PREVIEW
Foreign exchange and tax reforms are praised by international banks but most Nigerians are yet to see the benefits
For the multilateral financial institutions and investment banks, President Bola Tinubu’s economic reforms are stabilising the country’s finances and staunching the loss of billions of dollars in revenues but with consumer prices still rocketing few Nigerians are seeing the green shoots of recovery. Ahead of the Christmas holiday, the price of a chicken in the market has risen to N16,000 (US$10) that’s just under half the minimum monthly wage.
Popular anger against Tinubu and the ruling All Progressives Congress (APC) government is simmering but for now the opposition parties are too weak and divided to pose a serious threat in by-elections or debates in the National Assembly. Tinubu probably faces more opposition within his party, especially from its northern members, than from outsiders.
Although official GDP growth accelerated in the last quarter to 3.46%, inflation (33.9% October) remains among the highest in Africa, while the weaker naira undermines Nigerians’ spending power, poverty is at near-record levels, business confidence is low, and major power sector outages disrupt economic activity. Confidence in key ministers retained during Tinubu’s cabinet reshuffle, such as agriculture minister Abubakar Kyari and power minister Bayo Adebalu, remains low (AC Vol 65 No 11, Tinubu weighs politics vs competence &Vol 65 No 22, No policy shifts as Tinubu reshuffles).
Nigeria’s return to the international bond markets on 2 December, raising $2.2 billion in oversubscribed Eurobonds in 10- and 6.5-year paper is seen by Finance Minister Wale Edun as a vote of confidence in the Tinubu government’s policies. Central Bank of Nigeria (CBN) governor Olayemi Cardoso also views it as a sign of investor confidence and Nigeria’s improved liquidity and creditworthiness. However, the borrowing costs for the new bonds exceed 10% for the 10-year bonds and slightly less for the 6.5-year debt, highlighting the deterioration of Nigeria’s external financing environment in recent years.
The Eurobond has been accompanied by increased investor purchases of naira-denominated debt, as the domestic currency strengthens. Increased confidence in the naira in part stems from a new ‘electronic foreign exchange matching system’ recently introduced by the CBN.
With the halt – for now – of CBN Ways and Means financing and Nigeria’s reluctance to seek an IMF programme, federal spending remains heavily reliant on naira borrowing in the domestic debt market. Significant concessional financing still comes from the World Bank, which approved $1.57bn in September for health, education and sustainable power. Nigeria issued its maiden $900 million domestic dollar bond in September.
According to Patience Oniha’s Debt Management Office, much of the Eurobond funds are allocated to financing Nigeria’s 2024 fiscal deficit. Revenues have been improving as a percentage of GDP since last year but they fell short of budget targets by a quarter (in August), while debt service exceeded targets by a third, and capital expenditures lagged by 60%.
On the plus side, 2024 non-oil tax revenues have outperformed in naira terms, partly due to reforms and the naira’s depreciation. Below-target oil revenues will challenge the 2025 budget, which relies on optimistic oil market assumptions.
The Nigerian National Petroleum Corporation (NNPC) claims that oil production has returned to 1.8 million barrels a day. However, the assumption – in the governments’s pre-2025 federal budget ‘medium term expenditure framework’ (MTEF) containing key budget parameters and projections – that 2025 oil output will reach 2.06m b/d is ambitious, as is the claim that over 600,000 b/d of condensates will allow for total production of 2.12m b/d without violating Nigeria’s 1.5m b/d OPEC quota. Addressing key production outages in the second half of 2024 and bringing the new Utapate oil grade online, currently at 40,000 b/d, only partially closes the gap.
Eighteen months after Tinubu’s inauguration, oil theft continues to undermine fiscal plans. NNPC chief executive Mele Kyari still insists that efforts by the government, security agencies and oil companies have substantially reduced the leakage.
Unlike previous budgets under former President Muhammadu Buhari, which balanced unrealistic oil production targets with conservative oil price assumptions, the 2025 budget will assume oil prices at $75 per barrel, roughly level with current prices. In 2025, oil price projections suggest Africa’s oil producers are unlikely to see a near-term price dividend, despite extended OPEC production cuts and conflicts in the Middle East.
In 2024, the federal government is relying on a windfall tax on banks’ 2023 profits to help bridge the gap between the amended ‘Budget of Renewed Hope’ revenues and expenditures (AC Vol 64 No 24, Tinubu struggles to rebalance the budget).
Banks argue this will hinder their efforts to meet CBN-mandated recapitalisation targets, while Moody’s warns it will undermine their creditworthiness. Big accounting firms criticise the tax for unfairly targeting banks, leaving other businesses with foreign exchange gains untouched. Multinational operators like MTN lament the impact of the weaker naira on their profits in Nigeria.
