Updated: Nigeria’s central bank projects economy to grow 2.0% in 2021

…says external reserves at $35bn no cause for worry foreign investors withdraw $100bn from emerging markets

The Central Bank of Nigeria (CBN) on Friday said the country’s economy, which entered its second recession in five years following a 3.62 percent GDP contraction in the third quarter of 2020 after having contracted by 6 percent in the second quarter, could emerge from recession by the first quarter of 2021.

Godwin Emefiele, governor of the CBN, who spoke in Lagos at the 2020 bankers’ dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN), also projected the economy to grow by 2.0 percent next year, driven by sustained implementation of the government’s intervention measures.

Cumulatively, he said, the intervention efforts represent about 3.5 percent of Nigeria’s GDP.

As a way of calming the nerves of Nigerians over declining external reserves, which currently stand at $35 billion, Emefiele said there was no need to worry as the nation’s buffer can finance seven months of imports.

The external reserves give the apex bank the firepower to defend the naira, which has weakened to N498 per dollar on the black market.

Emefiele noted that the decline in crude oil earnings as well as the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into Nigeria. In order to adjust for the decrease in supply of foreign exchange, the naira was devalued from N305/$ to N360/$, and subsequently to N380/$.

“Our actions in 2021 would be guided by the considerations that emerged from the Monetary Policy Committee meeting of November 23 & 24, 2020, which sought to address the major headwinds exerting downward pressure on output growth and upward pressure on domestic prices,” he said.

He said downside risks remain, as restoration of full economic activities, particularly in service-related sectors, remains uncertain until a COVID vaccine is produced and made available to millions of people across the world.

With the decline in the nation’s foreign exchange earnings and successive exchange rate adjustments, he said the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria and aid conservation of external reserves.

“Due to the unprecedented nature of the shock, we continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which rapid changes in the exchange rate could have on key macro-economic variables,” Emefiele said.

The impact of the pandemic and the resulting slowdown in economic activity led to a significant outflow of funds from emerging-market economies.

Consequently, foreign investors withdrew over $100bn worth of funds from emerging markets between February and April 2020. These funds were subsequently invested in safe-haven assets such as US treasury bills and the Japanese yen.

The increase in outflows from emerging markets also led to a corresponding depreciation in the currencies of several emerging market countries such as Brazil (-27.3 percent), Turkey (-35.1 percent), Argentina (-35 percent), Russia (-20 percent), Angola (-27 percent) and South Africa (-9 percent) year to date.

“We must therefore find ways to insulate our economy from the impact of these shocks through our diversification efforts, while also working to ensure that we adhere to safety protocols in order to prevent a surge in COVID-19-related cases, as this could further cripple economic activities,” Emefiele said.

On inflation, Emefiele expects it to begin to moderate by the first half of 2021 as efforts are being made to enable significant cultivation and production of key staple items in the dry season.

He said the banking sector, therefore, has a significant role to play as a facilitator of growth in the agriculture sector, through its intermediation function.

Some of the opportunities in the agriculture sector that banks should explore, he said, include ways to address some of the existing gaps in the agriculture value chains, such as storage centres, transport logistics, and technology.

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