Nigeria’s economy is facing turbulent times over the drop in crude oil prices to $35 per barrel on Monday. The impact on foreign reserves, exchange rate stability and equities market will be devastating to the economy. These scenarios could led multilateral institutions to revise downwards their 2020 projections on Nigeria’s growth. Analysts insist that with growth in Gross Domestic Product (GDP) still fragile and foreign portfolio investment inflows low, Nigeria needs more than sound economic policies to pull out of the rubbles, writes COLLINS NWEZE.
NIGERIA’S worst economic storm is approaching. The sudden drop in prices of to $35 per barrel, nearly 35 per cent below the $57 per barrel budget benchmark is worrisome.
For those who understand that over 95 per cent of Nigeria’s foreign exchange earnings (forex) come from crude oil exports, there is much to worry. The last time crude oil prices neared this price was January 2016 when crude oil price touched $25 per barrel (pb), with little hope that it would rebound.
Although two years after, the prices rose significantly, touching $64.41 per barrel on February 1, 2018 even as Goldman Sachs predicted that Brent Crude could rise higher.
But like a dangerous circle, the prices of crude oil on Monday fell to $35 per barrel, which could lead to key disruptions in the economy, including making multilateral institutions to revise their 2020 economic projections for Nigeria’s growth.
Head of Research at Coronation Merchant Bank, Guy Czartoryski said oil price crash will be a defining risk for Nigeria’s foreign exchange market.
“We began this year with the view that the Naira/US dollar exchange rate could hold for most of 2020. When the coronavirus outbreak became apparent at the end of January, we still believed that a combination of monetary stimulus in developed markets and foreign portfolio investment into Nigeria would stabilise the risk outlook. Last week’s crash in oil prices, however, elevates risks considerably,” he said in an email report to investors.
IMF/World Bank projections
Contrary to the 2.1 per cent growth projected by the World Bank in the Nigerian economy in 2020, the International Monetary Fund (IMF) projected 2.5 per cent growth for it. The IMF projection, as contained in its January Global Economic Outlook, which covers two-year growth target. The IMF prediction is 0.4 per cent higher than 2.1 per cent projected by the World Bank for three years: 2020-2023. The World Bank report was captured in its January Global Economic Prospects released on January 8. It, however, described the country’s macroeconomic framework as not “conducive to confidence”, adding that the macroeconomic framework is characterised by multiple exchange rates, foreign exchange restrictions and persistent inflation.
In the report entitled: “Tentative stabilisation, sluggish recovery”, signed by Gita Gopinath, an Economic Counsellor and Director of the Research Department at the Fund, the IMF said the Nigerian economy will grow at 2.5 per cent this year and the next.
According to the Fund, the economy grew 1.9 per cent in 2018 and 2.3 per cent last year. The IMF said emerging market economies in macroeconomic distress related to domestic imbalances will need to continue making the policy adjustments necessary for rebuilding confidence and putting in place the conditions for a return to stable and sustainable growth.
The report said: “In these contexts, ensuring adequate safety nets to protect the vulnerable remains critical within overall constraints. High-debt economies should aim for consolidation — calibrating its pace to avoid a sharp slowdown in activity — by improving subsidy targeting, broadening the revenue base, and ensuring stronger compliance.”
The Fund said monetary policy should remain accommodative where inflation is still muted. With interest rates expected to remain low for long, macro-prudential tools should be proactively used to prevent the build-up of financial risks.
It further said: “Given historically low interest rates alongside weak productivity growth, countries with fiscal space should invest in human capital and climate-friendly infrastructure to raise potential output.
“Economies with unsustainable debt levels will need to consolidate, including through effective revenue mobilisation.
“To ensure a timely fiscal response if growth were to slow sharply, countries should prepare contingent measures in advance and enhance automatic stabilisers.”
The Fund said a coordinated fiscal response may be needed to improve the effectiveness of individual measures.
“Across economies, a key imperative is to undertake structural reforms, enhance inclusiveness, and ensure that safety nets protect the vulnerable,” it said.
