Nigeria’s already strained foreign reserves may come under more pressure in coming months as the country’s quarterly balance of payment deficit for the first three months of 2020 swung to its highest in at least 25 quarters.
The balance of payment, which measures the export and import transactions of Nigeria with the rest of the world, hit -$11.182bn as at first quarter of 2020, from a surplus of $6.28bn and $2.096bn in the fourth and first quarters of 2019, respectively, according to BusinessDay analysis of CBN data.
This deficit shows that Nigeria imports more goods, services, and capital than it exports, which leads to more international borrowing to finance that consumption. With FX demand backlogs currently mounting amid dollar scarcity in the country, analysts say the FX reserve would come under pressure.
“One of the key things keeping our reserve at current levels is because the CBN is yet to resume intervening fully in the market,” said Boboye Olaolu, sub-Saharan Africa economist at CSL Stockbrokers Ltd. “If the CBN starts intervening in the market today, the reserve would be pressured.”
Olaolu said CBN’s monthly intervention in the market has averaged $2.7bn over the last three years. In the face of an estimated $7bn FX demand currently unmet, the resumption of sales activities will require the CBN drawing down its $36.166bn reserve.
The BoP figure mostly accounts for a period where the full impact of the coronavirus pandemic was yet to materialise, suggesting a steeper deficit in the second quarter, according to economists.
In Q1, Nigeria’s current account deficit shrank by $2bn to $4.88bn, helped by a smaller trade deficit, its largest component, despite a bigger deficit in services and income accounts.
However, oil and gas exports hit the lowest levels since the third quarter of 2017, two months after Nigeria exited the 2016 recession.
While overall trade declined, export and imports in the quarter slowed due to the impact of the coronavirus on international trade and domestic activities.
“At the moment there is an imbalance of payment that could persist till the end of the year unless oil price props up to $60 per barrel levels or there is a technical devaluation by the CBN to N400 from N360,” said Olaolu. “However, the dynamics has not changed at the moment. What played out in Q1 will most likely play out in Q2.”
Analysts expect Nigeria to report lower exports in Q2 on the heels of historic plunge in oil price that followed lower oil demand as a result of lockdowns and a price war between Russia and Saudi Arabia which depressed prices to near $20 per barrel.
Dollar inflow to the economy on the heels of lower crude oil sales forced the CBN to sell dollars N13.5 higher at N380.2/$ in the I&E windows and adjust the official exchange rate to 360/$ in March.
Nigeria also plans to unify the various exchange rates but economists say this will not be sufficient to improve its BoP crisis given that current account deficit, a problem before the COVID-19 pandemic, is due to the country’s fixed exchange rate regime.
A fixed, more appropriately pegged, exchange rate regime means the naira is quoted much lower than its real market price. This causes demand to be much higher than supply, a gap the CBN has to fill by drawing from its FX reserve.
According to the CBN data, financial and capital account netted -$6.3bn in Q1 compared to $13.24bn in the fourth quarter of 2019 and $4.82bn in the first quarter of 2019.
As at April, foreign portfolio investment (FPI) declined by 15 percent while the dollar supply into the I&E window is at its lowest levels since the start of the year at least, according to FMDQ data.
Uche Uwaleke, a professor of finance and capital markets and chair, Banking and Finance Department, Nasarawa State University, Keffi, said persistent deficit trade balance hurts the country’s balance of payments, exerts pressure on the forex market and depletes external reserves as imports outweigh exports.
This situation, he said, is exacerbated by the vagaries in the international market for crude oil which is the country’s major source of foreign exchange. Brent on Tuesday climbed to a three-month high of $44 on stronger demand.
Against this backdrop, it is vital that the recent IMF loan is utilised to fill the hole in the country’s BoP while seizing the opportunity of the three years moratorium offered by the Fund to develop multiple sources of forex with a focus on agriculture as well as reduce the level of imports via an aggressive implementation of import substitution policy.
In its April 2020 World Economic Outlook, the International Monetary Fund (IMF) predicted Nigeria’s current account balance to further contract to -3.3 percent in 2020 from -3.8 percent in 2019 and -2.5 percent in 2021.
“The pace of economic recovery remains slow, as declining real incomes and weak investment continue to weigh on economic activity. Inflation – driven by higher food prices – has risen, marking the end of the disinflationary trend seen in 2019. External vulnerabilities are increasing, reflecting a higher current account deficit and declining reserves that remain highly vulnerable to capital flow reversals. The exchange rate has remained stable, helped by steady sales of foreign exchange in various windows,” Amine Mati, IMF senior resident representative and mission chief for Nigeria, stated in the February 2020 Article IV document.
Nigeria’s external reserves declined to $36.31 billion as at June 18, 2020 from $36.59 billion as of May 29, 2020, data from the CBN indicated.
Hope Moses-Ashike & Segun Adams
