Currency Crisis Rocks 2024 Budget: Government Contemplates Review

Recent upheavals in the foreign exchange market have thrown the 2024 Budget into disarray, signaling a potential need for a review of the Appropriation Act. According to Vanguard, insiders within the Finance Ministry disclosed that the budget’s key components have been significantly impacted by the sharp fluctuations in the foreign exchange market.

The official exchange rate benchmark, initially set at N800/USD1, has surged by nearly 50%, resulting in a doubling of both US dollar-based revenue and expenditure. As a consequence, the Naira values have skyrocketed by about 100%. The Senate’s approval of the N28.7 trillion budget, inclusive of N1.7 trillion for statutory transfers, N8.7 trillion for recurrent expenditure, and N9.9 trillion for capital expenditure, is now facing substantial alterations due to the currency market’s changing dynamics.

Financial experts interviewed emphasized that the budget, only six weeks old, has experienced a significant dislocation following the substantial depreciation of the Naira across various foreign exchange market segments. The impact on the 2024 budget is two-fold, with both revenue and expenditure surging simultaneously. However, experts caution that prudent fiscal measures are essential to prevent exacerbating the current economic situation.

While the rising exchange rate is expected to boost Naira revenue from the oil sector and other US Dollar-denominated revenues, estimated at over N15 trillion, there are concerns about a potential increase in expenditure. Experts project a rise in debt servicing costs and general foreign exchange-denominated expenditures in the budget, potentially wiping out the gains from increased revenue. This fiscal imbalance may further contribute to inflationary pressures and escalate the cost of executing the capital expenditure budget.

Analysts suggest that the government must exercise fiscal discipline to avoid profligacy, which could erode the benefits of the exchange rate gain. Additionally, potential labor union pressures for minimum wage increases and a surge in personnel costs could further compound the challenges, potentially leading to a budget deficit of over N20 trillion, a significant rise from the initial projection of N9.2 trillion.

Investment analysts emphasize the need for adjusting the budget exchange rate to current realities to ensure accurate revenue recognition. While a weaker Naira may boost USD revenues, it could also increase the cost of foreign debt servicing and impact the overall budget deficit. Experts stress the importance of a fiscally responsible approach to managing the additional revenue to avoid widening the deficit.

In summary, the recent exchange rate developments have injected uncertainty into the 2024 budget, requiring careful consideration and strategic adjustments to maintain fiscal stability amid the evolving economic landscape.