As Nigeria marked 64 years of independence on 1st October, 2024; the incumbent President; Bola A.As Nigeria marked 64 years of independence on 1st October, 2024; the incumbent President Bola Ahmed Tinubu; delivered a speech to commemorate the important event in Nigeria’s history. The speech prompted me to write this article.
He made mention of attracting $30 Billion in Foreign Direct Investments (FDI) in one year-
“Thanks to the reforms, our country attracted foreign direct investments worth more than $30 billion in the last year.”
This does not mean $30 billion has actually flowed into Nigeria. However, agreements have been signed between Nigeria and foreign investors promising to deliver this amount over the course of 5-8 years. This might seem like counting our chickens before they are hatched. Hence, we must do everything as a nation to ensure these investments do not only materialize but soon too. This is so because FDI has largely dried up in recent times. Take for example, out of total capital imported between 2023Q2 and 2024Q1 of $6.14 Billion only a relatively measly $448.95 million is in FDI. This comes to a paltry 7.31% of total foreign investments in FDI. The larger chunk of imported capital into Nigeria is hot money like Treasury Bills, OMO Bills and Foreign Loans. While this helps with the availability of Foreign Exchange (FX) or liquidity, it is not sustainable.
For Nigeria to attract FX, most especially in the form of FDI, there is a need to disincentivize divestments in the oil and gas sector as well as manufacturing; reduce investor apprehension about the Nigerian business environment; tackle insecurity, regulatory bottlenecks and infrastructural deficits; and the need to ensure structural barriers to foreign capital inflows are beaten.
Secondly, for the foreign exchange reserves (FX Reserves), it might have been one of the bright spots of the administration. As it made better than it met it. Nigeria’s FX Reserves were $35.14 Billion on 26th May 2023, but has since increased to $38.05 by 27th September, 2024 Billion despite the deployment of the reserves to clear almost the entire FX backlogs. This is clearly reflected in the President’s speech where he mentioned:
“We inherited a reserve of over $33 billion 16 months ago. Since then, we have paid back the inherited forex backlog of $7 billion. …. Despite all these, we have managed to keep our foreign reserve at $37 billion. We continue to meet all our obligations and pay our bills.“
Nonetheless, it must be added that the entirety of the backlog might not have been cleared as only “valid claims” have been settled. This clearly means there are claims the Central Bank of Nigeria (CBN) feels do not merit being attended to. Furthermore, according to IATA, 98% of trapped airlines funds have been cleared.
Thirdly, the Ways and Means (M&M) Advances are not cleared as they have not been repaid, partly or fully. They have only been securitized, meaning converted into a security to be bought and sold. So, the part of the President’s speech where he mentioned that should have been better worded:
“We have cleared the ways and means debt of over N30 trillion.”
The President’s immediately predecessor ballooned the M&M Advances from less than 1 trillion naira in 2015 to a whopping 22.7 Trillion naira which securitization was approved by the Nigerian Senate on 23rd May 2023. And a further 7.3 trillion naira in W&M Advances securitized through a Senate approval on 30th December 2023. The securitization means the Nigerian state would be paying back the accumulated debts from the CBN over the course of 40 years. And the catch is the rate of interest to be paid, which is now in a single digit instead of what would have been without the securitization.
While the World Bank recommends, debt service-to-Revenue ratio not exceeding 22.5% for developing economies like Nigeria, Nigeria has been struggling to keep up with its debt service. Take for example in 2020Q1, 96.7% of government retained revenue was used to service debts. This got worse in 2021Q1 at 123.2%; eased a bit in 2022Q1 to 120.5%. It, however, ballooned to 149.5% in 2023Q1. With the coming of the Tinubu administration, it crashed to 74.3% in 2024Q1. This can be largely attributable to the hiked in the pump price of fuel as well as the depreciation of the naira in terms of the dollar. What is more, the securitization for the over 30 Trillion naira in W&M Advances reduced the rate of interest charged. So, the President assertion that:
“We have reduced the debt service ratio from 97 per cent to 68 per cent.”
This does not mean that it is uhuru. As Nigeria has been accumulating debts of recent. And these have to be paid back eventually. So, unless all the necessary measures are taken, Nigeria may go back to using 100% of retained income to service its debts. This, however, can be avoided by continuous structural reforms; sensible fiscal management; increased revenue; increased oil production as well as seeking loans on concessional not commercial terms.
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