|
Getting your Trinity Audio player ready...
|
The COVID-19 pandemic outbreak accompanied by economic and health crisis, among other disruptions, have dashed the expectations of experts and government officials who hoped for a fruitful year, 2020.
However, in most economies of the world, the precarious events arising from the pandemic have necessitated a synchronisation of monetary and fiscal policies put in place to battle the pandemic and restore growth.
To this end, Morgan Stanley economists have doubled down on a V-shaped global recovery.
Sadly, this is partly the case in Nigeria, the largest economy in Africa. We see the federal government and Central Bank of Nigeria (CBN) seemingly work at cross purposes as each goes in a different direction from the other.
The FG has made clear its strategies to help the country avoid a recession or at best recover quickly. Whether or not these strategies are effective in achieving this is a discourse for another day.
But the current CBN’s capital control measure, just like in 2016, may see the economy collapse on the altar of foreign exchange scarcity despite boasting that there is enough liquidity to meet legitimate dollar demand.
Our analysis shows that Nigeria’s foreign exchange demand backlog is estimated at $7 billion. This comprises manufacturers FX demand at $2 billion while foreign equity investors and foreign holders of CBN’s OMO bills account for roughly $5 billion.
Given importation of raw materials, a major factor ensuring business continuity in the manufacturing space, unmet dollar demand will only stiffle activities, making GDP (which measures business activities) growth a mirage considering the significant contribution of the manufacturing sector.
Also, a pandemic situation like this usually sees investors (foreign and domestic) apply caution; some even exit the market. The sluggish recovery of crude oil prices in the advent of a second wave of COVID-19 virus in China and the US puts Nigeria in a precarious situation.
We are really worried that with crude oil prices barely holding up at $38 per barrel and the CBN applying a capital control measure will only worsen investors’ confidence and deter foreign portfolio inflow, especially in the equities market.
It is worrisome too that despite the cheap valuations of the fundamentally strong stocks on the Nigeria stock exchange market (NSE) amid rising COVID-19 induced risk and the slump in oil prices, foreign investors have refused to take advantage with concerns over dollar scarcity and FX disparity.
Analysing 2020 data from the NSE we see a surge in foreign portfolio investment outflow by 31.79 percent year-on-year to N218.80 billion. Meanwhile, inflows dipped significantly by 35.03 percent to N86.25 billion within the same period. Given that Nigeria’s economy mirrors stock market performance, we are afraid 2016 may replay itself all over again.
It is sad to recall that, in 2016, the Nigerian economy contracted as the CBN’s capital controls exacerbated an already precarious situation while still battling with a slump in oil prices and local production.
The apex bank’s demand management strategy didn’t work in 2016 and it is very unlikely to work now. This is why we urge the CBN to seek other ways to complement lower dollar receipts from crude oil sales to meet dollar demand.
We see every need for the CBN to align all its conflicting exchange rates to bring clarity and confidence into the market. For us, that is the next best thing to do in the circumstance.
It is our belief that anything short of this will put Nigeria at the risk of a dent on the credit rating of Nigerian banks; affect trade which contributes 17 percent to GDP. Also, the CBN risks losing the confidence of foreign investors who are trapped in the long queue for dollars.
But investors’ confidence is not an option. Neither is business survival nor credit rating. All three are consequences.
It is rather unfortunate that the CBN has decided to go the same route it trod in 2016, prioritising its exchange rate over the economy. We are yet to recover fully from the 2016 crisis which resulted to loss of jobs, incapacitated foreign investments, saw inflation spike and businesses shut.
