Bleak Future for Naira as Nigerian Imports Bills Increase
Pressure on Naira is expected to persist in 2021 as higher imports bills continue to offsetting improved receipts from oil exports, thus resulting to low accretion into Nigerian external reserve.
However, for Naira to strengthen, analysts said the nation’s external reserves account for about 20% of the gross domestic products (GDP). At that level, the Central Bank of Nigeria would have strong war chest to defend the local currency in its weekly intervention.
Trade report for the fourth quarter from the National Bureau of Statistics (NBS) indicated that Nigeria’s foreign exchange receipts fell below outflow of foreign currency for import bills settlements.
Invariably, the report indicated that demand for foreign currency for import bills payment expanded above exports earnings, which resulted to N1.8 trillion negative position when converted at CBN official exchange rate of N379/$.
In its projection for 2021, Fitch Solutions said in a report that Federal government will see an increase in oil revenue, saying crude export value will rebound 32% as prices increase but this will be offset by higher imports.
According to the firm, oil receipt plunged by some 48% in 2020 due to virus-induced economic stress with positive outlook as vaccines discovery has provided an insurance to global economic resurgence.
Analysts believe that rising imports has continue to be putting pressure on Nigerian Naira as the apex bank struggle to protect the local currency from further devaluation.
In the last five year, the Central Bank of Nigeria (CBN) official foreign exchange rate has depreciated 92.4% amidst unmet rising demand for foreign currencies in the country.
In 2016, Nigeria’s official exchange rate was ₦197 to a US$1 in 2016 as against ₦379 today’s rate quoted by the apex bank, indicating that movement of Naira alone has impoverish Nigerians.
To manage Naira effectively, the Central Bank of Nigeria has initiated various measures to attract inflow and reduce outflow, but situation has remained the same over the years.
Recalled that the CBN banned some items from accessing foreign exchange for importation, restrained repatriation of dividend offshore and announced decision to pay N5 on every dollar inflow via remittances.
Oil Export Revenue to Rise
Global prices of oil gained 7% in five trading days last week amidst improve demand outlook following strong gross domestic product growth recorded in the first quarter and the United States better macroeconomic data.
In the first quarter of 2021, National Bureau of Statistics of China reported that the country’s GDP growth came strong at 18.3% despite the pandemic.
Nigeria’s gross domestic product report for the first quarter is expected this week. However, analysts’ consensus show there economy will record positive growth figure despite downside risks.
With the size of import bills as against foreign earnings, demand for foreign currency continues to outpacing supply amidst FX backlog, thus necessitated capital control measure.
However, foreign investors are not taking the Nigerian multi-tiered foreign exchange rate slightly as foreign inflow remains tepid while others seek to exit the economy.
Many Nigerian companies purchase raw materials for various productive activities from foreign countries which often raise demand for dollar amidst limited foreign currency inflow.
This has often impacted the nation’s net foreign exchange position but the problem remains unresolved as there are limited alternatives.
CBN continue to ban some items from accessing FX as rising importation pull down balance in external reserves while export receipts –majorly from oil- depends on global prices.
Recently, the International Monetary Fund (IMF) raised global economic growth forecast to 6% following improved metrics from 5.5% in its initial estimate.
As well, Nigerian economy is expected to deliver 2.5% year on year growth in 2021 due to improvements in macroeconomic condition –internal and external.
Growth Set To Accelerate
Fitch Solutions expects growth to accelerate moderately to 2.9%, noting that OPEC+ cuts are set to end in April 2021, and analysts expect domestic oil output to increase by 4.6%, with the value of net oil exports to rise by 11.8%.
“Although imports are also likely to rise due to the wider domestic economic recovery, we nevertheless expect net exports to remain positive and contribute 1.3 percentage point to real GDP growth”, the firm added.
According to the report, private consumption is also likely to be a key growth driver in 2021, contributing 0.9pp to headline growth.
