Nigeria is experiencing a crippling foreign exchange (FX) shortage that makes it impossible for Small Medium Enterprises (SMEs) to get sufficient FX to conduct their businesses and drive economic growth.
Manufacturers cannot import the raw materials they require, traders cannot import goods for retail, and enterprises struggle to survive without access to FX.
Nik G Mirpuri, CEO of Nik Foods, when asked via email about the ease in accessing FX from banks to run his business, he said they were only able to get some FX to pay part of their bills last Wednesday after six years.
Speaking further on the inability to get FX, Nik said, “There have been several issues in this case. However, the main bottleneck has been the bank receiving allocation from CBN.”
Following a decrease in dollar inflows prompted by the coronavirus pandemic in 2020, Nigeria’s external reserve was severely strained, limiting the central bank’s capacity to defend the naira against the dollar.
Nigeria’s external reserve, dependent on FX inflow, is critical in protecting the naira and covering the country’s import bill. Lower inflows from crude oil revenues, international inflows from investors, overseas remittances, and external loans are all indicators of a declining external reserve.
Nigeria’s external reserve, which peaked at $41.8 billion on October 29, 2021, has fallen to $40.42 billion as of January 20, 2022, according to the CBN, this is still way below the all-time high record of $64.85 billion in August 2008.
Nigeria’s capital imports fell by 60 percent in 2020 to $9.7 billion from $24 billion in the previous year.
Paul Onwuanibe, the CEO, of Landmark Group, told BusinessDay it takes forever to get FX from the bank, saying, “We’ve been trying to get dollars for a year and there has been no other alternative than to wait.”
Although, there was a significant impact on external reserve in the third quarter of 2021, following the issuing of a $4 billion Eurobond by the Federal Government and the receipt of the $3.5 billion Special Drawing Right (SDR) from the International Monetary Fund (IMF) on August 28, 2021, FX supply has not matched demand.
Following the limited investment inflows and high dollar demand to finance imports and services, the external reserve has been under strain.
Some of the factors limiting Nigeria’s foreign exchange supply include the following:
Oil production
Despite being Africa’s largest oil producer, Nigeria has struggled to maintain high oil production levels. The development of the international crude oil market has contributed significantly to the growth of the country’s external reserve.
The fall in oil production in the country has had an impact on the government’s external reserve, which is heavily reliant on oil exports.
Despite the fact that Nigeria earned $11.3 billion from crude oil and gas exports in the third quarter of 2021, when oil prices averaged $75 per barrel, the country’s crude oil output has remained stuck at only two-thirds of its full potential, especially many of its large oil fields in the Niger Delta.
The country told OPEC that its oil output declined by about 78,000bpd, leading to 1.19 million bpd in December, according to a direct communication source from the cartel’s latest report released on January 18, 2022.
Dolapo Oni, an international oil and gas expert familiar with Nigeria’s petroleum industry, said Nigeria’s top 10 oil fields over the last decade have shed over 25 percent of output.
“These top oil fields were mostly replaced with many smaller oilfields, which were not fully optimised, therefore not sustainable,” Oni said in a tweet.
OPEC’s data also show Nigeria’s rig count declined further in December 2021 to six from seven recorded in November 2021.
The rig count averaged 10 units in the third quarter of 2021, but decreased to seven in the fourth quarter, a far cry from the 16 units recorded in 2019 and 11 units reported during the peak of the epidemic in 2020.
Despite ENI (the field operator) allegedly fixing all damages last year, export levels have plummeted from their prior level of 100,000bpd to an average of 50,000bpd since Brass River exports were threatened by a pipeline explosion in November 2020.
Further data suggest that loadings from the Erha FPSO stopped for about two months during October-November for no obvious cause.
Diaspora remittances
Remittances have the potential to boost economic growth and alleviate poverty. Remittances not only improve recipients’ general well-being but also help to increase FX liquidity and reduce dollar shortages within the country, freeing up funds for the importation of goods and raw materials needed to keep businesses afloat.
Although the country’s FX shortage has been largely attributed to the pandemic-induced collapse in global oil prices and production/demand, it is also due, in part, to a large drop in remittances, which had been a major source of FX in the country.
In the past, remittances into Nigeria have been on an upward trend since 2010. The World Bank states that total remittances into Nigeria grew to $23.8 billion in 2019 from $20.6 billion in 2010. This however changed in 2020 when yearly remittances had a sharp decline.
The Migration and Development Brief report by The Global Knowledge Partnership on Migration and Development (KNOMAD) revealed that the diaspora remittances into the country fell by 27.7 percent to $17.2 billion in 2020 from the previous year.
However, as of the second quarter of 2021, remittance into Nigeria slightly increased to $4.99 billion showing a slight recovery from the previous quarter where $4.34 billion was recorded. Year-on-year, remittances grew by 46 percent from $3.4 billion in the second quarter of 2020.
Although the increase shows that the country is recovering, remittances have failed to get back to the pre-pandemic levels which at the second quarter of 2019 was $5.91 billion.
According to KNOMAD, the true size of remittances, which includes formal and informal flows, is believed to be larger than officially reported data, though the extent of the impact of COVID-19 on informal flows is unclear.
“I think what’s happening is that more people are making use of informal channels for remittances and it’s not fully captured in the official statistics,” noted Andrew Nevin, chief economist of PwC.
“This also means we are having more invisible imports,” he explained
Speaking on what can be done to increase remittances into the country, Andrew said the e-naira app can be a major driver in the ease of sending money.
Read also: Threats to SMEs growing in Nigeria
“The e-naira can play a great role. If there is a unified exchange, it would be a fantastic vehicle to do the remittances. If you can send the remittance instantly to someone’s phone. It just shows up in their e-naira wallet,” he said.
To promote more remittances into the country, the government came up with a scheme “The Naira 4 Dollar” in March 2021.
This is a scheme that was initiated by the government to “sustain the encouraging increases in inflows of diaspora remittances into the country.”
Foreign investment
Foreign investment is a crucial component of foreign capital inflow, on the other hand, Nigeria has recently struggled to attract foreign investment for its domestic businesses, putting the country’s economic growth at a significant disadvantage.
Reduction in foreign investment was linked to unfavourable investment conditions, policy inconsistency, persistent security issues, severe infrastructure deficit, as well as institutional and structural challenges.
Latest data from the National Bureau of Statistics (NBS) show Nigeria’s overall capital inflows increased by 97.73 percent to $1.7 billion as of nine months in 2021.
Portfolio investment was the largest contributor, accounting for almost 70.3 percent ($1,217.2m) of total capital inflows during the period under review.
While FDI inflows, frequently touted as part of the solution to Nigeria’s economic woes, accounted for just 6.23 percent or about $107.81 million of the total capital imported by Nigeria in the third quarter of 2021.
A report from the NBS reveals that the total value of capital importation into Nigeria dipped by 147 percent year-on-year to $9.7 billion in 2020 from $24 billion in the previous year.
Nigeria’s annual FDI inflows are much less than the $100 billion estimated to be required for economic growth by the Africa Development Bank (AfDB).
Policy inconsistency, a business environment that existing local and foreign investors say is anti-business, and the lack of political will to open up the economy to private capital are said to be the reasons why foreign investments into Nigeria have continued to decline.
