Nigeria’s economy slowed to its lowest level in more than a year as the impact of the coronavirus pandemic took a toll on both oil and the non-oil sectors of the economy. Growth in Real Gross Domestic Product (RGDP), a metric which measures the total monetary value of economic activities in the country after being deflated by a base year price index, stood at 1.87 percent, year on year, in the first quarter of 2020, the National Bureau of Statistics (NBS) said, Monday.
That’s a slower growth when compared with the 2.55 percent which the economy reported in the fourth quarter of 2019. The slower growth in the economy was reported in both the oil and the non-oil sector, as both sectors eased from 6.36 percent and 2.26 percent, in the previous quarter, from to a growth of 5.06 percent and 1.55 percent respectively, in Q1 2020.
In a related development, Foreign exchange rates are galloping again in Nigeria. Dealers are speaking in hushed tone afraid of regulatory sanctions. Unmet demands are piling up and manufacturers are raising alarm. Nigeria’s foreign exchange market is virtually frozen. It is a playback to the dark days of 2016 and early 2017 when it is alleged, the market was being rigged.
The fall in oil prices means the central bank of Africa’s largest oil producer has run low on dollars and is struggling to meet FX demand, forcing it to resort to demanding management tactics from 2016 with little success.
Bankers say there is a foreign exchange demand backlog of around $1.5 billion currently. That’s up from the $1 billion estimated a month ago. Sources say regulators are now resorting to pressuring banks on FX quotes to submit in attempts to ration scarce dollars. Meanwhile banks are pressured on what quotes to submit.
In 2016, some $7 billion of foreign exchange bids went unmet at the height of a crippling FX crisis that was also triggered by a fall in oil prices. The crisis dissipated after the CBN weakened the official rate by 40 percent and created a special market-driven window for investors and exporters in 2017 which helped to somewhat restore investor confidence in the country’s FX market.
Four years since the crisis of 2016 and Nigeria seems to be drifting towards those dark days yet again. While there’s an FX demand backlog piling, the naira has crashed to a near three-year low of N460 per dollar at the black market and the forwards market is flashing signs that investors see the naira falling to as low as N510 in a year’s time. The plunge in the black market rate, in particular, creates all sorts of problems for the central bank in its bid to force a convergence of the country’s multiple exchange rates, as the plunge is an indication the central bank may have to weaken the official rate further after the devaluation in March.
The central bank in March weakened the official rate to N360 per dollar from N306, and the parallel market rate was moved to N380 from N360. It called the move an “adjustment” rather than a devaluation. Naira devaluation was less than other commodity producers from Russia to Colombia whose currencies, the ruble, and peso, are down by 17 percent and 19 percent, respectively, since the beginning of this year. In Nigeria, crude accounts for 90 percent of foreign-exchange earnings and reserves are down 12 percent since January to $33.6 billion. The current backlog in the market has forced some manufacturers and importers to source dollars at the black market, pushing the exchange rate to new highs. As of May 21, a dollar sold for a record N460 at the black market, according to data from abokifx, a website that tracks daily movements in the unofficial exchange rate. That’s up 28 percent from March. That means the spread between the unofficial black-market rate and the official rate of N360 now sits at N100, while the Investors and Exporters’ window rate at N383 varies from the black-market rate by N77.
Meanwhile, 12-month naira forwards are trading at around N510 per dollar, suggesting investors see the currency falling to around that level in a year.
Godwin Emefiele, the central bank governor, has since called an emergency virtual meeting with corporates asking manufacturers and importers to stop patronizing the black market and urged patience while promising the CBN would meet all of their demands in no time. But there’s little confidence in the CBN’s FX firepower at a time when external reserves are dwindling and oil prices have slumped.
Though oil prices have improved in recent days, with Brent crude climbing to a one-month high of $34 per barrel, only Eurobond investors have shown more risk appetite towards Nigeria as they have across other emerging markets.
Yields on Nigeria’s dollar bonds maturing in 2047 fell from an all-time high of 13.2 percent on March 19 to 9.1 percent on Wednesday.