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Rising Debt, Banking Sector Recapitalisation: Three major issues that will shape Nigeria’s economy in 2020

In 2020, the apex bank might be forced to revert to a 14 per cent benchmark interest as it adopts a more hawkish stance in its monetary policies to contain the rising inflation.

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Traders mill around in a Lagos market. (Photo by Financial Times)

The Nigerian economy witnessed almost an uneventful 2019.

First, it was characterised by marginal year-on-year Gross Domestic Product, GDP growth – which rose by 0.17 per cent to average 2.28 per cent growth in Q3.

There was also the depressing unemployment figures, which stood at 23.1 per cent in Q3, and a return to rising inflation which rose to 11.85 per cent in November - its highest in eight months.

The economy, however, saw a few wins. These included the stability in the foreign exchange market, where the naira remained at N360/$1 throughout the year at the parallel market, and the rise in export which climbed 26.5 per cent year-on-year to N2.219 billion in September 2019, boosted by manufacturing. The government was also able to return Nigeria’s budget to its January to December cycle.

But going into 2020, here are three issues that are likley to shape the economy:

1. Banking Recapitalisation: 2019 saw the return of Nigeria’s central bank chief, Godwin Emefiele as the governor for the second time. His five-year plan, which he unveiled in March, included a strategic five points agenda that included targeting a double-digit growth in the next 5 years, recapitalisation of the Nigerian banks, development of a regulatory sandbox to test fintech solutions, targeting exports with the Anchor Borrowers’ Programme and increasing BVN enrolment to 100 million.

By the end of 2019, the apex bank had already ticked some of these boxes including developing a regulatory sandbox to test fintech solutions. This was launched in December. It has also begun the plan to increase the Bank Verification Number, BVN enrolment by announcing during the last Bankers’ Committee meeting a plan for a BVN 2.0. The plan to target exporters with the Anchor Borrowers’ Programme is already in force.

It is highly likely that 2020 will be the year the apex bank will commence the implementation of the plan to recapitalise the Nigerian banking sector. The CBN said the idea is to position Nigerian banks among the top 500 in the world and reduce the impact of a crisis on the financial system.

2. Inflation: The CBN was well on its way to taming inflation to at least a single-digit until September this year. It kept a tight leash on money supply, retaining the benchmark interest rate at 13.5 per cent since March 2019.

However, in August 2019, President Muhammadu Buhari directed the apex bank to stop selling foreign exchange to importers of any food item. This would be followed by a partial closure of the land borders by the Nigeria Customs Service, NCS. This triggered food inflation, leading to a hike in inflation to 11.24 per cent in September, from 11.02 per cent in August.

In 2020, the apex bank might be forced to revert to a 14 per cent benchmark interest as it adopts a more hawkish stance in its monetary policies to contain the rising inflation.

Nigeria’s inflation might also be compounded by the implementation of the new minimum wage as well as the increase in Value Added Tax, VAT from 5 to 7.5 per cent.

3. Debt: Nigeria’s rising debt profile has been a subject of major economic and political discussions in 2019. 2020 will see more discussions around the concerns on the country’s ballooning debt.

Nigeria’s debt stood at about N12.603 trillion by December 2015. This was just about the time President Muhammadu Buhari was coming into office. Four years and seven months into his government, the country’s total public debt, according to the Debt Management Office, DMO has risen to N25.7 trillion.

Critics believe piling on the debt is tightening the noose on Nigeria’s economic recovery, but the government says borrowing is imperative to build the catalytic infrastructure needed to set the economy on the path of growth. The government also argues that compared to other economies, debt to GDP which stood at 27.26 per cent in November is still manageable.

But not everyone agrees. The International Monetary Fund, IMF says the debts are already at a risk threshold, and with low revenue and debt service at over 70 per cent, the fund warned in November that Nigeria’s debt remains unsustainable.

But by December, the President was back at the National Assembly resubmitting an earlier rejected request for a $29.96 billion loan to fund the execution of some 39 projects across the country.

Criticisms had trailed this recent request. Former Vice President Atiku Abubakar condemned the debt plan, saying the “endless borrowing will lead to endless sorrowing”.

Former President Olusegun Obasanjo said Nigeria risks bankruptcy over the rising debt.

Despite these concerns, analysts believe the Senate will approve the loan request. And unfortunately, it will not be the last debt by this administration. Analysts fear the debt level may reach a crisis proportion as the country risks defaulting on some of the obligations before year-end.

What’s your thought on the economy in 2020? Share with us on news@nigeriatodaynews.com

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