2019 polls: Macroeconomic challenges, others put pressure on Naira

…FX window records $731.5m in one week
…$2.8bn Eurobond sale to provide respite to foreign reserves –Analysts
…As FG determines to expand exportation of locally produced goods
Due to several uncertainties surrounding Nigeria’s 2019 general elections, macroeconomic challenges, among others have continued to mount pressure on the nation’s local currency, Naira, foreign exchange reserves, and the nation’s economy at large, findings by The Daily Times revealed.

This is amid growing concern over a possible slowdown in global growth, owing to the trade war between the United States and China.

Already, this has taken adverse effects on Nigeria’s economy, as foreign reserves dwindle despite improved in global oil prices.

Nigeria’s Gross Domestic Product (GDP) dropped to 1.50 per cent in the second quarter of 2018, slower than 1.95 per cent recorded in the first quarter of 2018.

GDP growth in second quarter of 2018 was primarily driven by the non-oil sector, which expanded by 2.05 per cent while the oil sector contracted by 3.95 per cent partly due to lower oil production levels with output averaging 1.84 million barrels per day (mbpd) in second quarter of 2018, against 1.87mbpd in second quarter 2017 and 2.00mbpd in first quarter of 2018.

Also, the naira has continued to depreciate over increased in foreign exchange demand, due to Yuletide season, while weakening at the parallel market against the US Dollar by 0.28 per cent to N363, compared to between N360 to N362 that it has been selling since the beginning of the year.

The Naira against the Dollar strengthened by 0.04 per cent week-on-week (w/w) to N363.60 in the Investors & Exporters Foreign Exchange (I & E FX) window.

In the just concluded week the I & E FX window recorded lower transactions turnover of $731.46 million, compared to $1.128 billion traded the previous week.

Meanwhile, the foreign reserves continued to decline — dropping $154.64 million to $41.76 billion — despite the absence of the CBN’s conventional weekly interventions.

Financial analysts, however, believe that the drop in foreign reserves tends to trigger foreign investors exit as various signals continued to show that the nation’s economy is yet out of woods.

Analysts at Cordros Capital said: “Our theme for the foreign exchange market, particularly in the short to medium term, remains stability, as oil revenues (despite the recent decline in oil price) continue to shore up the foreign reserves, supporting the CBN’s continued intervention.

The $2.8 billion Eurobond sale is expected to provide some respite to the foreign reserves, further supporting our outlook.”

Although, it is noteworthy that the effective foreign exchange management policies introduced by the Central Bank of Nigeria (CBN), specifically the I&E FX window has helped to an extent the stability in the forex market.

But this stability is now under threat. Reflecting the impact of exogenous shocks, mainly driven by monetary developments in the United States, in particular, the near-term outlook for the currency market in Nigeria appears grim in the wake of dwindling foreign reserves.

A broad retreat by foreign investors from Nigeria on the back of interest rates hike in the United States is mostly to blame.

While the US monetary policy normalisation represents one primary reason for foreign investors’ exit alongside concerns over potential fallout from an escalating trade war between the United States and China, another trigger has been the heightening political uncertainty.

Besides these, other factors that could be putting a strain on the country’s external reserves include the increasing cost of servicing growing external debts,

high import bills despite government measures and the high dollar preference over the naira by politicians which came to the fore during the just concluded political parties’ primary elections.

Commenting on the decline in Nigeria’s external reserves, Head of Banking and Finance Department at the Nasarawa State University Keffi, Prof. Uche Uwaleke, urged the CBN to sustain its demand-side management measures including the policy on 41 items.

Perhaps more than ever before, complementary fiscal policies are required.

He explained: “To halt the declining external reserves, therefore, the CBN should continue to sustain its demand-side management measures including the policy on 41 items. Perhaps more than ever before, complementary fiscal policies are required.

“The government may consider the use of protectionism, the new weapon in town, to curtail imports.

“The short-term solutions should also include getting wealthy non-resident Nigerians to play a role in ramping up foreign reserves. Instead of Eurobond sales, the government should issue more of Diaspora bonds, as it did in the past, provided the proceeds are tied to viable infrastructural projects.

Also, the Chief Executive Officer, Enterprise, Stockbrokers Limited, Mr. Rotimi Fakayejo, said the CBN is working hard to ensure the foreign exchange buffer does not depilate

His words: “Dwindling foreign reserves is expected as 2019 election is close. We are expecting the foreign reserves to bounce back after the election as foreign investors are skeptical about the outcome of the elections.

“The CBN is working hard to ensure the foreign exchange does not depreciate and that is why the intervention has increased lately.

“The dwindling foreign reserves will discourage more investors to come in. the steady drop in foreign reserves means that the nation’s economy is not robust.”

Meanwhile, Minister of Budget and National Planning, Senator Udoma Udo Udoma, said the Federal Government is committed to the diversification of the country’s economy away from dependence on oil and gas.

Senator Udoma who was in Lagos over the weekend said the government is taking steps towards expanding exports of locally produced goods and services, stressing that the ultimate aim is to reduce the nation’s current dependence on crude oil for most of our foreign exchange receipts.

He explained that the present administration at inception met an economy in severe decline and took decisive measures to revive the economy, including the adoption of an expansionary fiscal budget in 2016. This helped to reflate the economy and stimulate economic activity.

“The 2016 Budget was underpinned by a Strategic Implementation Plan (SIP), consisting of a series of short-term measures aimed at boosting economic activities to restore confidence.

The SIP was followed, after extensive consultations with all segments of society, with the development of the Economic Recovery and Growth Plan (ERGP) 2017 – 2020, launched by the President in April, last year”, he added.