External Debt Servicing May Pose a Problem ― Rewane
The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr Bismarck Rewane, has raised concern over the nation’s ability to service its foreign debts. Rewane, during a presentation at a breakfast session sponsored by Rand Merchant Bank in Lagos, said his prediction was based on the multiple scenario analyses by the firm.
He said the forecast for the Nation’s economy showed a mixed outcome of positivity and negativity. According to him, inflation is close to an inflection point and Government revenue will remain robust, thanks to Oil proceeds. Rewane said, “The pressure on the exchange rate will build up due to increased liquidity and demand pressures, and there would be a temptation to appreciate the Naira for political expediency.
“Key policy reforms will take the back burner for politics. Nigeria’s foreign debt service will become a potential problem. Nigeria’s external trade will be more balanced between Asia, the European Union and America.” The financial expert added that there was also a possibility of capital flight as elections were approaching.
According to him, Gross Domestic Product growth trajectory will be sustained, albeit at a slow pace, and will force the marginal propensity to consume to blink. Rewane, who spoke on ‘Enhancing Nigeria-South Africa Trade: The case for a Naira/South African Rand swap’, stated that a swap arrangement between Nigeria and South Africa, estimated to be in the region of $1Bn over three years, would enhance trade flows by at least 50 per cent to $4Bn.
He said a swap would narrow Nigeria-South Africa trade imbalance to less than $1Bn, and would benefit companies that play in retail, telecoms, power and entertainment sectors. He noted that a swap would ease the demand pressure on both currencies, and bring about a three per cent cutback on external reserves depletion. According to Rewane, Nigeria’s currency is near fair value.
He stated that if a currency attained equilibrium, there would be no need for a swap. He said bilateral trade between Nigeria and South Africa would improve trade ties, encourage movement of goods and services, ease pressure on external reserves, and enhance infrastructural development and job creation.
Rewane added that there was a wrong framework that equated a currency trader to a smuggler and expected both to pay premiums. “A trader is one who wants to pay all his duties , while a smuggler is one who is willing to pay a price, provided it is lower than the normal dues. When you set up a framework that assumes everybody is a trader and is expected to pay a premium, it would affect the market,’ he said.
According to him, the currency will go into equilibrium, changing the structure and converging multiple exchange rates.