Nigeria Looks To The Financial Market to Service Its Budget Deficit

In an interview at the World Economic Forum in Davos, Switzerland, Nigeria’s Finance minister Wale Edun announced plans to “tap a range of instruments to help finance this year’s budget deficit,” which is estimated at 3.9% of Nigeria’s GDP.  “The gap has to be covered, not as in the past by printing of money, but going to the financial markets and purchasing on reasonable terms those funds,” he said. In simpler terms, Nigeria will finance its budget deficit—a situation where expenditure outpaces revenue in a fiscal year—not by printing money, a practice which could exacerbate the country’s sky-high inflation, but by borrowing from various financial institutions. In practical terms, this could include concessional financing (custom loans with favorable terms such as low interest rates); bilateral agreements (loans or grants obtained by leveraging a relationship with a foreign nation); and commercial markets.  What does all of this mean for Nigeria’s precarious economic situation and what possible effects might it bring to bear on the economy?

The first thing to understand is that despite its unfavorable reputation, especially in Nigeria, budget deficits are no more harmful than a company borrowing loans to finance its operations. Running on a deficit is not the problem—some of the world’s strongest economies from the US economy to Japan and Canada, consistently run on deficits—the problem, however, is what the borrowed money is used to finance. After years of missing its OPEC quota for crude oil output, due to decreased production on account of insecurity and rampant oil theft, Nigeria finds itself pressed for additional funding for its budget. 

The primary effect of Nigeria’s current fiscal policy—turning to the markets to finance the deficit as opposed to printing money—would be a reduced risk of inflation, which is ideal given the country’s frighteningly high inflation rate (34.80%). Sourcing for funds transparently through the markets, rather than printing money could also help shore up investor confidence. This is crucial given the grounds the nation has ceded in the past two years in this area. The obvious accompanying consequences would be higher debt levels. Borrowing in foreign currencies could also impose a strain on the naira due to repayment obligations in dollars or other currencies, potentially affecting foreign exchange reserves. Negotiating for favorable terms could however help cushion these effects. Overall, given the country’s bleak circumstances, this is a step in the right direction. But it’s merely a bandaid on a wound as opposed to a permanent solution. Long term, the government has to prioritize investing in infrastructural developments, improving security, bolstering investor confidence in the country, and establishing key areas of competitive advantage within the economy.