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Home Economy

Nigerian Economy Heads For Deep Recession As Foreign Reserves Plunge By $5.10 Billion

Olawale Joseph by Olawale Joseph
May 10, 2020
in Economy, National, Op-Ed
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Nigeria Economy, foreign reserve
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As many would say, events that have characterized the year 2020 are indeed unprecedented, and the Nigerian economy just like may others are being faced with shocks and downturn never witnessed in modern history.

According to data obtained from the Central Bank of Nigeria (CBN), Nigeria’s gross foreign reserves depleted by $5.10 billion between January and May 2020. As at May 5th, 2020, total gross reserves stood at $33.4 billion, a 13% drop when compared to $38.5 billion in January.

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Why the foreign reserves continue to decline

The impact of Covid-19 pandemic on Nigeria’s foreign reserves cannot be over emphasized, due to the crash in global oil price and continued lockdown across countries of the world.

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However, it should be noted, that while the Covid-19 pandemic is expected to have spiral effects on the Nigeria’s economy landscape in the short to medium term, the country’s foreign reserves already started a freefall since May 2019, when foreign reserves last stood at $45 billion.

Specifically, Nigeria’s foreign exchange market is largely heated by high demand for import which stokes forex transactions, and the CBN comes in handy with continued intervention in the exchange windows to manage naira volatility against its counterpart.

Eco Bank

As at the third quarter of 2019, analysis of CBN Q3 2019 statistical bulletin showed that between January – September, foreign exchange inflows through the CBN was estimated at $43.17 billion, while outflow was $45.05 billion, aggregating a deficit of $1.87 billion. This implies that the CBN supplied more foreign exchange than it received.

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Further breakdown showed that over 62% of the total forex supplied by the CBN was at various foreign exchange windows, with sales to Bureau De Change (BDC) gulping the share. Also, 25% of forex supply was for other official payments which include public sector parastatal and joint venture companies.

Again, the outbreak of Covid-19 pandemic is supposedly affecting foreign investors’ confidence in the Nigerian economy, resulting in capital outflow. According to the latest Foreign Portfolio Investment (FPI) report released by the Nigerian Stock Exchange (NSE) for Q1 2020, foreign capital outflow in March was estimated at N87.73 billion, 89% increase from N46.5 billion recorded in January.

Nigerian economy challenged before Covid-19

The challenges faced by the Nigerian economy amid Covid-19 pandemic is multifaceted. First, it is important to state that oil price is not expected to peak in 2020. According to the Energy Information Administration outlook for April 2020, Brent oil price is expected to average $33/b in 2020. With the struggle to abate Covid-19 pandemic still subsisting globally, Nigeria fiscal imbalance is expected to further be exacerbated and the path to recovery may take a very slow trajectory.

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Secondly, according to the IMF, Nigeria’s economy was already facing headwinds even before the COVID-19 outbreak. A typical example is the deteriorating current account, which shifted into a substantial deficit as the goods and services trade balance deteriorated by 5.5% of GDP in 2019. By and large, demand for foreign goods continues to remain the bane of current account and trade balances.

The IMF has projected that Nigeria’s foreign reserves is expected to decline to as low as $25 billion at the end of 2020.

Thirdly, the Nigerian government has already secured a $3.4 billion loan from the IMF under the Rapid Financing Instrument. While more borrowings are imminent, debt servicing is expected to gulp a significant part of government revenue. According to the IMF staff report on Nigeria, while debt to-GDP indicators remain sustainable, higher interest rates will increase Nigeria’s vulnerabilities by placing a principal risk on debt service. Specifically, the IMF noted that an interest rate shock would increase the FG interest-to-revenue ratio to 145%.

How declining foreign reserves affect you

Basically, Nigeria’s foreign reserves are assets held on reserve by the monetary authority (CBN) in foreign currencies. Foreign exchange inflow in Nigeria are basically through Central Bank and Autonomous sources.

GTBank

The outbreak of Covid-19 pandemic has presented its own unique challenges to both Nigeria’s fiscal and monetary landscape. In a bid to ease pressure on the foreign reserves, the central Bank has been reactionary with a 15% devaluation of naira through the unification of the official exchange rate to the BDC operators and importers and exporters (I&E) window.

[Read Also: Do This And Africa Will Survive – John Kufuor Advises]

Meanwhile, there are concerns that the continued spread of Covid-19 and crash in oil price means the Central Bank may further devalue the naira if the pressure builds further on the country’s reserves.

Following various disruptions on the global front, the IMF already projected a 3.4% contraction of the Nigerian economy in 2020, and this may be worse off if things do not improve. Although, the federal government has obtained a $3.4 billion loan from the IMF under the RFI scheme. This, in the meantime, is expected to buy some time for the Nigerian economy.

 

 

Tags: Central Bank of NigeriaForeign ReserveNSERecession

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