FX volatility may affect smooth implementation of 2024 budget – Uwaleke
Professor Uche Uwaleke has identified foreign exchange volatility as a major hindrance to the smooth implementation of the 2024 budget.
Uwaleke, a Prof of Finance and the Capital Market at the Nasarawa State University, told Blueprint that despite the promise the 2024 budget proposal holds, the likely distortionary impact of the new FX regime would determine its outcome.
The federal government recently presented the N27.5 trillion 2024 budget proposal to a joint session of the National Assembly in Abuja.
According to Uwaleke, the N750 to the dollar rate used for the 2024 budget is a tall order.
“It’s most likely the exchange rate will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations.
“This is particularly so in respect of the dollar-denominated component of the budget much of which can be found in the over N3 trillion proposed defence spending as well as in recurrent debt expenditure.
A volatile and high exchange rate will increase the cost of servicing external debt and further widen the budget deficit.
“In my view, a well implemented and corrupt-free dual (not multiple) exchange rate regime (one official including for debt service and another tier for other transactions) helps to bring certainty in government procurements and short term planning in general,” he said.
The former Imo Sate Finance Commissioner also talked about the likely impact the mode of financing the over N9 trillion budget deficit may likely have on the cost of capital for firms and the stock market.
He said, “Unlike in previous budgets where the amount voted for new borrowings were split fairly equally between domestic and foreign sources, this time around domestic borrowing is taking up a huge chunk at about 78% (N6.1 trillion out N7.8 trillion provisioned for new borrowings)
“This can have the effect of crowding out the private sector, hiking interest rates, increasing cost of funds and depressing the equities market as investors migrate to fixed income securities. The outcome will be a further weakening of the productive sector.
“In this regard, the government is advised to explore more opportunities for concessional project-tied loans from multilateral and bilateral sources. This will help to boost forex reserves and stabilize the exchange rate.”
On domestic borrowing he said, “With respect to borrowing domestically, it’s important that emphasis should be placed on the use of the right instruments such as infrastructure bonds as opposed to FGN bonds that are inflationary prone.”
