The Importance of Funding Nigeria's Infrastructure Deficit with the Naira

Feranmi Olaseinde

Feranmi Olaseinde

Oct 07, 20233 min read

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The Importance of Funding Nigeria's Infrastructure Deficit with the Naira

Introduction:

Nigeria's infrastructure deficit is a pressing issue that requires immediate attention. In order to address this problem effectively, it is crucial to consider funding these projects with the Naira, the country's national currency. This approach would allow Nigeria to avoid the volatility of exchange rates while simultaneously tackling its infrastructure challenges.

Off-Balance Sheet Financing as a Tool:

One possible avenue for funding infrastructure projects is through off-balance sheet financing (OBSF). This accounting practice involves recording corporate assets or liabilities in a manner that does not reflect them on a company's balance sheet. OBSF is often used by highly leveraged businesses to maintain low debt-to-equity and leverage ratios, thereby preventing negative debt covenants from being breached.

Legitimacy of Off-Balance Sheet Financing:

It is important to understand that OBSF is a legal practice when companies adhere to accounting rules and regulations. When used correctly, OBSF allows businesses to secure partnerships and joint ventures, engage in research and development projects, and enter into operating leases. This practice enables companies to shift ownership to other entities, such as subsidiaries or special purpose vehicles (SPVs), which have their own balance sheets.

The Risks of Off-Balance Sheet Financing:

While OBSF can be a useful tool, it is essential to recognize its potential risks. If companies misuse this practice to hide assets or liabilities from investors and financial regulators, it becomes illegal. A prominent example of this misconduct is the infamous Enron scandal. Therefore, it is vital for companies to strictly adhere to established accounting principles, such as generally accepted accounting principles (GAAP) in the case of the United States.

Connecting the Dots:

By funding Nigeria's infrastructure deficit with the Naira, the country can avoid the negative implications of exchange rate volatility. Simultaneously, OBSF can be utilized as a legitimate accounting practice to ensure that leverage ratios remain within acceptable limits. This approach allows companies to engage in partnerships and joint ventures without compromising their financial health.

Actionable Advice:

  • 1. Enhance Transparency and Accountability: To ensure the legality and ethicality of OBSF, it is crucial for companies to prioritize transparency and accountability. By maintaining accurate and comprehensive records, businesses can demonstrate their compliance with accounting rules and regulations.
  • 2. Strengthen Financial Regulations: Governments should focus on strengthening financial regulations to prevent the misuse of OBSF. By implementing robust oversight mechanisms and conducting thorough audits, authorities can detect any potential irregularities and hold accountable those who engage in fraudulent practices.
  • 3. Promote Infrastructure Investments: To address Nigeria's infrastructure deficit effectively, it is essential to encourage both domestic and foreign investments. By creating an attractive investment climate and offering incentives to investors, Nigeria can secure the necessary funding to improve its infrastructure.

Conclusion:

In order to address Nigeria's infrastructure deficit, it is imperative to fund these projects with the Naira. By avoiding the risks associated with exchange rate volatility, Nigeria can make substantial progress in improving its infrastructure. Additionally, OBSF can be used as a legitimate tool to manage leverage ratios effectively. However, it is crucial for companies to uphold transparency and adhere to accounting rules to ensure the legitimacy of this practice. By implementing strong financial regulations and promoting infrastructure investments, Nigeria can take significant strides towards bridging its infrastructure gap and driving economic growth.

Resource:

  1. "Why Nigeria’s infrastructure deficit should be funded with the Naira – Nabila Mohammed ", https://nairametrics.com/2023/09/27/why-nigerias-infrastructure-deficit-should-be-funded-with-the-naira-nabila-mohammed/ (Glasp)
  2. "Off-Balance Sheet Financing (OBSF): Definition and Purpose", https://www.investopedia.com/terms/o/obsf.asp (Glasp)

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