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JP Morgan: With $4.5bn Debt Service, Lower FX Position, Nigeria Requires Sustained Reforms to Attract Capital Inflows

“Thus, in our view, continuing on the reform path would be imperative to allay concerns on the external side.”

Nigeria’s high debt service rate amid relatively low net foreign exchange position calls for continued reforms to attract foreign capital inflows, according to a report by global ratings agency, JP Morgan.

The global investment bank released its report, as the Institute of Chartered Accountants of Nigeria (ICAN), on Monday, declared that the emergency $3 billion crude oil repayment loan facility provided by the Nigerian National Petroleum Company Limited (NNPCL) to ease the liquidity in the foreign exchange market would be insufficient if Nigeria could not increase its production and export of crude oil.

According to JP Morgan, while Eurobonds only start maturing from 2025, with continued maturities from 2027, the country still needs to service between $2.5 billion and $4.5 billion of public and publicly-guaranteed debt over the next few years.

Along with a structural Balance of Payment (BOP) deficit, JP Morgan said this would mean higher FX needs in the coming years, pointing out that with “relatively lower net-FX position providing limited space to plug this gap and borrowing costs on the expensive side with potentially no market access,” the country needed foreign direct and other portfolio investments to attract FX inflows.

The financial institution stated, “Thus, in our view, continuing on the reform path would be imperative to allay concerns on the external side.”

The report specifically noted that a stall in current reform momentum amid lower net FX reserves had the tendency to unnerve markets, adding, “But we remain cautiously optimistic.”

It stated that the recent decision of the federal government to freeze fuel prices remained a “pause on the reform path rather than a reversal as no subsidy payments should exist at current prices”.

The report stated, “We estimate net FX reserves at $3.7 billion, significantly lower than prior estimates, owing to larger-than-expected currency swaps and borrowing against existing reserves.

“Structural BoP deficit means authorities need to implement reforms that will attract steady external funding, but in the near term the CBN has the ability to source FX at commercial and semi-commercial rates.

“Lower net FX reserves reduce the willingness to introduce a flexible exchange rate regime in the near term. High private and moderate public sector external financing needs will keep Nigeria reliant on external financing for the foreseeable future.”

The ratings agency said Nigeria’s sovereign bond prices declined by 2.5-5pts across the curve since the CBN published its audited financial accounts late last week. It noted that the decision to freeze petrol prices at current levels resulted in concerns that fuel subsidies may have been reinstated, further weighing on asset prices.

According to the report, “That said, the announcement of a cabinet, which appointed technocrats in key positions, such as the Ministry of Finance may slow the Eurobond price decline in the near term, even if a likely slower pace of reform implementation could limit bond upside from here.

“The foreign exchange market will remain in focus given the likely lower starting point for net FX reserves, with an overall balance of payments deficit pointing towards continued FX pressure.”

The report pointed out that the new administration had a blistering start in June, and it enacted key reform measures, including the removal of fuel subsidies, followed by significant adjustments in the FX market.

It stated, “Since then, petrol prices have more than doubled and the naira has depreciated by c.40 per cent against the dollar in the official market. However, in recent days the spread between the parallel market (900) and interbank exchange (770) rates have widened, while the president this week announced there will be no further increase in petrol prices.

“While we think the FX market could benefit from better price discovery, we do not interpret the freeze on petrol prices as a reversal of the subsidy reform for now.

“This is because we estimate that at current average retail prices (NGN617/litre), crude oil prices (US$85/barrel) and the parallel market exchange rate (900), authorities are not currently subsidising petrol. However, invariably, a further rise in these key variables and government’s insistence on keeping petrol prices flat will result in a return of subsidies.”

The report further stated, “While we think the government remains committed to major reforms relating to fiscal adjustments (revenue mobilisation and expenditure rationalisation), FX market reform and oil sector revamp, the pace and momentum could slow given the significant inflationary impact on the population.

“The president has named his cabinet, which includes some technocrats in key positions, such as the Ministry of Finance (also doubling as the Economy Ministry) and the creation of new ministries of priority, such as tourism, digital economy, as well as steel development.

“Furthermore, junior ministers were appointed to the now split ministries of petroleum and gas resources, suggesting a continuation of the previous administration’s approach where the president appointed himself as the Minister of Petroleum and Gas Resources.

“That said, most other cabinet positions were dominated by politicians.”

