On 21 October 2022, Moody’s announced that it had downgraded the Nigerian Government’s long-term issuer rating from B2 to B3.
The deterioration of sovereign debt has an effect on long-term deposit ratings as well as senior unsecured debt ratings. Therefore, all Nigerian banks rated through Moody’s were also downgraded from B2 to B3.
The downward revisions contrast sharply with the view of Nigeria’s finance minister, who told Nigeria’s International Investment Summit in New York a few weeks earlier that Africa’s largest economy is not in a bad position.
Given that the debt-to-GDP ratio had not reached the crisis point of 40%, as stipulated by the Fiscal Responsibility Law, the scenario is still certain, he argued. But there is a clever logic to dismantling.
Nigeria has run budget deficits for decades, but at no time has the country violated Section 38 of the Central Bank of Nigeria (CBN) Act, also known as the Ways and Means Act. Government as lender of the last hotel at 5% of the real income of the last fiscal year.
By law, advances must not exceed $450 million. Under President Buhari, the government borrowed $48 billion, which is not included in Nigeria’s budget.
In addition, some of the cash has been used to finance direct government intervention systems such as the Anchor Borrowers Program and the President’s Fertilizer Initiative, which have high delinquency rates, given that they are guaranteed one hundred percent through the authorities.
Cash through channels and has also been used to finance oil subsidies, social investment systems and the emerging debt service charge.
This quantitative easing circular also played a role in accelerating market value indices, leading to double-digit inflation and several upcoming interest rate hikes.
To erase the overdraft, the CBN met with Finance Minister Zainab Ahmed and agreed to convert that budget into 40-year bonds with a 9% coupon (this also violates the law), illustrating that the country’s bond yield curve could only just begin. to invest, which can lead to a recession.
In a last-ditch attempt to curb liquidity, the central bank’s board of trustees withdrew more than 2. 7 trillion banknotes from circulation within 90 days.
However, it was excessive government spending to finance the deficit and pay for direct intervention systems that led to the doubling of cash flow in the first place, without the corresponding accumulation of production to adjust to cash supply.
Given the existing situation, possibly the time would have come for the CBN to replace its replacement rate mechanism from a fixed-rate style to a floating rate style, to attract foreign direct investment and net export earnings (NXP) from corporations. that they will divert their currencies to offshore accounts.
Ignoring the imperative of convergence of their exchange rates, as a tool to stabilize their currency markets, is like ignoring the effects of regressive models. Now is the time to act.