Blurb
Why you should be worried about the latest drop in external reserves
The CBN confirmed the external reserves stood at $39.8 billion, the first time it has dropped below $40 billion in almost two years.
During the week, reports from the website of the Central Bank of Nigeria confirmed that the external reserves stood at $39.8 billion, the first time it dropped below $40 billion in almost two years.
The external reserves depleted by another $1.1 billion in less than 5 weeks, as this is the highest fall it had recorded in the past 22 months.
According to the latest data obtained from the Central Bank of Nigeria (CBN), Nigeria’s external reserves dropped from $40.9 billion on 18th October to $39.8 billion in 26th November 2019.
Why the reserves are falling
Several factors determine the rise or fall in external reserves. In Nigeria, it has always been crude oil earnings and foreign investment inflows into the country.
- While providing reasons for the latest decline in the country’s reserves, the CBN disclosed in its monthly economic report for October 2019 that the decline was due, mainly, to foreign exchange market interventions, direct payments and foreign exchange sales at the I&E and SMIS intervention window
- Although the decline in the country’s external reserves has coincided with recent fluctuations in global oil price with Brent crude oil hovering around $62 a barrel, the depletion in reserves has more to do with other factors other than the global events.
[READ MORE: Nigeria’s External Reserves plunge to $40.3 billion as devaluation concerns brew]
- For instance, analysts have argued that as capital flows out of the economy, the CBN would continue to actively intervene in the foreign exchange market to keep the Nigerian Naira in check.
- A quick look into capital flows on the Nigerian capital market shows that foreign portfolio outflow stood at N428.8 billion in October 2019 (YTD), while inflow was N363.9 billion. This means capital outflow outpaced inflow on the Nigerian bourse.
- With the latest decline, the external reserves position could only finance 5.1 months of imports of goods and services, and 8.7 months of goods only, using the import figure for second-quarter 2019.
CBN says no alarm
Nigeria’s external reserves may have continued to plummet in recent months, but the CBN has once again stood firmly behind its intervention policy.
While fielding questions from newsmen after the Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, the CBN governor, Godwin Emefiele said the drop in the reserves was not enough to create fear in the economy.
According to Emefiele, “During the period when we had an economic crisis in 2015, 2016 and early 2017 where reserves dropped to 23 billion dollars, the country managed it and it survived. We do know that there is a focus on the fact that crude oil price is not as resilient as it was in 2018.
“We believe that crude oil price today at $63 per barrel, notwithstanding the drop in reserves below $40 should not cause any panic.”
Why investors are worried
While the CBN may have doused the tension with its remark, economic headwinds suggest investors should be worried.
For instance, while reading the communique on Tuesday, Emefiele disclosed that the Federal Government should reduce the $57 oil price benchmark as oil prices would remain relatively weak into the foreseeable future. This means foreign exchange earnings for Nigeria may continue at the low ebb going into 2020.
Investors are already raising concerns as the sustained decline in the country’s external reserves is raising questions about whether the CBN has the capacity to continue to ensure exchange rate stability.
Commenting recently, the Chief Executive Officer, Financial Derivative Company Limited, Mr Bismarck Rewane, said, “Demand for dollars will increase in the coming month due to inventory build-up ahead of Christmas and this will mount pressure on external reserve, hence gross external reserve level may decline further.”
[READ ALSO: External reserves drop by $3.2 billion in Q3’19]
What this means for 2020
With a large chunk of the country’s reserves also used in servicing external debt, the reserves may just continue to deplete, and this may pose a serious threat to the Nigerian economy going into 2020.
Already, more borrowings to fund the 2020 budget has been mooted by the government. This means as foreign portfolio investment declines, rise in debt servicing and continued intervention by the CBN in the FX market will trigger more pressure on the country’s reserves.
The drop in reserves means available buffer for the CBN to stabilise the exchange rate continue to weaken, suggesting devaluation may be on the cards if things get worse next year.
Blurb
Buharinomics: In Stagflation we trust
We explain why President Buhari is synonymous with stagflation and what he can do to get us out of it.
