Nigeria is set to receive $10 billion in foreign currency inflows in the coming weeks to alleviate liquidity issues in its foreign exchange market, according to Finance Minister Wale Edun. The announcement on October 23 has sparked discussions, with some experts questioning the source of the funds and how they will be used to clear foreign exchange (FX) backlogs and inject liquidity into the market.

Fitch Ratings, in particular, has expressed doubts about how the funds will be raised, though the government has hinted that part of the money will come from securitizing a portion of Nigeria’s future dollar inflows. This move, combined with the Central Bank of Nigeria’s (CBN) recent actions to settle outstanding FX forward contracts, has strengthened the naira in the short term and brought some relief to the economy.

The Federal Government is optimistic that once the FX backlog is cleared, confidence in Nigeria’s economy will improve, attracting further inflows. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, emphasized that clearing the backlog will create more space for the CBN to intervene in the FX market, potentially stabilizing the market and fostering investor confidence.

However, there is concern about what will happen to the local currency after the FX backlog is addressed. The Nigerian government’s reliance on future earnings to settle current debts has raised questions about the long-term implications for the country’s financial stability. Experts have debated the wisdom of using future revenue, particularly from Nigeria’s stake in the Nigerian Liquefied Natural Gas (NLNG), to clear current obligations rather than investing in growth.

A major part of the government’s plan involves securitizing around $7 billion of future dividends from NLNG over five years. The funds will be sourced through a consortium of banks led by Standard Chartered, with the government paying interest on the borrowed sum over time. This strategy has drawn criticism from some quarters, with concerns about the long-term impact on Nigeria’s financial health.

Tosin Adeoti, a sociopolitical and economic analyst, pointed out that the government is essentially borrowing against future revenue for a much longer period than advertised, possibly stretching the repayment timeline to 10 or 12 years. He raised concerns about the sustainability of this approach, given Nigeria’s ongoing foreign exchange shortages and debt obligations.

In addition to securitizing future NLNG dividends, the government is also looking to borrow $3 billion from the African Export-Import Bank (Afreximbank), with plans to use future oil earnings to repay the loan. This approach has raised concerns about the mortgaging of Nigeria’s future revenues to fill present gaps.

There is growing consensus that Nigeria needs to attract foreign direct investment (FDI) and portfolio investments (FPI) to stabilize the economy. However, the country’s current business environment, marked by a lack of confidence in government policies, has deterred many foreign investors. This was highlighted recently when Morgan Stanley Capital International (MSCI) announced plans to remove major Nigerian securities from its Frontier Markets Index, citing difficulties in repatriating funds.

The Nigerian government has made efforts to secure loans to address its current foreign exchange challenges, including a request for $7.8 billion in loans from the National Assembly. However, this reliance on future revenue and borrowing has raised concerns about the long-term sustainability of Nigeria’s fiscal policies.

As Nigeria’s external debt continues to grow, the country faces significant challenges in servicing its obligations. With a total public debt of N87.38 trillion in the second quarter of 2023, up 75.29% from the previous quarter, the government is increasingly reliant on borrowing to cover budget deficits. The rising debt burden, combined with high interest payments, poses a risk to the country’s long-term economic stability.

Experts like Bismarck Rewane, CEO of Financial Derivatives Company Limited, warn that the naira will remain volatile in the short term due to ongoing forex supply concerns. While the expected $10 billion inflow could provide some relief by year-end, there is no guarantee that this will lead to long-term stability.

Nigeria’s fiscal challenges are compounded by its dependence on oil revenues and federal allocations, which many analysts argue have fostered an unproductive economy. Most states rely on funds from the Federation Account Allocation Committee (FAAC), rather than generating their own revenue through productive means.

As Nigeria’s debt continues to grow, questions remain about how the government will manage its fiscal responsibilities and ensure long-term economic stability. While the anticipated foreign inflows may provide short-term relief, the long-term implications of borrowing against future revenues are cause for concern.