Despite accessing $3.4billion from the International Monetary Fund (IMF), the Federal Government still needs at least $10.6billion or about N4.1trillion to address the gaps in the country’s Balance of Payment (BOP), without mounting pressure on the foreign exchange reserves of the Central Bank of Nigeria (CBN).
With capital inflows impeded, pressure has continued to be on the forex reserves, closing lower at $33.4billion on Tuesday, down from $38.53billion it opened at the at the beginning of the year.
Indeed, the coronavirus has impacted the country’s capacity to finance its budget, as oil prices, on which the budget was predicated, remains below estimates.
Oil prices yesterday, recorded some gains as Brent Crude rose to $25.20, while Nigeria’s Bonny Light was up by 11.18 per cent to close at $16.51 per barrel as at 6:07pm local time.
The IMF noted that the shock would be only partially mitigated by lower oil-related imports of goods and services and income outflows, and an overall reduction in imports on the heels of a sharp output contraction and exchange
As a result of the challenges facing the economy, the BOP gap for 2020 is estimated at about $14billion or 3.2 per cent of gross domestic product (GDP), of which the $3.4billion from IMF would cover about 24 per cent.
In addition, the authorities are actively engaged in negotiations with the World Bank, the African Development Bank, the Islamic Development Bank, and Afreximbank for budget support loans of about $3.6billion or almost 26 per cent of the gap. The rest of the financing gap is expected to be met by further reserve drawdown and through greater exchange rate flexibility.
With fears of recession and weaker buffers, the CBN may yield to the demands of the IMF on the recently approved loan, to operate a more unified and flexible exchange rate.
Accordingly, the Federal Government in a letter of intent to request funding from the IMF, said more currency flexibility would help protect dwindling international reserves and avert economic distortions.
Although the CBN already moved towards this after it devalued the Naira from N305 to N360 in its official window, the rate still differs from that of the BDCs and the import and export (I&E) windows. Naira exchanged at N460/$1 in the parallel market.
The CBN had resisted the move for rate unification for many years and taking this policy decision might be a huge victory for many analysts. The move equally aligns with the FG’s resolve to remove subsidy and allow the market operate freely.
The IMF noted that though the authorities have allowed greater exchange rate (FX) flexibility and have taken important steps towards unification of existing FX windows, the process should be finalised immediately.
The Fund added that the Federal Government has equally expressed intentions to resume revenue-based fiscal consolidation programme, which started this year by increasing the VAT rate, and introducing an automatic fuel pricing mechanism, while creating fiscal space for priority spends, and avoiding recourse to central bank financing.
“To ensure financial assistance received as part of the COVID-19 response is used for intended purposes, the Nigerian authorities committed to undertake an independent audit of crisis-mitigation spending and related procurement processes and to publish procurement plans and notices for all emergency-response activities, including names of awarded companies and beneficial owners,” the IMF added.
According to the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, the IMF has consistently canvassed this position and Nigeria does not have much choice in the circumstances.
“Exchange rate has to reflect the macroeconomic fundamentals. To do otherwise is to create needless distortions, dislocations and distractions in the economy.
“A flexible rate would also enhance liquidity in the foreign exchange market. It is also important to liberalise forex inflows into the economy. This is not a time to put obstacles on the way of investors willing to bring private capital into the economy,” he added.
On Tuesday, the IMF approved $3.4billion of emergency funding for Africa’s biggest oil producer, the single biggest disbursement for any country yet with the coronavirus pandemic.
Although the Minister of Finance, Budget and National Planning, Zainab Ahmed, had insisted that the loan will not be tied to any conditionality, the unification plan however confirms the recommendations made by the IMF in its approval note, advising the CBN to expedite the unification of the exchange rate.
“We are committed to maintaining this more unified and flexible exchange-rate regime, which will operate in a market-determined manner and be allowed to respond to shocks, with the Central Bank of Nigeria only intervening to smooth large FX fluctuations,” the government said in a letter contained in the IMF’s staff appraisal of the financing request.
Finance Minister, Zainab Ahmed and Central Bank Governor, Godwin Emefiele, signed the letter dated April 21, according to Bloomberg.
Recall that last week, the CBN had debited N1.47trillion ($3.8billion) from commercial banks as additional cash reserves for failing to meet regulatory targets, a move seen by bankers and analysts as a way to ease pressure on the naira.
Deputy Managing Director and Acting Chair, of the IMF, Mitsuhiro Furusawa, in a statement, said: “The COVID-19 outbreak—magnified by the sharp fall in international oil prices and reduced global demand for oil products—is severely impacting economic activity in Nigeria.
“The authorities’ immediate actions to respond to the crisis are welcome. The short-term focus on fiscal accommodation would allow for higher health spending and help alleviate the impact of the crisis on households and businesses. Steps taken toward a more unified and flexible exchange rate are also important and unification of the exchange rate should be expedited.”