By Chinwendu Obienyi
Credit rating agency, Agusto&Co, has said Nigeria’s foreign debt could rise from about N15 trillion to N18 trillion if the Central Bank of Nigeria (CBN) devalues the Naira at about 20 per cent.
The firm stated this in its Economic Newsletter January 2022 edition, adding that Nigeria has assumed a hawkish foreign exchange policy stance since 2015 and this has been elevated since 2020 to date.
The Newsletter said that this hawkish FX stance has been characterised by political interference and demand management amidst a weaker supply of the US dollar in the FX market.
“The resultant effect of the demand management has been the wide arbitrage between the official foreign exchange market and the parallel market with spreads exceeding 30 per cent and even as high as 40 per cent.
Sadly, we believe this scenario will persist in 2022 resulting in more businesses having to source FX needs from the parallel market”, it said.
The firm also said that harmonising FX rates between the parallel market and the official market will not only cut the arbitrage between these two markets but also cut the speculative bets on the Naira.
It, however, noted that policy options that could improve foreign exchange supply will have implications on the fiscal side in two major ways, partly because monetary authorities have left things a little too late.
“Harmonising the FX markets could create an upside at the fiscal revenue end as the country will earn more from the sale of crude oil. On the other end, foreign debts could also rise in Naira terms. We project foreign debt could rise from about N15 trillion to N18 trillion if the CBN devalues at about 20 per cent. However, we note that the Federal Government’s borrowing stance creates a disincentive to review this hawkish FX policy stance.
With FGN 91-day treasury yields trading at an average of 3 per cent in 2021, the Federal Government is able to borrow at 12 per cent below the inflation rate of 15 per cent – an important benchmark to determine the price of money – thus leaving lenders with the short end of the stick”, Agusto&Co stated.