Nigeria could be needing as much as $9bn to plug a gaping hole in its balance of payment this year, the biggest imbalance in at least seven years, according to estimates from local consulting firm, Agusto & Co. That would be the largest outflow from the country’s external reserves since at least 2014 and could set the stage for a big currency devaluation.
Bankers estimate that close to 85 percent of Foreign Portfolio Investors have moved their money out of Nigeria since January, with more planning exits upon maturity of their investments as the country’s risk profile heightens largely on the back of low oil prices.
The International Monetary Fund (IMF) projects the gross external financing needs for emerging market and developing countries to be in the trillions of dollars, “and they can cover only a portion of that on their own, leaving residual gaps in the hundreds of billions of dollars”, said Kristalina Georgieva, the institution’s managing director. “They urgently need help.”
Like for some other developing countries, Nigeria’s balance of payment problem is rooted in the fact that as outflows rise, inflows have slowed to a trickle in Africa’s largest oil producing country.
Oil revenues are estimated to halve this year owing to the coronavirus-induced slump in global demand for the commodity. OPEC’s plan to cut 10 million barrels of daily production is not expected to significantly boost prices when factories globally remain shut and airlines grounded. Moreover, Nigeria’s production will also now be capped at 1.4 million barrels daily which limits any revenue upside from production.
Furthermore, Nigeria’s current account has been in a deficit the past few quarters mostly driven by services payments.
On the financial account front, there has been a slowdown in accumulation due to the Central Bank of Nigeria’s actions on the Open Market Operations (OMO) in October 2019 and the global risk off due to the COVID-19.
To fund the difference in its balance of payment, the country has been drawing down on its external reserves which is becoming increasingly unsustainable.
There are signs, though, that the government is well aware that it is unsustainable to rely solely on its relatively small external reserves of $36 billion to fix its balance of payment problem. The Federal Government disclosed plans last week to tap multilateral lenders, from the IMF and World Bank to the African Development Bank (AfDB), for some $6.9bn.
Going to the IMF for aid is unprecedented by Nigerian standards and perhaps an indication of a financial storm that’s even worse than in the thick of a recession in 2016.
Back in 2016, when Nigeria reeled from its biggest economic contraction in 25 years occasioned by the slump in oil revenues, then finance minister, Kemi Adeosun, said Nigeria would not consider going to the IMF unless it had a balance of payment problem.
“The IMF has to be the lender of last resort and we are not there yet,” Adeosun said at the time.
The current finance minister, Zainab Ahmed, has also said that the country would not seek an IMF programme but wants to draw on its Rapid Credit Facility (RCF) which is different from the IMF programme in that it comes with almost no conditionalities.
However, the $3.4 billion Nigeria seeks from the IMF which the Fund says will be under its Rapid Financing Instrument could be slashed to half if the Washington-lender sticks to its rule that countries can only borrow 50 percent of their quota or contributions to the Fund in one year. None of the countries, from Madagascar to Rwanda, who have received disbursements from the Fund under either the Rapid Credit Facility or the Rapid Financing Instrument got 100 percent of their quota. Instead, they got around 50 percent.
In addition, the IMF has said more than 90 countries had requested aid since the COVID-19 spread around the globe in recent weeks, which means the N1 trillion war-chest of the Fund would be keenly competed for by a legion of countries all seeking emergency bail-out.
Additionally, part of the $2.5 billion sought from the World Bank could already be spoken for by some state projects which reduces how much the Federal Government gets from this medium, even though the government may be assured of the $1 billion it seeks from the AfDB.
Omotola Abimbola, an analyst at Lagos-based Chapel Hill Denham, says the government may be able to raise only about $3 billion from the multilaterals, but that’s less than half of the $6.9bn target.
Going by the possible $9bn balance of payment deficit, raising $3 billion will leave the Federal Government with a gap of $6 billion.
To resolve this deficit, analysts are advising the government goes for a larger amount under an IMF Stand-By Facility rather than the RFI.
They also suggest the government allows the multiple exchange rates converge at a single market rate to stimulate increased diaspora remittances and grow exports aggressively.
“Nigeria needs around $10bn for starters and should be talking to the IMF for a loan of this size or at least a Stand-By Facility which would help engender investor confidence and somewhat slow the rate of portfolio outflows which would help ease our balance payment problem,” said a money manager who did not want to be quoted as he didn’t have authorisation to speak publicly on the matter.
The other alternative will be to tap the Eurobond market and that will be too expensive at this time given the risk aversion in the market, the money manager said.
“Raising debt from the local market is another alternative but the government will be wise to avoid debt that overburdens its already high interest payment to revenue ratio. An IMF loan comes at zero interest and should be preferable at this time but its lack of popularity among Nigerians could serve as a hindrance to taking this option even though it makes economic sense,” he said.
Taking an IMF loan isn’t a politically popular decision in Nigeria. Many Nigerians detest an IMF programme because of the conditionalities that the fund will force the country to implement in return for its cheap money.
“It doesn’t matter that some of those conditionalities will inadvertently help put the economy in better shape by curbing the excesses of the government from wasteful consumption subsidies to the over-bloated costs of running the government,” one Lagos-based economist said with sarcasm.
“We are resisting an IMF bailout, but time will tell if we really have a choice,” another person said.
While the government may stall in entering an IMF programme, it doesn’t help that Nigeria faces a financial crisis of this magnitude with depleted buffers and with little alternatives.
The country’s oil savings stashed in the Excess Crude Account combined with the assets in its Sovereign Wealth Fund is less than $3 billion from as high as $20 billion in 2008.
Another way to manage the country’s balance of payment crisis will be to further incentivise the inflows of diaspora remittances, according to Bode Agusto, founding managing director, Agusto Consulting.
Diaspora remittances have formed a sizeable chunk of dollar inflows into Nigeria since 2014, averaging $21 billion. It is estimated that remittances hit a six-year high of $25 billion in 2019 but that could cool to $20 billion this year as the COVID-19 pandemic hurts the incomes of Nigerians who reside in the principal sources of inflows – the US and UK.
However, diaspora remittances would be deterred if there’s a premium in the parallel market rate compared to the official rate, according to Agusto.
Since the CBN halted sales of dollars to the Bureau De Change operators, the parallel market rate has hit N415/$, creating a gap of $55/$ between the official market rate of N360/$.
“That’s no way to encourage Nigerians in the diaspora to bring money into the country through official channels, so whatever incentive must start from a unification of the multiple exchange rates,” Agusto said.
CBN last month devalued the naira because of the collapse in crude prices. The official rate was weakened by 18 percent to N360/$ from N306/$ where the rate had been for three years. The Investors and Exporters window rate also weakened to N380/$.
However, analysts say the government would need to allow the currency to depreciate further to match the weakness in the balance of payments.
The median forecast of some economists polled by BusinessDay points to a 25 percent decline from the current official rate of N360/US$ to N450.
That’s no easy route for Nigeria where a currency devaluation will hurt the economy which relies on imports for essential goods and services and will weaken the asset quality of the banks. It would also spur inflation which at 12 percent is already well above the preferred CBN target of between 6-9 percent.
LOLADE AKINMURELE
