Recession knocks on the door of Nigeria with pain and misery starring the people in the face as foreign-currency shortage is squeezing life out of Africa’s biggest economy as in 2015.
According to Bloomberg Banks won’t honor card payments, foreign investors can’t get their money out and manufacturers are unable to import vital raw materials as output hurtles toward a second contraction in four years.
Also, BusinessDay said its investigations show that emerging GDP data for Q2 point to an inevitable economic contraction of frightening proportions. And as was the case in 2016, the failure of monetary policies is worsening the impact of COVID-19 on the country.
Dependent on oil exports for half of its revenue, the Nigerian government’s coffers have emptied after crude prices plunged in the wake of the Coronavirus pandemic.
Nigeria needs oil prices of $70 per barrel and production of 2 million barrels a day to balance its budget, but prices are hovering around $40 and OPEC curbs have restricted the nation’s output to about 1.4 million barrels a day, with little prospect of a respite any time soon.
The evaporation of foreign income forced the Central Bank to halt weekly interbank foreign-currency sales since March. Now the effects of the dollar shortage are seeping through to the economy and inflicting pain on Nigerians and their businesses.
“A lot of the members can’t access the amount of dollars they need from the banks,” said Eke Ubiji, executive secretary of the Nigerian Association of Small and Medium Enterprises. “That is constraining business.”
The International Monetary Fund predicts Nigeria’s economy will contract by 5.4% this year, the most in four decades. The latest official job figures put the second-quarter unemployment rate at 27.1%, the highest in a decade.
Lenders including Guaranty Trust Bank Plc, Nigeria’s biggest by market value, have cut the amount of foreign currency customers can spend on payment cards abroad to a mere $100 a month from $3,000.
Rules on what companies do with the dollars they receive have also been changed, said Emeka Mgbeahuru, who runs Tropitec Ltd., an importer of agricultural equipment from Italy and China with distribution links across west and central Africa.
“When you source your own dollars, they won’t let you pay in cash into your account and won’t let you transfer to your suppliers,” Mgbeahuru said by phone from the southeastern commercial hub of Onitsha.
Many banks are following a template they used when they went through a similar contraction in 2016, which was to cut customers’ foreign payments and wait for crude prices to recover before raising the limits.
Central Bank of Nigeria spokesman Isaac Okorafor didn’t respond to a call and messages seeking comment.
“The challenge with dollar liquidity is an industry-wide problem,” said Bridget Oyefeso-Odusami, a spokeswoman of Stanbic IBTC Bank Plc, which cut its customers’ card spending to $500 monthly.
The shortage of foreign currency is forcing some companies to consider closing down, said Ubiji.
“If that happens, it has a ripple effect, which is loss of jobs. We wish the situation changes for the better,” he said.
Naira heads to N480 on black market as dollar squeeze persists
In a related development, the persistent pressure on the foreign exchange may see Nigeria’s currency hit N480 per dollar this week on the black market.
The dollar traded at N477 on the black market as at 11:32am on Monday, representing a N2.00k depreciation compared to N475 sold earlier in the morning. The weakening in the value of the naira is due to high demand by end users amid dollar scarcity.
The market has witnessed dollar shortages since early this year as a result of low oil prices, which accounts for about 90 percent of the country’s foreign exchange earnings and low inflows from remittances due to the Covid-19 pandemic.
At the retail bureau, the naira weakened by N1.00k as the dollar was trading at N476 on Monday as against N475 traded since last week.
However, the naira showed marginal appreciation of 0.06 percent at the Investors and Exporters (I&E) forex window as the market opened with an indicative rate of N386.10k on Monday morning, according to the data from FMDQ.
“Shrinking foreign exchange revenue due to low oil price and production, as well as drying capital flow and remittances have precipitated an overall Balance of Payments deficit, with implications for exchange rate pressure,” said Godwin Emefiele, Governor of the CBN, in his personal statement at the last Monetary Policy Committee (MPC) meeting in July 2020.
Following the outbreak of COVID-19, forex inflows into the I&E Window reduced on the back of lower Foreign Portfolio inflows, according to a report by FSDH Research.
Foreign Portfolio Investment (FPI) declined to US$57.7 million in May from US$2.04 billion in January 2020. The CBN intervention increased from US$390 million in January 2020 to US$2.48 billion and US$2.89 billion in February and March, respectively.
The attendant effect of COVID-19 on oil price constrained the CBN’s capacity to intervene further as dollar inflow dwindled in April.
Following the lockdown and restriction of economic activities in April and May, total inflows to the I&E Window dropped from US$3.19 billion in January to US$459.2 million in April and US$381.2 million in May 2020, the report noted.
Analysts at the FSDH Research said major factors responsible for the decline in foreign investment inflows include uncertainty on the economy especially given the outbreak of COVID-19 which has slowed overall investments.
Other factors include inconsistent policies, declining external reserves in Q1, insecurity and harsh operating environment for Foreign Direct Investment (FDI).
Nigeria suffers highest inflation rate since March 2018
Meanwhile, Nigeria’s inflation rate grew to 12.82% (year-on-year) in July, compared to 12.56% recorded in June 2020, the statistics office said on Monday.
The National Bureau of Statistics report shows that July Consumer Price Index rose by about 0.26 percent points higher than the 12.56 per cent recorded in June, indicating the highest rate since March 2018.
Nigeria’s inflation, a measure of living costs, has consistently increased for 11-months, rising from 11.02% in August 2019 to 12.82% in July 2020.
On a month-on-month basis, the Headline index increased by 1.25 per cent in July 2020 which is 0.04 percentage points higher than the 1.21 per cent recorded in June 2020.
The NBS said the urban inflation rate increased by 13.40 per cent year-on-year in July 2020 from 13.18 per cent recorded in June 2020, while the rural inflation rate increased by 12.28 per cent in July 2020 from 11.99 percent in June 2020.
On a month-on-month basis, the urban index rose by 1.27 percent in July 2020, up by 0.04 from 1.23 percent recorded in June 2020, while the rural index also rose by 1.23 percent in July 2020, up by 0.04 from the rate recorded in June 2020.
The report stated that the composite food index rose by 15.48 per cent in July 2020 compared to 15.18 per cent in June 2020.
The rise in the food index, NBS said, was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, oils and fats, and fish.
On month-on-month basis, the food sub-index increased by 1.52 per cent in July 2020, up by 0.04 percent points from 1.48 per cent recorded in June 2020.