Public sector finances should be restructured — Report

THE RTC Business and Economic Report for April 2021 has emphasized the need for the government to restructure public finance to diversify and increase sources of revenue with the view to insulate the economy from the effects of crises such as the Covid-19 pandemic. 

According to the report published by RTC Advisory Limited, a leading economic, policy, business and strategy advisory firm, “The Covid-19 pandemic has exposed the need for restructuring public sector finances generally at federal, state and local levels. The objectives of such restructuring will include increasing and diversifying the sources of revenue; restructuring existing financial obligations and liabilities; reducing waste and inefficiency in government finances; increasing opportunities for commercialisation, privatization and PPPs in government MDAs and overall improving public finances.” 

While harping on the need to diversify the economy, the RTC report observed that global oil production would rise due to the OPEC+ supply reduction of 1.14 million barrels per day (mbpd) starting from May, which would result in an increase of Nigeria’s oil production, a situation that “would positively affect Nigeria’s export earnings and might aid the country’s foreign reserves.” 

It, however, called for the diversification of the economy, saying “With a continuous overreliance on crude oil as the source of foreign exchange of the country, a critical question to ask is: How would the country carry on with debt servicing if the global oil market crashed again?” 

It continued, “The improvement in external reserves was due solely to improvements in the global oil markets which is not sustainable for the country. Thus, it is expedient for Nigeria to diversify its export base.” 

While decrying the worsening security situation in the country, the report stated that, “The alarming rate of the insecurity issues in the country will lead to major disruption in the economic activities of the country, specifically, the farmers, schools and traders. If not checked and corrected, this could be a negative signal to potential investors and pose Nigeria as an unsafe nation to set up investment which will adversely affect foreign exchange earnings.” 

It added that “The worsening security challenge in the country is increasingly leading to a significant economic cost for a nation that needs all the investment opportunities it can garner. The Nigerian government must regard tackling insecurity as an urgent economic imperative.” 

According to the report, headline inflation will not abate anytime soon. “We expect a further appreciation in the headline inflation in the coming months as a result of the planting season, increasing insecurity issues, and continuous pressure on naira. The CBN could adopt a tighter monetary policy position at its next meeting scheduled for May 24-26, 2021,” it said. The RTC report also stated that “Nigeria through DMO said it had increased how much public debt it could incur from 25 per cent of its Gross Domestic Product (GDP) to 40 per cent. Thus, increased borrowing would lead to an overlapping generation case; implying future governments would be saddled with repaying debt rather than meeting their growth objectives.” 

The report also posited that monetary policies would likely cause the value of treasury bill to soar while bringing down the value of stocks. It said, “Monetary authorities will continue to use the primary and secondary instrument to take out excess liquidity and push up interest rates. Thus, as the treasury bill and interbank rates continue upward trend, the stock market might experience a bearish performance as yields on equities become unattractive.” 

The report added that treasury bill can go as high as 10.5 per cent per annum by midyear.

 

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