Zainab Ahmed, Nigerian Minister for Finance

By JULIUS ALAGBE

Nigeria’s economy is facing multiple economic stress-tests from various angles due to waves of Coronavirus pandemic that hit the global economy. The Institute of International Finance in a recent macroeconomic report on the country stated that significant external pressure will reduce the nation’s export by 40%. The Institute stated this as it observed that external pressure is rising markedly for the country.

To reflate global prices of oil, the Organisation of Petroleum Exporting Countries were requested to cut supply. Meanwhile, receipts from oil account for more than 90% of Nigeria’s foreign receipts, though pundits have stated that the economy is well diversified. Analysts explained that as price hovers below the initial budget benchmark, and followed by supply cut, budget deficit have widened to N5.4 trillion.

In the macroeconomic note, IIF explained that the dramatic decline in oil prices since the beginning of the year – together with production limits under the OPEC+ agreement – will reduce goods exports by more than 40% in 2020.

“Despite significant import compression, we expect the current account deficit to remain sizeable”, IIF stated.

Just recently, Fitch Ratings stated that oil supply cut by the country would hurt the economy. The rating agency stated that Nigeria’s adherence to oil production cuts under the OPEC+ agreement will lead to deeper economic contraction and fiscal deficits.

“The combination of these would then have compound pressures on external finances from the slump in oil prices”, Fitch explained.

At the same time, the Institute said that the large non-resident inflows observed in the first half of 2019 have since reversed, and capital flow dynamics are not expected to improve anytime soon in the context of global risk-off behaviour.

“While external support—including $3.4 billion under the IMF’s Rapid Financing Instrument – will reduce pressures, we still project significant reserve losses in 2020”, the Institute held.

 The Minister for Finance, Budget and National Planning, Zainab Ahmed had in a recent press briefing after the first virtual meeting of the National Economic Council (NEC), said the Nigerian economy was expected to record negative growth of about -8.9% as it slides into recession, due to the outbreak of the coronavirus pandemic and crash in oil prices.

The Minister disclosed that the ravaging coronavirus pandemic was not only affecting the country economically but also has implications for the health sector, as the resources to fight this appear inadequate.

She also admitted that the crash in crude oil price would negatively affect the country ‘s revenue and foreign exchange earnings

This oil price crash and coronavirus pandemic outbreak has also affected the economic growth of the country and weakened the naira.

 “Net oil and gas revenue input to the federation account in the first quarter of 2020 amounted to N940.91 billion. This represents a shortfall of N125.52 billion.

‘’But with the work that the Economic Sustainability Committee is doing bringing up a stimulus package, we believe that we can reduce the impact of that recession.”, said, finance Minister

Zainab Ahmed added, “And if we apply all that has been proposed and we can implement it we might end up with a recession that is -0.4%. But in any case, we will go into recession but what we are trying to do is to make sure that it is shallow so that we will quickly come out of it come 2021’’

Nigeria’s current account balance stood at $17 billion deficit or 3.6% of the gross domestic product in 2019. However, IIF stated that the shift from a $3.9 billion surplus in 2018 was primarily driven by a smaller goods surplus.

“We expect this surplus to turn into a deficit in 2020 as lower oil prices and production cuts reduce exports dramatically”, the Institute forecasted.

Like IIF, Fitch stated that the contraction in exports and remittance inflows means the current account will remain in deficit, despite a sharp drop in imports.

“We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8% of GDP in 2020 and 2.5% in 2021”, Fitch said.

In the note, IIF then stated that despite substantial import compression, it projects a current account deficit of $14.7 billion or 3.4% of GDP this year. The Institute highlighted that a sharp decline in goods imports and services debits mean a lower breakeven oil price of roughly $70/bbl.

“However, we expect the average crude oil price in 2020 to be around $35/bbl. We documented in previous research that Nigeria experienced substantial inflows of short-term portfolio debt in the first half of 2019, largely as a result of foreign purchases of Central Bank of Nigeria (CBN) bills.

“We expressed concern not only about the increasing cost of this type of financing but also the possibility of capital outflows”, IIF stated in the report.

However, the report revealed that these short term debts materialized in the second half of 2019 to the tune of $6.6 billion. The Institute projects that non-resident flows to Nigeria will be markedly weaker this year – at $8.5 billion compared to $17.7 billion last year – leading to substantial reserve losses.

Over the first three months of this year, gross foreign reserves declined by $3.3 billion, bringing the total to $35.3 billion at the end of March. Furthermore, the Institute said it expects weak inflows to continue until the global risk-off sentiment subsides.

According to the Institute, Nigeria’s external financing needs will be significantly higher in 2020 compared to the previous year, as non-Eurobond amortization is rising. It explained that while not a concern over the near term, increased issuance of Eurobonds in recent years will lead to even higher financing needs after 2025.

IIF stated that it is worth noting that both external public debt which is about $28 billion or around 6% of GDP at the end of 2019 and total public debt of 19% of GDP are very low in comparison to other SSA countries – and the overall EM universe.

However, given extremely low non-oil revenues, repayment of any amount of debt could be a challenge, the Institute said. The report further asserted that low oil prices not only contribute to a sharp decline in merchandise exports but also widen the fiscal deficit. This is on an explanation that oil revenue accounts for more than 50% of total revenue in most years and is strongly correlated to the Naira-value of oil exports.

“For 2020, we expect the fiscal deficit to reach close to 5% of GDP”, the Institute estimated.

While expenditures are rising in GDP-terms as well, revenue collection weakness dominates, with non-oil revenue remaining persistently low. The Institute stated that as the deficit has increasingly been financed externally, global risk-off behaviour and capital outflows will impact the government’s ability to run fiscal deficits.

In addition to the extremely limited room for fiscal stimulus, monetary policy room is restricted by Nigeria’s multiple exchange rate regimes, it added. The report stated that considering the significant external stress, together with the risk of local COVID-19 outbreak, the country will need to rely on external support.

In addition to the recently approved $3.4 billion in IMF RFI funding, Nigeria is planning to receive an additional roughly $3.6 billion from the World Bank, African Development Bank, Afreximbank, and Islamic Development Bank. Nevertheless, the Institute believes that reserve losses will remain substantial in 2020—around $8 billion or around 25% of the current stock.

“If oil prices do not recover and foreign investors not reengage materially, large financing needs over 2020-22 may force Nigeria to address fundamental imbalances. One option is to impose capital controls to prevent significant outflows, but this would only delay the inevitable.

“A better path forward would be a multi-year IMF program. Exchange rate liberalization would allow for substantial current account adjustment, while IMF engagement would improve market sentiment and enable Nigeria to easily rollover of existing debt.

“Thus, we believe a program of $15-20 billion over 2020-22 could be sufficient to relieve pressure on reserves,” the Institute stated.