…. GDP set to contract by 4.6% in 2020
Economists and financial experts have lamented the crisis rocking the naira and fall in foreign reserves, saying if appropriate measures are not taken the pressure on naira may see it hitting N500 per dollar soon.
They attributed the fall in naira at the parallel market which hit N480/$ last week to the forces of demand and supply as well as over-dependent on oil as the major source of the country’s external reserves.
The experts also stated that continuous fall in external reserves could have a ripple effect on the economy such as rise in unemployment, exchange rate, continuous rise in inflation, and reduction in production activities among other factors.
Rise in inflation
Analysts at FSDH, an investment house, had said following the impact of COVID-19, Nigeria’s Gross Domestic Product, GDP, would contract by an estimated -4.6% in 2020.
Major sectors such as trade and construction which are labour intensive were worst hit in Q2, thereby worsening the unemployment situation in the quarter.
Sunday Vanguard recalls that the naira, last Tuesday, fell 1.04 per cent to N480 to a dollar at the black market after the Federal Government said it would reopen airports for international travel in two weeks, a move that could increase dollar demand, forex traders said.
The naira had been stable for over a week at the black market at N475 per dollar, where it traded at more than 20 per cent weaker to the official over-the-counter spot market.
With the price of oil, Nigeria’s main export, depressed and foreign reserves dwindling, the Central Bank of Nigeria, CBN, is hanging on to dollars to support the naira – leaving a shortage of hard currency supply for investors and importers.
Currency markets anticipate an increase in demand with airports having been closed since March 23, 2020, to all but essential international flights as part of efforts to combat the COVID-19 pandemic.
Forex sales
In March, the CBN suspended forex sales to retail currency bureaus that resell hard currency to individual users with medical bills and school fees abroad.
As international travel resumes from August 29, traders anticipate a surge in dollar demand, likely heightening pressure on a currency that has been devalued twice so far. Commenting on the pressure on the naira, Professor Uche Uwaleke of the Finance and Capital Market Department of the Nasarawa State University, Lafia, said: “ I think the greatest challenge the country’s economy is facing at present is forex.
The illiquidity in the forex market is connected to inflationary pressure, unemployment and is a drag on GDP growth. The high exchange rate in an import-dependent economy feeds into the prices of goods and services. The inability of firms to access forex for critical raw materials results in low capacity utilisation, low production and sales leading to job losses.
“The present situation sends wrong signals to foreign investors and is negatively affecting the country’s financial markets, especially the stock market where transactions by foreign investors have been on the decline.
”I think the current forex scarcity has both supply and demand dimensions. On the supply side, we are all too aware of the decline in crude oil prices, Nigeria’s major export commodity, as well as the drying up of capital inflows due to COVID-19.
On the demand side, the pressure by foreign investors in search of forex to exit, continuous importation of petroleum products, medical and several other equipment connected with the fight against COVID-19 have contributed.|”
Critical imports
While commenting on the depletion of foreign reserves, he said: “The need to meet some of these critical imports have depleted external reserves and left the forex market gasping for liquidity to the extent that unmet forex demand is said to run into billions of dollars.
To complicate matters, speculators have flooded the market, taking positions in the US dollar with the expectation that the naira will further be devalued.
Some now demand dollars as a store of value.”
On the remedy to avert further depletion of foreign reserves, he said: “The CBN forex demand management measures including the restrictions regarding forex on some products such as rice and maize will help.
The unification of exchange rates across all forex windows will also go a long way in ameliorating the challenge as it is expected to encourage capital inflows.
But, that depends on the spread, intensity and duration of COVID-19 globally and how soon a vaccine is developed. The best that can be done now is to manage the demand by making use of locally made goods to reduce imports.”
Monetary and fiscal
Reacting as well in an interview with Sunday Vanguard, John Isemede, immediate past Director-General/CEO, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), said: “Why will Nigeria not have forex crisis? What are we producing as a nation? There is a big gap between monetary and fiscal policy. When we look at areas such as services, what are our Nigerian professionals such as doctors, engineers, and professors among others are remitting as Diaspora remittances to our country?”