“We expect consumer confidence to rise as mass distribution of a Covid-19 vaccine gathers pace – enabling the removal of any remaining social distancing restrictions – and inflation eases.
The Nigerian government revealed plans to vaccinate 40.0% of the population by end-2021.
However, Fitch Solutions said delays in procuring the vaccine and logistical challenges resulting from Nigeria’s underdeveloped public health system and challenging geography means that a large percentage of the population will only be inoculated next year.
In a more bearish economic recovery estimates, the firm projects that Nigeria will see a return to real GDP growth of 2.3% in 2021, as against IMF 2.5% growth expectation for the year.
“Our Oil & Gas team forecast the value of the country’s oil exports to rebound by 31.7% on the back of a robust uptick in global growth, which will see the price of Brent crude increasing by 22.7% to USD53.0/ bbl”, it added.
Fitch Solution however hinted that it has forecast 5.5% over 2021 compared to an estimated -3.9% in 2020. Explaining further, the firm stated that the resulting rise in government fiscal receipts will support the nation’s expansionary spending plans for 2021.
It projected the federal government’s retained revenues to increase by around 45.0% to NGN3.9 trillion, or 2.0% of GDP, compared with 1.6% of GDP in 2020.
The report reads that the budget raised both recurrent and capital expenditure, which is expected to see government consumption rise by around 14.0% and contribute 0.9pp to real GDP growth.
In its projection, the firm estimated that net exports will contribute just 0.2pp to headline growth, with the rise in oil exports largely offset by higher imports.
The rise in capital spending will also have positive knock-on effects for business investment, notably in the construction sector, while greater progress on reforms will encourage a wider uptick in fixed investment.
The firm said its infrastructure team forecasts that the construction industry will expand by 2.1% in 2021 following a steep 6.3% contraction in 2020.
In particular, as the Petroleum Industry Bill aims to increase private sector participation in the critical hydrocarbons industry, and will likely provide tailwinds for investment in the coming quarters.
However, the report said the pace and scale of the investment recovery will be tempered by persistent macroeconomic challenges, including foreign exchange shortages and logistical bottlenecks, and operational risks related to social unrest and persistent insecurity.
Consequently, Fitch Solutions anticipates fixed investment rising by a relatively modest 2.8% in 2021 from -1.6% in 2020, contributing 0.4pp to headline growth.
It also said private consumption will return to positive territory but growth will be weak at 0.7% (contributing 0.4pp to headline growth) because of high inflation and subdued labour market conditions.
“Inflation rose every month in 2020 because of depreciatory pressure on the naira, and rising fuel and food costs, and we expect price growth to remain elevated over 2021, averaging 14.6% compared to 13.2% in 20202, it added.
Fitch Solutions said Nigerian households spend around 57.0% of their incomes on food, and with food inflation of 19.6% in December likely to remain at double-digit levels due to supply challenges.
Experts believe that high joblessness in Nigeria will also weigh on incomes. Despite a general improvement in economic conditions in 2021, Fitch Solutions expects a relatively minor improvement in the unemployment rate.
Unemployment rate printed at 27.1% in 2020, Fitch Solutions expect this to close at 24.5% in 2021, which it considered significantly higher than 2015-19 average of 17.4% – though unemployment rate printed at 33.3% in Q1-2021.
Nigerian economy shrank by 6.1% year on year in Q2-2020 and 3.6% in Q3-2020, reflecting persistently weak demand for Nigeria’s main export, oil, and the continued – albeit tapering – impact of domestic social distancing restrictions aimed at containing the spread of Covid-19.
In the pandemic year, it was estimated that value of Nigeria’s net oil exports fell by 48.4% because of moderating production – linked to Nigeria’s commitments under the OPEC+ deal – and weak oil prices.
In the period, Brent crude price average US$43.2 per barrel (/bbl) in compared to USD$64.2/bbl in 2019, thus explain pressure on the government revenue. As a result, net exports subtracted an estimated 3.0 percentage points from headline GDP.
Bleak Future for Naira as Nigerian Imports Bills Increase