By Onu Okorie
Executive Director Crown Resources Dev Co CREDCO Ltd Mr Ben Owoleke has said that there’s a significant rise in government debt in naira terms by about N12 trillion to N90 trillion or external debt of $42 billion following the recent Naira exchange rate unification.
He disclosed this in a statement made available to the media yesterday in Abuja as he gave 10 major implications of Naira exchange rate unification.
Mr Owoleke who is currently handling the 10MW Katsina Windfarm further explained that the policy that makes Nigerian Naira exchange rates to be determined by the market forces will come with both positive and negative implications.
He said that, while significant market distortion has been removed by the Policy, the other spiral effect is that debt to Gross Domestic Product GDP ratio will increase by about five per cent as well.
And there will be a corresponding increase in debt service cost with respect to foreign debt service
He however, assured that the government’s revenue will increase in naira terms resulting in a higher tax/revenue to GDP ratio. “Corporate tax collection may however decline as many businesses crystallize forex losses due to the higher exchange rate.”
Also there will be possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligations, an increase in budget deficit will arise if otherwise
Other possible effects include: impact on the pump price of petrol which could inch closer to the current pump price of diesel and there should be some cost savings as government discontinues with the various fx interventions e.g. Naira4Dollar, RT200 etc which cost tens of billions of naira
He said that the country will attract fix inflows especially from portfolio investors, foreign direct investment FDI and exporter’s proceeds while impact on Diaspora remittances would be marginal.
He argued that the capital market will benefit as it is likely to appreciate further as foreign investors take position and there should be negligible impact on the general prices of goods and services as products already factored in parallel market rates to a large extent.
According to him, “overall, this is a positive move. However, the government needs to manage the dynamics to restore confidence. The backlog of forex demands need to be addressed and government should be ready to supply forex to stabilise the exchange rate in the short term.”
He advised that the government should relax capital control and administrative bottlenecks including unbanning the list of items prohibited for fx (and complement with higher import duties), remove the need for certificate of capital importation etc to prevent the parallel market rate from simply moving further away from the official market rate.
Stop the demand for certain taxes and levies in foreign currency, it creates unnecessary fx demand without adding to supply.
The aggregate demand for fX across markets should reduce as round-tripping incentives are removed, for instance people who fake foreign travels just to get fX at discounted rates. Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies thereby attracting more fX inflows and lowering the cost of borrowing.
