Exchange Rates Unification: Nigeria’s External Debt To Rise By N12trn—expert
With the Nigerian Naira now exchanging in the official forex market at market determined rates, a significant market distortion has been removed. Expectedly this will come with both positive and negative implications, Taiwo Oyedele, a Fiscal Policy Partner and Africa Tax Leader at PwC has said.
Oyedele in an email message at the weekend disclosed that among the negative implications is a significant rise in government debt in naira terms by about N12 trillion to N90 trillion i.e. the external debt of $42 billion will increase by the difference between the old and new rates. In the email message titled; ‘10 major implications of naira exchange rates unification’, Oyedele disclosed that as a result of the above, the debt to GDP ratio will increase by about 5 per cent; even as the economy will a record a corresponding increase in debt service cost with respect to foreign debt service.
He noted that the government’s revenue will increase in naira terms resulting in a higher tax/revenue to GDP ratio. While corporate tax collection may however decline as many businesses crystallize forex losses due to the higher exchange rate.
According to him, there will be a possible reduction in the budget deficit if the government’s forex revenue exceeds foreign currency obligations, “an increase in budget deficit will arise if otherwise,” he said.
Oyedele also disclosed that there will be a possible impact on the pump price of petrol which could inch closer to the current pump price of diesel. “There should be some cost savings as the government discontinues the various forex interventions e.g. Naira4dollar, RT200 etc which cost tens of billions of naira.
“The country will attract forex in- flows especially from portfolio investors, FDI and exporters proceeds. Impact on diaspora remittances would be marginal,” he disclosed. Similarly, the capital market will benefit as it is likely to appreciate further as foreign investors take position.
While a negligible impact on the general prices of goods and services is anticipated as products already factored in parallel market rates to a large extent, Oyedele stated. He said: “Overall, this is a positive move.
However, the government needs to manage the ensuing dynamics to ensure confidence. The backlog of forex demands need to be addressed and the government should be ready to supply forex to stabilise the exchange rate in the short term.”
He further urged the government to relax capital control and administrative bottlenecks including unbanning the list of items prohibited for forex (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.
Oyedele also urged the government to stop the demand for certain taxes and levies in foreign currency, saying it creates unnecessary forex demand without adding to supply. Furthermore, the aggregate demand for forex across markets should reduce as round-tripping incentive is 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 forex inflows and lowering the cost of borrowing,” he said.
New Telegraph