Nigeria, Turkey and South Africa are all shut out of a scheme launched by the US Federal Reserve and the International Monetary Fund (IMF) to lend dollars to countries struggling to contain the spread of the coronavirus pandemic.
Frontier and emerging market countries secure a dollar swap line from the United States that would help them in the management of their external account and provide an extra cushion in the event of an abrupt outflow of funds.
The Federal Reserve usually injects such liquidity to central banks of countries with strong economic fundamentals and independent central banks.
But lots of nations do not have the above criteria as they are struggling with deteriorating exports revenue, portfolio outflows, and a weak currency.
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“I think shutting the country out will further compound the woes of the central bank as we may see more outflow as there could be flight to safety,” Ayodeji Ebo, managing director/CEO of Afrinvest Securities, says.
Ebo says the central bank needs to act fast and adjust the naira so that the situation will not get out of hand.
Nigeria has been grappling to access foreign currency as it has $8.40 billion denominated sovereign and corporate bonds and loan repayment this year, according to a latest report by the Financial Times of London.
As a result of the precipitous drop in oil price brought on by coronavirus pandemic that paralysed business activities, the country’s ministry of finance and budget planning slashed the budget by 15 percent.
The Central Bank of Nigeria (CBN) was forced to devalue to $360 from $306 so as to protect the foreign exchange reserve and stabilise the economy.
Nigeria’s foreign-currency reserves have dropped by just $5 billion over the first four months, according to a recent report by global ratings agent, Fitch.
The IMF has approved $3.40 billion in emergency financial assistance under the Rapid Financing Instrument to support Nigeria’s efforts in addressing the severe economic impact of the Covid-19 shock and the sharp fall in oil prices.
But the amount is only 0.8 percent of gross domestic product, and the central bank had launched a stimulus of $2.40 billion at the height of the pandemic.
Without enough stimulus or bailout from foreign financial institutions, analysts say the country could slip into another recession in the space of five years.
“They could believe that Nigeria has got its fair share of dollar liquidity as the country has just received energy financial assistance from the IMF. The country may have exhausted its borrowing limits,” Johnson Chukwu, managing director, Cowry Asset Management Limited, states.
The IMF has said the economy is expected to shrink by 3.4 percent this year and the country could face a recession lasting until 2021.
Brent crude, the international benchmark, was up 1.5 percent at $35.20 a barrel, after crashing below $18 in March
West Texas Intermediate, the US marker, rose 0.7 percent at $32.20 a barrel, as it neared a negative territory last month.
The uptick in commodity price was largely driven by the gradual opening of business across Europe, Asia, and the United States after several weeks, while an output cut agreed by OPEC+ allies also added impetus to the rally.
However, Fitch has said in a recent report that Nigeria’ adherence to oil production cuts under OPEC+ agreement will lead to deeper economic contraction and fiscal deficits and compound pressures on external finances.
The contraction in exports and remittance inflows mean the current account will remain in deficit, despite a sharp drop in imports, according to Fitch.
“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8 percent of GDP in 2020 and 2.5% in 2021,” the ratings agency notes.