It advised countries to cooperate on multiple fronts to lift growth and spread prosperity.
The Fund further said: “They need to reverse protectionist trade barriers and resolve the impasse over the World Trade Organisation’s appellate court.
“They must adopt strategies to limit the rise in global temperatures and the severe consequences of weather-related natural disasters.
“A new international taxation regime is needed to adapt to the growing digital economy and to curtail tax avoidance and evasion, while ensuring that all countries receive their fair share of tax revenue.”
It insisted that while there are signs of stabilisation, the global outlook remains sluggish and there are no clear signs of a turning point.
“There is simply no room for complacency, and the world needs stronger multilateral cooperation and national-level policies to support a sustained recovery that benefits all,” it added
What history says
The rise in crude oil prices had also prompted the IMF to revise its 2018 projections for Nigeria’s growth to 2.1 per cent from 1.9 per cent. The growth, it says, would be supported by higher oil prices and domestic production, increased forex liquidity and market deregulation. These will boost investor confidence, foreign direct investment and foreign portfolio investment inflows. But achieving these, the Fund says, would require implementing set of policy measures, such as tax reforms, social safety programmes, and investments in infrastructure.
Leverages for Nigeria’s economic recovery
The over $60 billion turnover recorded in the Investors’ and Exporters’ (I&E) Forex Window is expected to help keep the naira stable, despite calls for its devaluation.
The I&E Forex window, launched by the Central Bank of Nigeria (CBN) in April 2017, has attracted over $60 billion to the economy. It has also remained one of the key instruments expected to help stabilise the currency against others.
The I&E Forex window, codenamed ‘willing buyer, willing-seller window’, allows foreign investors to bring in dollars at any price, provided they could find buyers at such a rate. The figure at the window has also impacted positively on the Purchasing Managers’ Index (PMI).
CBN Governor Godwin Emefiele said the I&E Forex window is one of the policies that sustained the stability of the naira and will continue to raise foreign capital inflows into the economy.
Emefiele said that as part of the bank’s priorities for next year, the regulator was determined to maintain its stable exchange policy stance in the near to medium term given the relatively high level of reserves.
A report by FSDH Research said that prior to the I&E Forex window introduction, the market and exchange rates were in turmoil. However, in a dramatic turn of events, the acute shortage of forex, which businesses and individuals grappled with, witnessed an unprecedented improvement, with banks and Bureaux de Change (BDCs) desperately looking for forex buyers.
A Lagos-based economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, described the introduction of the I&E forex window as the best policy by the apex bank.
Diversifying the economy
Nigeria’s plan to diversify the economy from crude oil earnings is expected to boost foreign investors’ confidence in the economy, President/Chairman of Council, Chartered Institute of Bankers’ of Nigeria (CIBN) Uche Olowu has said.
Speaking at the Economic Outlook forum in Lagos, he disclosed that as soon as the economy is diversified, the country will see higher accretion to the foreign reserves and improved confidence in the economy.
He said opportunities in the agricultural sector should be explored to improve the country’s capacity to export agric products.
Pressure on naira
The pressure on the naira has been on for years, with the CBN regularly intervening to stabilise it against the dollar. The CBN says it defended the naira with $8.28 billion through its intervention within the first six months of last year, according to its half-year report.
The naira is exchanging at N306.95 in the official market and N364 to dollar in the parallel market and has stayed below N365 to dollar in the last one year, both at the official and parallel markets. But the naira, recently depreciated past N400 to a dollar on the one-year forward market which is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery.
CBN Director, Financial Markets Department, Angela Sere-Ejembi, noted that $2.1 billion was auctioned at the Inter-bank spot; $550.70 million went to Invisibles, $810 million for Small and Medium Enterprises (SMEs), $212.11 million at the I & E Forex window and $4.57 billion as Forwards sales.
Member of CBN-led Monetary Policy Committee (MPC), Prof. Adeola Adenikinju, warned that the naira faces some challenge ahead unless some conditions threatening the currency’s stability were addressed
