Nigeria may have gotten some short relief with the $3.4 billion external support under the IMF’S Rapid Financing Instrument ( RFI)- to augment its balance of payment needs, analysts at the Institute of International Finance, ( IIF) have predicted significant reserve losses to the tune of $ 8billion in 2020, as the spread in COVID- 19 continues to exacerbate existing external pressure on Africa’s biggest economy.
IIF in a report seen by Businessday, said in addition to the extremely limited room for fiscal stimulus, monetary policy room is restricted by the country’ s multiple exchange rates regime. The significant external stress, together with the risk of local COVID- 19 outbreak, the country will need to rely on external support.
In addition to the recently approved $ 3.4 billion in IMF RFI funding, Nigeria is planning to receive an additional roughly $ 3.6 billion from the World Bank, Afri – can Development Bank, Afreximbank, and Islamic Development Bank.
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“Nevertheless, we believe that reserve losses will remain substantial in 2020— around $ 8 billion or around 25% of the current stock” IIF said.
The report said with dramatic decline in oil prices since the beginning of the year—together with production limits under the OPEC+ agreement, this wi l l reduce goods exports by more than 40percent in 2020, noting that the large nonresident inflows observed in first half of 2019 have since reversed, and capital flow dynamics are not expected to improve anytime soon in the context of global risk- off behavior.
“Nigeria’s current account balance stood at -$ 17 bn (or 3.6% of GDP) in 2019. The shift from a $ 3.9 bn surplus in 2018 was primarily driven by a smaller goods surplus. We expect this surplus to turn into a deficit in 2020 as lower oil prices and production cuts reduce exports dramatically,” IIF said.
As a result, and despite substantial import compression, we project a current account deficit of $ 14.7 bn ( or 3.4% of GDP) this year. A sharp decline in goods imports and services debits mean a lower break- even oil price of roughly $ 70/ bbl. However, we expect the average crude oil price in 2020 to be around $ 35/ bbl.
Nigeria experienced substantial inflows of s h o r t – t e rm portfolio debt in first half 2019, on the back of foreign purchases of Central Bank ( CBN) bills. Sadly, over the first three months of this year, gross foreign reserves declined by $ 3.3 billion, bringing the total to $ 35.3 billion at the end of March.
Noting that it expects weak inflows to continue until the global risk- off sentiment subsides.
The report noted that low oil prices would not only contribute to a sharp decline in merchandise exports, but also widen the fiscal deficit further, as oil revenue accounts for more than 50percent of total revenue in most years and is strongly correlated ( 0.8 over 2008-18) to the Nairavalue of oil exports.
“For 2020, we expect the fiscal deficit to reach close to 5% of GDP. While expenditures are rising in GDP- terms as well, revenue collection weakness clearly dominates, with non- oil revenue remaining persistently low. As the deficit has increasingly been financed externally, global risk- off behavior and capital outflows will impact the government’s ability to run fiscal deficits,” IIF said.
