THE WILL
An international credit rating agency, Citigroup Global Markets Limited, has expressed optimism about President Bola Tinubu’s market-focused reforms, stressing that they are capable of unwinding the policy mistakes of the past within the next 6-12 months.
In a 3-page communication to its clients titled ‘Citi CEEMEA (Central & Eastern Europe, Middle East and Africa) Credit – Nigeria Trip Notes’ dated October 4, 2023 and seen by THEWILL, the firm observed that 10 years of seriously misaligned policy measures inflicted severe distortions on the economy, which it considers a herculean task to fix..
“Ten years of seriously heterodox policy has created deep distortions in the economy – no small feat to turn-over.” It added, “Luckily, Nigeria is a country that can run a current-account surplus, an enviable position relative to many in the sub-region. If the administration can unwind the policy mistakes of the past over the next 6-12 months, Nigeria could-just-about-balance itself without market access. That makes it a good curve to consider on beta led dips.”
Recalling their meetings with government officials in Lagos and Abuja, the firm said,
“Despite the murmurings of slow reform momentum, we came away from Nigeria with more optimism on the team in charge.
“Our journey happened at a good juncture. After months of stalled reform, the naming of a new CB (Central Bank) governor completes the economic team, allowing the government to hopefully move forward.
“The pace may be slower than anticipated by President Tinubu’s first aggressive moves on FX and the fuel subsidy, but that is arguably needed considering the depth of various distortions and the risk of piling costs on the average Nigerian.”
The agency expressed huge confidence in the ‘economic triumvirate’ of the President, the Finance Minister and the Central Bank Governor, which it said presents a sound ground for impressive performance having worked together in the past.
“Back to the economic triumvirate. In our meetings, we were continuously reminded that Nigeria has never had such a strong team between the Finance Minister, Wale Edun, the Central Bank Governor, Yemi Cardoso, and the President. The triumvirate have all worked together in the past, and all have orthodox/private sector backgrounds. That bodes well – reflected in support from the private sector, bilateral and multilaterals.”
According to the report, the challenges ahead call for adequate measures to correct the deep distortions in the economy and offload the backlog of forex obligations that mounted under the Buhari/Emefiele administration.
“That said: the problems are deep in the Nigerian economy. The triumvirate needs to unwind the deeply confused policy implemented under the Buhari (Emefiele) administration.”
Outlining what it considers the priorities of the Tinubu administration, the firm urged the government to resolve the $6.8 billion forex obligation backlog which has impeded the ability of banks to administer letters of credit.
“The question is: does the Central Bank need to find US$6.8bn of fresh dollars? We’d argue probably not – considering it is all in ‘the family’, a partial repayment and subsequent ‘restructuring’ of the balance would probably be Ok.”
It also frowned against forex restrictions that encumber smooth market operations, especially the contentious 43 forex-barred items.
It said, “There are all kinds of regulations that need to be removed to get rid of the tiered FX system: the glaring one is the restriction of FX provision for 43 items. An elegant system may persuade more transactions to move from the parallel to the formal rate (where we hear US$1-200mn/day is transacting).”
The firm said the fuel subsidy removal lacks clarity, and urged the government to articulate its stand as well as the actual savings from the policy which was hastily pronounced.
It urged the authorities to ensure that the MTEF (Medium-Term Expenditure Framework) which is due in October offers a solid view of
assumptions for the December budget. “We can then ascertain how realistic the fiscal goals are, and how they are financed.”
Regarding monetary policy, the firm noted,“Mopping up liquidity and getting the policy rate and yields to work together will be a juggling act – not to mention as it has implications on the government’s borrowing costs. But it will be essential for stability.”
On oil production, the report said, “increasing oil production is the silver-bullet. But everyone also agrees that it is tough to see this materialise in the short run. The scale of the theft (100s of thousands of barrels per day) implies great organization, and high-level contacts. Tough to break that, considering the pay-out. And then getting companies to invest in aged infrastructure is tough. We’d therefore maintain an assumption of ~1.5mln bpd of production, anything more is upside.”
In conclusion, the firm said it hopes to see significant improvement on the issues before the end of the year, stressing that the coming year would be crucial…
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