Recent slides in the official exchange rate of the Naira and the dramatic widening of the parallel market premium signaled that the unease in the Nigerian foreign market has intensified, testing our capacity as a nation to stabilize the Naira.
This piece simplifies the forces at work and identifies fruitful paths to a stable Naira.
1. Crucial Role of Pandemic-Related Trade Shocks
We must remind ourselves that the current exchange rate crisis is triggered by the foreign exchange supply shortfalls in the wake of the pandemic induced global lockdown in 2020.
a. Nigeria’s annual average net goods exports inflow of US$34 billion from 2005 to 2014 had dropped to an annual average inflow of US$5.9 billion from 2015 to 2019, before dipping steeply into steep net outflow of -US$16.4 billion in 2020 (that was a US50 billion shortfall relative to the 2005-2014 average) and it is likely to remain a net outflow in 2021.
b. Balances on Nigeria’s trade in services and incomes have historically been negative.
c. Remittances is now the only source of net inflow on Nigeria’s current account, with annual average inflow of US$21 billion from 2005 to 2020. This was not large enough to offset deficits from goods, services, and income, leaving the current account in a steep deficit of -US$16.98 billion in 2020.
d. The combined FDI and ODA inflows of about 5.2 billion were offset by FPI outflows of 3.6 billion to leave net capital inflows at a paltry 1.7 billion in 2020.
Nigeria’s external payments situation is unlikely to change much in 2021 as we have done nothing to reposition to attract the types of the liquidity inflows that are abundantly available in the prevailing global environment like many of our peers are already doing as shown below.
2. The Role of Supply
Overall foreign exchange supply conditions are determined in part by:
a. Generic developments in external trade and payments conditions that have reduced net-inflows of foreign exchange into Nigeria, and indeed all other countries.
b. Government’s capacity to boost the sizes of net-inflows from targeted components of the current and capital accounts, especially in the face of pandemic-related downswings in global economic conditions that helped some countries blunt the edges of adverse generic shocks.
c. Confidence or lack of confidence of residents and non-residents in the ability of the government to stabilize supply in the event of adverse shocks could inform their decisions on whether to hoard or sell foreign exchange, especially in the face of crisis.
#Nigeria #EconomicAssociates
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