Meanwhile, ICAN declared that NNPCL’s emergency $3 billion crude oil repayment loan facility, meant to ease the liquidity in the foreign exchange market, would be insufficient if Nigeria could not increase its production and export of crude oil.

The 59th President of ICAN, Dr. Innocent Okwuosa, stated this, on Monday, in Lagos during a media chat titled, “The NNPCL $3billion Afrexim Bank Borrowing, Naira Exchange Rate and Fuel Subsidy: Our Position.”

Okwuosa stressed that naira’s performance in the foreign exchange market would continue to face challenges because of a short fall in foreign exchange earnings due to oil theft and other factors.

According to Okwuosa, “While it may be too early to assess the impact of these interventions by the CBN and NNPCL, we are of the view that they appear insufficient to address the issues they are meant to address”, as long as Nigeria’s foreign exchange revenue continued to dwindle with crude oil production “falling to just 1.081 million barrels per day (bpd) in July 2023 compared to the quota of 1.8 million bpd set by the Organisation of Petroleum Exporting Countries (OPEC).

“This is due in part to oil theft, production inefficiencies and lack of accountability in the industry, and as such our foreign exchange revenue and, hence, exchange rate will continue to be challenged.”

The ICAN president demanded, “The CBN and NNPCL should disclose the extent of unpaid foreign exchange bills and outstanding debt obligations, to enable Nigerians know if the $3 billion will make a sustainable impact on the foreign exchange rate.

“Then there is the question of why NNPC is the channel for obtaining the $3 billion loan rather than the CBN?”

He, however, acknowledged that the intervention had improved liquidity in the foreign exchange market that had seen positive movement in rates, particularly in the parallel market for now.

The president of ICAN also stated that other causes of foreign exchange rate instability in Nigeria included lack of diversity in the country’s export base, trade imbalance, high inflation rate, low productive base, and weak infrastructure.

Others, according to him, are policy inconsistencies, corruption, non-alignment between fiscal and monetary policies and high cost of doing business in Nigeria.

The institute also warned that in view of the identified gaps, “The much-anticipated foreign exchange stability and economic growth may remain elusive if solutions are not provided in the short, medium and long term as against the quick fix interventions.”

Okwuosa appealed for accountability and transparency, which demanded that the cost of refining a litre of fuel locally or importing the same from abroad should be disclosed to Nigerians, “as any choice in this affects exchange rate and fuel price.”

He pointed out that the accountability and transparency issues could be addressed through a clear methodical analysis that should provide to Nigerians the cost composition of imported petrol.

Okwuosa added, “If indeed the landing cost exceeds the pump price, then Nigerians have a right to know who is paying for that differential, which is effectively a subsidy. Is it NNPC Limited, or is it through direct deductions from FAAC allocations to the federal, states and local governments? This calls for accountability and transparency.”

Okwuosa also asked if the government would, “probe and sanction licenced marketers who have imported petrol over the years and allegedly made inappropriate subsidy claims. Again, this calls for accountability and transparency.

“Should we not opt for local refining, leveraging on as many modular refineries as can be incentivised? This surely will be cheaper than imported fuel.”

The ICAN president also made some recommendations that would create the capacity to drive economic recovery and growth by boosting local production and reducing the demand for foreign exchange. The recommendations included the postponement of the implementation of non-critical dollar-denominated components of the 2023 budget until the FX situation improved and the need to address speculative demand for dollars through confidence-building measures and pronouncements.

Others are incentives that would encourage diaspora remittances through formal channels, institutionalisation of accountability and transparency within the oil industry and foreign exchange market, and the establishment of whistleblowing lines to report banks involved in round tripping as well as the activation of laws to sanction persons or institutions engaged in dollarisation of the economy.

Okwuosa also recommended that the government should promote “patronage of made in Nigeria goods using enabling laws.

“Improve the standard of education and health facilities in the country to reduce education and medical tourism.

“Encourage companies operating in Nigeria to source raw materials locally via backward integration.

“Fix the refineries to reduce import of petroleum products with attendant reduction in FX pressure.

“Incentivise existing modular refineries and the establishment of new ones.”

Okwuosa also recommended, “Revisiting the Nigeria-China currency swap to reduce demand for the Dollar.”

Okwuosa concluded, “The government must imbibe comprehensive economic reforms, improve governance, policy consistency and make concerted efforts to diversify the economy. The devaluation of currency should be the last resort to the economic imbalance.”

James Emejo and Dike Onwuamaeze

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