Economists define stagflation as a period of slow economic growth, high unemployment rate and higher inflation. It is one of the worst kinds of economic state of affairs that often leads to poverty, insecurity and social-economic crisis. It is a sticky economic conundrum that is incredibly difficult to escape from.
The latest data from the National Bureau of Statistics reveal Nigeria barely slipped out of a recession in the 4th quarter of 2020 with a 0.11% GDP Growth rate. Despite being a welcome news, it is the slowest GDP Growth rate on record at least since 2011.
Earlier on, in the same week, the Statistics Bureau also released inflation data for the month of January revealing an inflation rate of 16.47%, the highest since April 2017, and affirming Nigeria’s galloping inflation status.
Nigeria is in a protracted state of stagflation and has been in the state since the Buhari administration came into power in 2015. Nigeria’s Gross Domestic product per quarter has averaged 0.18% in the last 6 years since this administration got elected into power. The Buhari government has also presided over a consumer price index change of 108.6%, meaning that prices of nearly every measurable item have doubled in the last 6 years.
Flashback to the first installment of General Buhari and the story is all too familiar. Nigeria’s GDP Growth rate for 1983, 1984 was -10.92% and -1.12% respectively. Annual inflation rate in the same period was 17.2% and 23.8% respectively.
Buharinomics is synonymous with Stagflation.
How did we get here?
While it all started from the drop in oil prices in 2014, a cocktail of economic policies from the Buhari-led administration is largely blamed for Nigeria’s economic quagmire. Since it came into power, the government has adopted economic policies that are centered around defending the local currency, import substitution and social spending.
For all its good intentions, these policies are pregnant with side effects that potentially erase its positives, turning into cancer of cataclysmic proportions.
For example, while the policy of defending the exchange rate stabilized the naira between 2016 and 2019, it cost the CBN trillions in interest payments and high cost of borrowing.
The high cost of borrowing is associated with higher inflation and stunted economic growth as small businesses cannot secure the funding required to expand and even when they do it is expensive.
The policy of promoting locally made goods over their foreign alternatives has also led to multiple bans of access to forex to imports, higher customs duties and taxes on imports and a crushing border closure all of which have combined to send inflation off the roof.
Nigeria’s inflation rate conundrum can also be traced to supply-side challenges such as insecurity, logistic gridlocks, corruption and inefficiencies at the Nations ports and an overall bitter experience in the nation’s ease of doing business.
How to get out of Stagflation
There is no clear-cut set of rules that can end stagflation however a rethink of the government’s approach to policymaking and implementation could be a good first step to control it, especially if the target is one of the major causes of stagflation, supply-side inflation.
To address Nigeria’s challenges with Stagflation, the Buhari Government will have to swallow its pride and relinquish trust in moribund policies that have not worked. Wholesome of Nigeria’s economic challenges are out of its control (like fall in oil prices) a huge chunk of it is self-inflicted and as such within its control. For example, it must fix the spate of insecurity around the country by being more deliberate with dealing with bandits, militant herdsmen and terrorists.
It must declare a national emergency in the nation’s ports and reduce the lead time to clearing goods for import or export. It must address the logistics issues affecting the distribution of farm produce from a place of planting to the destination of consumption.
Monetary policy restrictions stifling trade must be loosened and replaced with a reward policy system that encourages exports as against imports without banning cheap substitutes that have no local production advantage. We need new regulations and laws that favour private sector investments, protect property and enable capital formation. A case in point is the perennial PIB Bill that gets debated year after year.
These are not novel ideas within economic circles and as such cannot be that difficult to conceive and concede to doing. The challenges have always been the will and courage to act in defiance of snags such as vested interests, political ideology, endemic bureaucracy, and corruption. This government has shown in the past that it can roll back on unpopular policies except that it does it too late with not enough time to create a positive impact.
Margaret Giwa
December 1, 2019 at 3:53 am
We must try our possible best to keep our foreign reserve steady.