Foreign debt accounts for more than 95% of Nigeria’s external reserves after falling behind $35 billion mark due to lack of external inflows arising from weak foreign investors sentiment analysts said in a report.
While foreign debts level has increased further as a result of pandemic-induced fiscal stress, the Nigerian external reserve has plunged strongly to $34.7 billion as of May 2021 compared with $33.348 billion external debts.
Tumbling gross foreign reserve has however weakened the Nigerian central bank market intervention amidst scarcity of foreign currencies inflow into the economy.
Analysts told MarketForces Africa that CBN’s weekly intervention in the foreign exchange market has dropped, even after the economic lockdown has been lifted.
“Inflow into the Investors and Exporters Window has failed to revert to pre-pandemic period”, Chapel Hill Denham said in its reports.
According to data obtained from the central bank, the gross external reserve has plunged to $34.7 billion, though Brent crude oil price is trading close to $68 per barrel.
In April, foreign exchange reserves jumped by 0.2% to USD34.88 billion at the end of April from March 2021 record despite a decline in the average price of Bonny Light crude oil over the same period.
This period coincided with low demand outlook in the oil market as Bonny Light softened by 2.06% to USD64.27 a barrel.
Persistent External Liquidity Tensions:
Fitch said Nigeria continues to contend with external liquidity pressures magnified by the pandemic shock, and resilience to adverse external developments is weak.
Despite gradual and moderate exchange-rate depreciation over the past year, the naira is still overvalued, adding that currency overvaluation will hamper a correction of external imbalances.
The report said Nigeria’s current account will remain in deficit in 2021-2022. However, the Ratings revealed expectation that the gap will narrow from its 2020 level, driven by the rise in oil prices, and will be smaller than in rating peers.
Foreign Reserves Offer Support:
At their current level, Fitch Ratings stated that Nigerian foreign reserves offer higher coverage of current account payments than in rating peers and could be supported by increased external public-sector borrowing.
“However, we believe a backlog of foreign exchange demand for imports and capital repatriation will constitute a sizeable drain on reserves should FX supply normalise.
“Continued FX restrictions could still protect reserves, but protracted hard-currency scarcity would harm production, spur inflation and forestall a recovery in investor confidence”, Fitch noted.
Fiscal Developments Driven by Oil:
Experts believe the outlook for public finances is mostly a function of oil revenue, given the low level of non-hydrocarbon fiscal receipts, while there is little leeway to further reduce spending.
Still, the growth-starved petrol-dollar-powered gross domestic products growth trajectory lean more on oil market performance.
“For Nigeria, there is a direct relationship between the global oil prices and GDP growth achieves per period”, Economists highlighted at MarketForces Africa forum.
“We foresee little progress on boosting tax revenue in the medium term. Social resistance to the ongoing reforms of energy subsidies raises risks to our budget forecast”, Fitch said in a report.
The Ratings also noted the public debt/GDP will remain much below ‘B’ medians in the medium term but low fiscal revenue raises challenges to its sustainability, particularly at the federal government level.
Mild Economic Recovery under Way:
The International Monetary Fund (IMF) recently raised the global economic growth forecast to 6%, the positive feel anchored on vaccinations as growing numbers of economies opened up.
This was against 5.5% initially projected amidst rising cases of coronavirus that impacted the global economy negatively.
However, a new development that arises is likely to dampen the economic recovery outlook not initially factored into the IMF equation, especially the increased caseloads of infections in India.
For the year 2021, IMF expects the Nigerian economy to expand 2.5%, though GDP growth was tepid at 0.11% in the final quarter, which effectively lifted the country from recession.
Though positive, some pundits believe the projection is weak when considering the rate of population growth in Nigeria, historically at about 3% per annum.
Fitch explained that average growth in 2020-2021 will be in line with rating peers.
“The rebound in oil prices and an absence of renewed restrictions on movement will support the recovery but challenges will stem from FX scarcity, infrastructure gaps, electricity outages, and security-related disruptions.
“If approved, the long-awaited Petroleum Industry Bill could improve the medium-to-long-term outlook for investment in the oil sector, which continues to be clouded by insecurity and governance challenges”, the Ratings added.
Foreign Debt Accounts for 96% of Nigeria’s $34.7Bn External Reserves
The FX market was relatively dull in April, with barely any movement across all segments of the FX market, analysts at Chapel Hill Denham said in a report.
The firm said liquidity also nosedived in the Investors and Exporters Window as daily turnover fell by 11% to US$59.1 million as the CBN failed to significantly step up intervention sales in the window.
The firm explained that fundamentally, the local currency remains overvalued based on Reel Effective Exchange Rate (REER), trading nearly 20% above its long-run level.
“The adjustment process in the balance of payments is incomplete, as reflected in the wider trade deficit in Q4-2020, despite the previous currency devaluations.
“Our base case view remains that the regulator would have to engineer further adjustments in the Nigeria Autonomous Foreign Exchange (NAFEX) rate to resolve the liquidity challenges facing the market.
“The timing is uncertain, but maybe drawing close, given the recent intra-day volatility of the dollar and Naira pair”, Chapel Hill Denham said in the report.
In a quest to attract foreign currencies, the CBN announced an indefinite extension of its “Naira 4 Dollar Scheme”, which was originally scheduled to end on 8 May 2021.
The policy was introduced in March 2021, to encourage remittance inflows via official channels, through a N5 incentive fee for every dollar of inflow.
Analysts said the CBN is yet to publish data to quantify the impact of the policy on remittance inflows, particularly via official channels.
“While the policy may have achieved some modest success to justify the indefinite extension, further reforms – particularly increased flexibility in pricing – by the regulator would be required to narrow the wide parallel market premium”, Chapel Hill Denham stated.
Nigeria’s Debt Rises to N32.92 Trillion
Nigeria’s total public debt stock surged by 20.12% to N32.92 trillion as of December 2020 from N27.40 trillion as of December 2019.
Cowry Asset Limited report showed the increase in the country’s total debt stock was chiefly due to a 40.82% rise in external debt to N12.71 trillion or USD33.35 billion at N381.00/USD as of December 2020.
This came in stark contrast from N9.02 trillion or USD27.68 billion at N326.00/USD in December 2019 – essentially multilaterals.
However, the firm remarked that implicit interest rate on total borrowings fell to 7.41% in 2020 amid increased concessionary loans – especially from IMF and AfDB and low domestic interest rate environment in 2020.