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The expansionary tendency of the 2011 appropriation budget
passed by the Senate on Wednesday would yet again put the Central Bank of
Nigeria (CBN) under to introduce liquidity tightening much quicker than it
ought to.

Razia Khan, regional head of Research, Africa, Global Research
at Standard Chartered Bank at a media presentation in Lagos yesterday said a
major problem with the outlook is that it gives a false hope that all is well.
“Raising recurrent expenditure creates an expectation that this is the amount
that would be received every year such that if revenue drops, it becomes
difficult to cut back.”

The Senate approved a budget of N4.971 trillion as against
N4.538 trillion presented by President Goodluck Jonathan. Out of the amount,
N2.467 trillion or 54.4 per cent was earmarked for recurrent (non-debt)
expenditure, while N1.562 trillion or 34.4 per cent is for capital expenditure.
“Such higher spending, everything being equal will lead to higher inflation.”

According to Razia, the budget outline does not add real value
to the economy as such huge spending on recurrent expenditure have shown in the
past. “Other African countries are making more progress than Nigeria in terms
of increasing revenue earnings as a percentage of GPD (gross domestic product).
The huge amount that we have seen and the increasing debt burden that is
required to sustain the budget is worrying,” she said.

More transparency

While Nigeria still holds much promise to investors, she called
for more transparency on how resources are allocated. “Another source of
concern is the run down in the foreign exchange reserves. You can see how
reserves rise at the beginning of the month and fall at the end of the month.
The uncertainty for investors is that it is not necessarily transparent.
Investors want to know about what the future risks are.”

She said Nigeria would need to pay more attention to its debt
market, particularly the sustainability of the debt level especially with the
figures approved for the 2011 budget just passed by the Senate. “Nigeria is
still within comfortable level but we worry about the rate of increase and what
the borrowings are for. We can’t look at debt ratio in isolation but how much
of future earnings of Nigeria are going to be ring fenced to be able to pay.”

Nigeria’s potential She however said Nigeria has the potential
to double the size of her economy within the next 10 years if it maintains the
current trajectory of 7 per cent annual growth in gross domestic product (GDP),
adding that African economies are the focus of many global financial players.
“The growth momentum in Africa has been strong. Perhaps, more meaningfully in
our view is that policy makers in Africa are reacting to the global financial crisis
themselves, using monetary instruments to address the issues.”

According to her, the youth dependency which used to be the case
in much of Africa is changing as many of the youth are growing into working age
due to a change in demography. “With the exception of Asia and the middle east,
much of the rest of the world are contending with an aging population.

She said the regulator would need to keep its focus on the
exchange rate in order to achieve a more balanced portfolio. Contrary to
expectations, she advised the CBN not to embark on huge devaluation of the
naira. “What we will not recommend is a big devaluation in the naira because
that will create more problems in the economy. It may lead to increase in
prices. There is nothing to stop the CBN from adjusting it up gradually in
response to higher demand. Why ignore the signals coming from the market. If
you keep supplying foreign exchange just to keep exchange rate steady and
demand keeps rising, then you are creating a situation which is simply problematic.
The band could move up to N151 for example. ” She said the plan by the CBN to
begin foreign exchange forwards may reduce demand pressure.

The CBN has said it would commence sales of foreign exchange
forwards from Wednesday, 23rd March, 2011.