FX Scarcity Will Drag Economic Recovery as Nigeria Faces Stagflation

FX Scarcity Will Drag Economic Recovery as Nigeria Faces Stagflation

Nigeria’s foreign exchange (FX) shortage could forestall economic recovery in the second half of 2020, research analysts at FSDH Merchant Bank have hinted.

In its macroeconomic note, FSDH explained that Nigeria faces severe stagflation as its economic size shrink amidst rising inflation, unemployment rates.

Key economic metrics have slipped into red due to the global and internal economic challenges facing the policy makers.

Private sector investment has waned due to rampaging coronavirus pandemic, with foreign investment inflow data showing downbeat interest in the Nigerian economy.

In the second quarter of the year, capital imported into the economy dropped, just the same time when its trade balance signposts balance of payment stress.

Analysts said a number of foreign investors are stranded in the Nigerian financial market due to FX shortage that makes repatriation difficult, thus forcing the apex bank to engage in some sorts of sophisticated, albeit, unpopular currency control.

According to analysts, inability to access foreign exchange would limit output and drag economic productivity in the second half of 2020.

This is counterproductive for the economy as the Federal Government struggles to stimulate economic recovery, though critics said response to COVID-19 financial support was poor.

FSDH note stated that the nation is at the risk of potential stagflation as gross domestic products (GDP) dropped 6.1% in the second quarter of 2020.

Analysts explained that this is the first negative growth since the first quarter of 2017, coming at the time when both inflation and unemployment hit rooftop.

MarketForces recalled that in the first half of 2020, GDP growth averaged -2.12%.

In H2, FSDH stated in the report expectation that this sluggish economic performance will continue especially given the lockdown of key sectors, the tough business climate and persistent challenges in the fiscal space.FX Scarcity Will Drag Economic Recovery as Nigeria’s Faces Stagflation

In addition, analysts stated that Nigeria’s foreign exchange challenge will play a major role in shaping economic outcomes in the second quarter of 2020.

“Already, there have been limited FX supply which has resulted in depreciation of the currency in the parallel market”, FSDH noted.

More recently, the CBN has embarked on FX rationing and exchange rate adjustments, among other measures, to reduce pressure on the Naira and maintain a stable exchange rate.

However, FSDH stated that drawing from experience during the last recession, limited availability of FX as well as FX rationing could have unintended consequences on broad economic aggregates such as GDP, Inflation, external reserves and foreign investments.

“Growth of key sectors such as trade, manufacturing and agriculture could also be constrained by limited availability of FX to secure inputs”, FSDH stated.

Reconciling sectoral growth with job losses, it is evident from the NBS data that labour intensive sectors that experienced slowdown/decline in output, accounted for larger job losses in the second quarter of 2020.

Results from the NBS COVID-19 impact survey showed that 42.2% of respondents stopped working between March and May as a result of the pandemic.

During the lockdown, Commerce (Trade), Agriculture and Services had the highest share of job losses, respectively.

Nigeria’s two biggest sectors – Agriculture and Trade – both in terms of contribution to GDP and employment, experienced slowdown in activities as the government implemented lockdown and restrictions in second quarter of 2020.

Read Also:Nigeria records positive trade balance in Q3

For agriculture specifically, while the sector grew by 1.6%, job losses were significant due to seasonal factors and interrupted access to seedlings/farms/markets among other factors.

FSDH said of all the major sectors in the economy, it highlighted five sectors that will be positively affected by the pandemic.

The firm explained that with the exception of Electricity, all other sectors (Agriculture, Finance, Health and ICT) in its analysis showed positive growth as revealed by the NBS data on sectoral growth.

It noted that Agriculture has remained resilient during and post 2016 recession and highlighted that constant demand for agriculture output for both consumption and as intermediate input will sustain the sector.

Read Also: CBN Forecasts Negative Economic Growth for Q2

The sector grew by 1.6% in the quarter and was instrumental in limiting the decline in overall output especially given that it accounts for a significant weight (25%) in overall GDP output.

Nigeria faces severe stagflation as GDP declines, Unemployment & Inflation rise

Analysts stated that largely, the impact of COVID-19 was largely felt on output, employment and inflation.

With COVID-19, many companies engaged in non-essential items were forced to shut down operations.

As a result, the total number of individuals employed in the country declined to 35.6 million in 2020 Q2.

Unemployment rate rose to 27.1% in the quarter. Key sectors such as Agriculture, Trade and Manufacturing experienced significant job losses.

A fall in output was also accompanied by rising prices with inflation rate at 12.6% in June 2020.

Supply bottlenecks and value chain disruption were largely responsible for the rise in inflation.

Headline inflation rate rose to 12.82% in July 2020, a 26 basis points increase from 12.56% in June 2020.

Increase in food inflation is a major driver of overall inflation in Nigeria. On a month-on-month basis, average prices rose by 1.25%.

FSDH said FX shortages, exchange rate depreciation and supply bottlenecks are key factors responsible for the increase in general price level.

FX Scarcity Will Drag Economic Recovery as Nigeria Faces Stagflation