The removal of VAT from over 60 items, including selected petroleum products, could ease transport-related inflation. However, Finance Minister Edun has recently disclosed plans for a VAT increase to 10% from 7.5%, suggesting that the increased rates would target luxury goods.
In 2025, the government aims to collect 34.8 trillion naira in budget revenues, 56% of them from oil, to finance a N47.9trn budget. This substantial hike from 2024 will require boosting non-oil tax revenues and positive oil sector developments.
Another complicating factor will be the need to move unmet 2024 expenditures, including capital expenditure, into the next year. Past experience suggests that the 2025 budget allocation of 34% for capital expenditures, significantly higher than the unmet 2024 target, is unlikely to be achieved.
Taiwo Oyedele, Chair of the Presidential Committee on Fiscal Policy and Tax Reforms, is driving the government’s tax-raising efforts. He claims that tax reform bills, including raising the threshold to exempt millions more Nigerians from income tax, will generate growth. Yet Northern state governors, whose internally generated revenues are far below those of Tinubu’s home state of Lagos, oppose the reforms, which are seen as centralising taxing powers to the federal government (AC Vol 64 No 24, Tinubu struggles to rebalance the budget). Opposition to the government’s four tax bills has held up the presentation of the budget at the National Assembly. Political sources in Abuja suggest that an interim budget for 2025 may be presented in the week ending 21 December before the National Assembly goes into recess.
Services sector growth remains strong (5.2% in Q3) but manufacturing and agriculture are struggling, with agriculture heavily impacted by severe flooding. Growth in the oil sector, officially just over 5% of GDP, remains volatile. The CBN remains a key player in Nigeria’s finances, despite scaling back quasi-development financing prevalent under Cardoso’s predecessor Godwin Emefiele (AC Vol 64 No 12, When – not if – Emefiele leaves the bank).
Recent World Bank analysis reveals that Nigeria’s implicit foreign exchange subsidy – stemming from converting foreign exchange revenues into naira at overvalued official rates – was, prior to Cardoso’s reforms, even greater than the now significantly reduced fuel subsidy. According to its calculations, the combined foreign exchange and fuel subsidy exceeded 10 trillion naira (5.2% of GDP) during 2022, before falling to around 7 trillion naira last year, prior to foreign exchange ‘unification’.
World Bank analysis suggests this year’s foreign exchange reforms have significantly reduced, Nigeria’s revenue losses from oil and gas, import duties, VAT, business taxes and distributions from government-owned enterprises. And that these reforms have improved national finances and fiscal space, and reduced the economic distortions and corruption fostered by the previous fragmented exchange rate regime.
CENTRAL BANK LEADS CHARGE AGAINST INFLATION
The Central Bank of Nigeria (CBN) is crucial in combating inflation, which remains heavily driven by food prices (almost 40%, October). This significantly affects the population, with almost 32 million people facing acute food insecurity, according to the UN World Food Programme. This figure is 11m up on last year due to severe floods, in the northeast and northwest.
The CBN Monetary Policy Committee’s modest 0.25% rate hike to 27.5% on 26 November has sparked optimism that 2025 might see rate cuts, partially reversing the 8.75% cumulative rise in the monetary policy rate (MPR) since the first MPC meeting under CBN Governor Olayemi Cardoso in February.
Economists believe Cardoso’s foreign exchange market reforms will enhance the effectiveness of CBN interest rate policy. This contrasts with Emefiele’s tenure, where critics found other measures, such as open market operations more effective. Although the use of OMOs to reduce liquidity has increased under Cardoso.
Although central bank intervention in the foreign exchange market has decreased, it has narrowed the parallel market premium and, according to latest CBN figures, increased foreign exchange reserves to over $40bn. Economists speculate that the central bank may be preparing to meet upcoming foreign exchange obligations. Others remain sceptical about the true level of net reserves.
The CBN’s foreign exchange reforms, its shift from quasi-fiscal policies and the fiscal reforms backed by Finance Minister Wale Edun and Tinubu have been well-received by the international financial institutions. According to Cardoso, remittances and portfolio investments have increased this year. This has led to discussions about a Diaspora bond for Nigerians in the United States.
Despite a modest increase in foreign direct investment this year, it remains low compared with peer economies. Banks have been striving to attract foreign investment to meet the new capitalisation requirements by the 2026 deadline.
Nigeria’s foreign exchange inflows and the international financing environment remain vulnerable to global events, such as higher US interest rates under a new Trump administration committed to tariffs, which could disrupt global trade, as well as lower oil prices through increased US production.
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