, cost of import will rise reducing corporate margins, while dollar scarcity will increase forex demand pressure at the parallel market.
He said “possible increase in domestic interest rates will push up the cost of funds while fixed income investors will benefit from higher interest rates, but could weigh on stock market performance.
Perceptions
Analysts are of the view that Nigeria’s debt service is very expensive because of the perception of investors of the country as high risk.
The International Monetary Fund (IMF) in its 2021 Article IV report stated that Nigeria spent 85.5 per cent of total revenue to service its total debt of $95.17 billion in 2021.
Juxtapose that with its peer country, South Africa which spends a mere 20 per cent to service its much bigger debt of $261 billion in the same period under review.
The chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said debt service ratio is a function of the magnitude of the debt and its cost.
“If the amount you are borrowing is high, you also have to pay more. Also, Nigeria borrows at expensive rates, especially the Eurobonds. Sometimes, we celebrate that our Eurobondsare oversubscribed, but the yields are very high when you compare them with other countries,” he said.
He said investors perceived Nigeria as high-risk, explaining that risk premium must be paid when bonds were perceived as high-risk. Presently, Nigeria’s revenue to GDP stands at nine per cent
The president of Lagos Chamber of Commerce and Industry, Michael Olawale-Cole, said, “We are likely to have a higher debt service-to-revenue ratio if revenue levels do not increase significantly.”
Way forward
To avoid the present situation, Idakolo said the authorities need to begin to look inwards on how to generate more revenue instead of the usual borrowing.
“Nigeria needs to look inwards to ensure that more revenue accrues to the government through Crude oil by blocking all avenues for crude oil theft and we must also ensure that we achieve self sustainability in crude oil refining and fertiliser production to spur growth in agriculture and other productive sectors.
“This will significantly increase our revenue and reduce the need for additional borrowing by the government. The CBN can also increase its foreign reserves and thereby strengthen the Naira,” he said.
Olamilekan opines that the government has been paying lip service to getting alternatives to borrowing.
“The Nigerian state over years paid lip service to securing alternatives to borrowing; neither did it follow through its non-oil sector economy diversification policy toward the improvement of national revenues.
“Nevertheless, the authority must, first, tighten every loose end as embezzlement of public funds is still evidence. The TSA and IPPIS readily come to focus. Secondly, we need to review and rethink our proclivity for loans. Lastly, it’s time government owned enterprises re-double efforts as revenue generating agencies make room for losses,” he said.
