Nigeria finds itself navigating a challenging path to recovery from the substantial drop in foreign exchange inflows into its economy. A recently published report by PricewaterhouseCoopers (PWC) suggests that this decline is expected to persist, exacerbating Nigeria’s existing FX predicament.
The Unrelenting FX Struggles
Despite the Nigerian government’s effort to float the naira, the disparity between the official and parallel market exchange rates continues to widen, putting immense pressure on the foreign exchange supply. The most recent exchange rates reflect the growing divide, with the Investors & Exporters (I&E FX Window) reporting a rate of N848/$ before closing at N775. Simultaneously, at the parallel market, the dollar traded for N1,100.
Concerns are escalating amid this unfolding dollar crisis, with the PWC report signalling a potentially gloomy future.
Alarming Trends in Capital Importation
In the second quarter of 2023, Nigeria witnessed a substantial drop in the importation of foreign currencies, totalling a mere $1 billion. This figure represents a significant 32.9% decline compared to the $1.535 billion recorded during the same period in 2022 and a 9.04% decrease from the $1.13 billion in Q1 2023.
PWC’s Nigerian Economic Outlook for October underscores the risk that the declining global trade growth poses to Nigeria’s trade balance and foreign exchange inflows.
The Impact on Remittances
The report highlights that remittance flows to low and middle-income countries are expected to experience slow growth, increasing by 1.4% in 2023 compared to the 8% growth recorded in 2022. This subdued growth is attributed to the softening of economic activity in remittance-source countries, resulting in limited employment and wage gains for migrants.
While remittances to Nigeria accounted for 38% of the total flows to Sub-Saharan Africa, they increased by only 3.3% to reach $20.1 billion.
Divergence Between Official and Parallel Markets
The report also notes a rising trend in FX inflows from non-Central Bank sources. This influx from autonomous sources further contributes to the widening gap between official and parallel market exchange rates. It suggests that official interventions may not accurately reflect the actual market dynamics, as an increasing portion of annual inflows is sourced from unofficial channels.
Impact of Growing Public Debt
Nigeria’s increasing public debt, standing at N87.4 trillion in Q2 2023, is attributed to securitization of ways and means and naira devaluation. The report points out that foreign suppliers may be reluctant to accept letters of credit due to unsettled $7 billion FX obligations to domestic lenders. This could result in reduced imports of crucial goods and inputs for manufacturing and retail/wholesale trade, potentially intensifying inflationary pressures and negatively impacting GDP growth.
The rise in Nigeria’s debt service to revenue ratio to 96% in 2022 raises concerns about a widening fiscal deficit, high debt servicing to revenue, and escalating debt to GDP ratios.
Recommendations for the Way Forward
The PWC report suggests five key recommendations to address the current challenges:
- Boosting Investors’ Confidence: Nigeria should provide a transparent FX management story to regain investor confidence.
- Managing for Flexibility and Shocks: The country must build resilience to withstand external shocks through well-sequenced policy execution.
- Short-term Solutions for Enhanced FX Liquidity: Immediate measures to improve foreign exchange liquidity are necessary.
- Deepening Financial Markets: Nigeria should work on strengthening its financial markets.
- Longer-term Sectoral Policies: Focusing on sectors that can drive exports and boost domestic consumption is essential.
In summary, Nigeria’s FX woes persist, and the PWC report cautions that the road to recovery may be lengthy. Clear policy actions, improved investor confidence, and a strategic approach to address the root causes of the crisis are essential to restore stability to the nation’s foreign exchange market and fuel economic growth.
