FX Scarcity, Policies Choices Could Hurt Nigeria’s Economic Recovery
Multiple issues around Foreign exchange lingered despite the monetary policy authority’s multi-tiered exchange rate management stance. However, the outbreak of virus which has damaged economic trajectory worsen the case thus far.
The Central Bank of Nigeria’s currency control policy choice is however getting weak due to lower accretion into the external reserves.
MarketForces had reported that the CBN has been unable to meet backlog of FX demand, though apex bank said this stands at around $2.5 billion, many investment banking firms indicate backlog range between $5 billion to $7 billion dollar.
Adjusting for external reserves for SWAPs which was US$8.6 billion in March and external holdings of open market operations (OMO) bills of US$10.4 billion in March, Chapel Hill said the organic portion of the nation’s reserves is much lower at US$16.7 billion.
The pressure on FX is going to affect the manufacturers as imports bill rise, which would lead to increased production cost and adjustment to prices.
The Nigerian manufacturing sector expend significant amount importing raw materials that cannot be source locally from other countries with base currency being dollar, and thus scarcity of the greenback is already putting strain on productivity across various segment of the economy.
In a macroeconomic note, FSDH Research, noted that Nigeria’s foreign exchange (FX) shortage could forestall economic recovery in the second half of 2020.
Already, there are indicators that support the investment company’s projection according to series of reports from the Nigerian Bureau of Statistics and the Central Bank of Nigeria.
According to FSDH, aside from FX challenges, Nigeria also faces with severe stagflation as its economic size shrink amidst rising inflation, unemployment rates.
Analysts noted that the nation’s key economic metrics have slipped into red due to the global and internal economic challenges facing the policy makers
But hope for recovery looks bleak as revenues to the Federal Government is on decline due to oil related challenges.
Global prices of oil has become more uncertain, unfortunately Nigeria also breach compliance request as to volume expected to supply into the market, and the Oil cartel insists for supply cuts.
The pressure face was however exacerbated on account of dwindling variables, both price and volume which analysts have predicted could worsen down in the second half of 2020.
Analysts recall that prior to the global Covid-19 pandemic, Nigeria’s FX situation remained fairly stable amidst fast rising headwinds.
The Investors & Exporters (I&E) window traded within the N362/US$ – N364/US$ range, as CBN was able to sustain its weekly interventions in the various windows with external reserves still at about US$38.0 billion levels.
However, FSDH recognised that this fairly stable FX market was precariously based on sturdy oil prices (at c.US$60/bbl.) and normal oil production/demand levels.
As the pandemic spread, countries implemented lockdown measures to contain it and this led to a slump in demand for crude oil.
The oil futures market reacted by selling down futures contracts with Brent crude sliding 60.9% from the end of January to US$22.74/bbl. by the end of March.
In response, the Organisation of the Exporting Countries and allies (OPEC+) reached an historic oil production cut agreement which required Nigeria to cut its oil production by about 30.0% to 1.4mb/d.
The outcome of this agreement resulted in Brent futures recovery to stabilize at US$40.0/bbl. – US$45.0/bbl. levels.
Nevertheless, this led significant decline in Nigeria’s FX earnings given an oil price which is about 25.0% lower and production levels (despite lack of full compliance to OPEC cuts) lower by about 20.0%.
The CBN has devalued the Naira twice this year with the official exchange rate losing 24.3% to settle at N379.0/US$ from N305.0/US$ previously.
At the I&E window, the naira closed at N385.67/US$ which represents a 5.8% year to date depreciation from N364.51/US$ as at 31 Dec 2019.
FSDH explained that it is important to point out that the underlying macroeconomic challenges that were faced prior to the pandemic are exacerbated by the current FX scarcity.
The nation’s debt book has skyrocketed significantly such short term interest payment almost equal total revenue generated.
Also, private sector investment has waned due to rampaging coronavirus pandemic, with foreign investment inflow data showing downbeat interest in the Nigerian economy.
In the second quarter of the year, capital imported into the economy dropped, just the same time when its trade balance signposts balance of payment stress.
Analysts said a number of foreign investors are stranded in the Nigerian financial market due to FX shortage that makes repatriation difficult, thus forcing the apex bank to engage in some sorts of sophisticated, albeit, unpopular currency control.
According to analysts, inability to access foreign exchange would limit output and drag economic productivity in the second half of 2020.
This is counterproductive for the economy as the Federal Government struggles to stimulate economic recovery, though critics said response to COVID-19 financial support was poor.
FSDH note stated that the nation is at the risk of potential stagflation as gross domestic products (GDP) dropped 6.1% in the second quarter of 2020.
Analysts explained that this is the first negative growth since the first quarter of 2017, coming at the time when both inflation and unemployment rates hit the rooftop.
MarketForces recalled that in the first half of 2020, GDP growth averaged -2.12%.
In H2, FSDH stated in the report expectation that this sluggish economic performance will continue especially given the lockdown of key sectors, the tough business climate and persistent challenges in the fiscal space.
In addition, analysts stated that Nigeria’s foreign exchange challenge will play a major role in shaping economic outcomes in the second quarter of 2020.
“Already, there have been limited FX supply which has resulted in depreciation of the currency in the parallel market”, FSDH noted.
More recently, the CBN has embarked on FX rationing and exchange rate adjustments, among other measures, to reduce pressure on the Naira and maintain a stable exchange rate.
However, FSDH stated that drawing from experience during the last recession, limited availability of FX as well as FX rationing could have unintended consequences on broad economic aggregates such as GDP, Inflation, external reserves and foreign investments.
“Growth of key sectors such as trade, manufacturing and agriculture could also be constrained by limited availability of FX to secure inputs”, FSDH stated.
Reconciling sectoral growth with job losses, it is evident from the NBS data that labour intensive sectors that experienced slowdown/decline in output, accounted for larger job losses in the second quarter of 2020.
Results from the NBS COVID-19 impact survey showed that 42.2% of respondents stopped working between March and May as a result of the pandemic.
During the lockdown, Commerce (Trade), Agriculture and Services had the highest share of job losses, respectively.
Nigeria’s two biggest sectors – Agriculture and Trade – both in terms of contribution to GDP and employment, experienced slowdown in activities as the government implemented lockdown and restrictions in second quarter of 2020.
For agriculture specifically, while the sector grew by 1.6%, job losses were significant due to seasonal factors and interrupted access to seedlings/farms/markets among other factors.
FSDH said of all the major sectors in the economy, it highlighted five sectors that will be positively affected by the pandemic.
The firm explained that with the exception of Electricity, all other sectors (Agriculture, Finance, Health and ICT) in its analysis showed positive growth as revealed by the NBS data on sectoral growth.
It noted that Agriculture has remained resilient during and post 2016 recession and highlighted that constant demand for agriculture output for both consumption and as intermediate input will sustain the sector.
The sector grew by 1.6% in the quarter and was instrumental in limiting the decline in overall output especially given that it accounts for a significant weight (25%) in overall GDP output.
Analysts stated that largely, the impact of COVID-19 was largely felt on output, employment and inflation.
With COVID-19, many companies engaged in non-essential items were forced to shut down operations.
As a result, the total number of individuals employed in the country declined to 35.6 million in 2020 Q2.
Unemployment rate rose to 27.1% in the quarter. Key sectors such as Agriculture, Trade and Manufacturing experienced significant job losses.
A fall in output was also accompanied by rising prices with inflation rate at 12.6% in June 2020.
Supply bottlenecks and va