Nigeria’s currency, the naira, is presently experiencing more pressures than ever before, based on negative macro fundamentals such as plunging crude oil prices which constitute the lion’s share in Nigeria’s export earnings, and the COVID-19 pandemic which has weakened global demand.
Recently, at a financial summit organized by Lagos Business School via teleconferencing, Nigeria’s celebrated economist, Bismarck Rewane on Nigeria’s present and projected situation said that Nigeria is experiencing “economic paralysis” caused by induced “economic coma.”
He spoke on how Africa’s largest economy, with a GDP (Gross Domestic Product) of $420 billion, would experience negative growth in the next three months due to lack of enough cash buffers that made it survive the earlier recessions in 2008, and 2016, coupled with Nigeria’s low productivity level, and poor management of its economy.
Rewane projected an increase in Federal Government spending, thereby spurring inflation, and Nigeria having higher unemployment levels in the mid-term, due to the COVID-19 onslaught, and plunging global demand for Nigerian goods and services.
In addition, he described the high national debt compared to Nigeria’s GDP as worrisome and projected inflation at 19% by the end of the year and remarked that these negative economic indicators further increased the odds against the naira.
Lately, the naira has been hitting new lows on the OTC, black, and spot markets as market liquidity remains very thin after the Central Bank devalued the naira’s official rate by 15%. It closed at a low of N389 on the spot market on Wednesday.
In a telephone interview with Nairametrics, Victoria Njimanze, an investment analyst of a leading investment bank explained in detail how Nigeria’s earnings have fallen, due to weakening crude oil prices, coupled with high inflation set in. She said:
“The oil sector provides around 90% of Nigeria’s foreign exchange earnings and around 70% of its budgetary revenues. With the COVID-19 pandemic, the demand for oil has dwindled due to demand shock and the country has over 50 million barrels for late April and May 2020 unsold, while the overhang is forcing down the value of the country’s crude oil.
“Nigeria’s Qua Iboe and Bonny light were traded at US$12/bbl as at the end of last week. This pales when compared with the revised budget benchmark price of US$30/bbl from US$57/bbl prior to the breakout of the pandemic. The situation has further worsened on the back of the newly agreed OPEC production cuts, with Nigeria’s oil production quota decline to 1.4mb/d from 1.7mb/d.
“As crude oil prices stay low, we also see foreign exchange earnings decline. With CBN (Central Bank of Nigeria) reserves at $33.66 billion, as on the 21st of April, which stands for a year to date decline of 13% and edge close to the $30billion mark? We saw a depreciation of the exchange rate by C.14% in the parallel market, and C.6% officially, and the suspension of foreign exchange sales to BDCs (Bureau De Change).”
Victoria also buttressed her point on how inflation is rising. According to her, on the inflation side, the CPI report by the NBS showed that headline inflation rate rose marginally by 6bps to a 23-month high of 12.26% YoY from 12.20% YoY in February, largely driven by the uptrend in core and food prices.
“Given the lockdown in major commercial hubs in the country, and closure of land borders, which will last the entire month of April, we expect to see headline inflation go even higher to 12.40%,” she added.
(READ MORE: Bears clawing down on the naira, hits N425 to $1)
The naira has dropped to N425 on the black market today, as a fallout of the Central Bank’s earlier decision to stop selling foreign exchange currencies to Bureau de Change dealers, and heighten the clampdown on currency speculators.
Princejoe Nnaji, a financial analyst at one of Nigeria’s Tier 1 banks, in a phone message to Nairametrics, explained how the COVID-19 onslaught has affected the naira. He wrote:
“Nigeria’s economic performance driven by its revenue generation is at the heart of how the odds are against the Naira. The advent of the covid19 pandemic has severely hampered the country’s ability to generate revenue leading to a weak Naira.
“Lower investor confidence which could lower foreign investment flows post-Covid19. The combination of rising inflation and the country’s import dependency which can not only weaken the currency but keep inflation high. Even if economic diversification is achieved overnight, revenue generation is not guaranteed because global consumer demand has been affected with millions out of work, and most important trading partners still are on lockdown.”