Wednesday, April 13, 2022 / 09:10 AM / by United Capital Research / Header Image Credit: BOL News While the Nigerian economy can be said to have fina
Wednesday, April 13, 2022 / 09:10 AM / by United Capital Research / Header Image Credit: BOL News
While the Nigerian economy can be said to have finally returned to
pre-pandemic levels, the FX market clearly remains under pressure from rising
dollar demand and year-on-year weakening in FX earning capacity of the economy.
This essentially means unrelenting pressure on the nation’s sacred economic
variable, exchange rate. Prior to the pandemic, the nation’s external reserves
hovered around $34.0bn levels and more than two years later, it stands at
$39.7bn, apparently enjoying the benefits of recent $5.25bn Eurobond issuances.
Organic accretion into the reserves has been unimpressive as FX earning sources
have underwhelmed.
First, despite oil prices rebounding from trough levels of $22.7/bbl in
Mar-2020 to above $100.0/bbl in Mar-2022, the nation’s external reserve is yet
to benefit from the rebound as oil production has continued to disappoint. Oil
theft and years of underinvestment in the nation’s oil infrastructure have come
home to roost, preventing the economy from enjoying the fiscal and FX gains of higher
oil prices. Further contributing to the FX woes, the nation’s import bill has
continued to rise due to global inflationary pressures and stronger consumption
demand. This has led to negative trade balance which continues to pressure
scarce FX resources. The situation worsens as many investors who exited
the economy prior to the pandemic are unwilling to return due to lack of
long-term clarity on FX situation as well as policy normalisation in advanced
economies.
Recently,
noticeable signs of pressure on FX have been observed, evidenced by further FX
supply controls implemented by the CBN. For example, commercial banks across
the country have communicated a cut in monthly FX transaction limit to $20
while CBN’s FX sales to importers have waned. Looking ahead, we see more
pressure coming as the CBN will be focused on helping the FG pay its upcoming
c.$1.0bn worth of foreign debt obligations. Thus, summer FX demand will be a
key pressure point for parallel market rates. In the long run, increasing the
economy’s FX earning capacity remains the ultimate route to resolving Nigeria’s
FX crisis for good. Thus, one wonders if proper implementation of the CBN’s
RT200 FX Programme could be the key to making perennial FX pressures a thing of
the past.
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