$2bn FX Backlog: Experts Suggest Way Out

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FOLLOWING an estimated $2 billion unmet Foreign Exchange (FX) demand, finance and economic experts have expressed concern that FX challenges will persist in 2021 unless certain deliberate steps are taken to attract more inflows.

It is the view of finance and economic experts from FSDH research, an affiliate of FSDH Merchant Bank that, “high interest rates environment, clearing of FX backlogs which has been estimated at $2 billion, issuance of Eurobonds, FX policy clarity are actions that could attract FX inflows into the economy.

“We expect improvement in foreign trade figures, particularly both oil and non-oil export as demand conditions improve across the globe.”

Projecting that foreign investment inflows will be higher than the $9.7 billion recorded in 2021 but below the pre-COVID-19 level of $24 billion, the experts fear that foreign exchange scarcity and insecurity will serve as  major constraints for investment inflows in 2021, owing to limited inflows from both crude and non-oil sources, rising imports and a backlog of foreign currency demand.

In its first quarter (Q1) 2021 review and outlook titled: “Nigeria Exits Its Worst Recession. Where Do We Go from Here?” FSDH analysts expressed further concern that other factors such as high fuel cost, logistics bottlenecks and infrastructure deficit will persist in the year.

According to them, “Foreign exchange challenges will persist in 2021 but we expect moderation in the latter part of the year.

“The wide gap between the official rates and parallel markets will continue to be a major FX challenge in 2021.”

The report further observed that import will continue to rise and that  Nigeria’s ability to reverse its trade deficit in 2021 will depend largely on crude oil production volumes.

Meanwhile, the foreign exchange market continues to witness a supply shortage of foreign currency to meet its demand. Consequently, the gap between the various markets keeps expanding.

As of March 16, 2021, the Naira on the investors and exporters (I&E) window closed at N409.67/$, representing a year-to-date appreciation of 0.14 per cent.

It depreciated by 5.43 per cent in the parallel market to N485/$. At the CBN official window, the naira remained stable at N379/$.

While available records show that external reserves trended upwards at the beginning of the year 2021, gaining 3.2 per cent as of January 25, the analysts noted that despite rising crude oil prices, reserves have lost 5.7 per cent of its value from January 25 to March 17.

It should be recalled that in 2020, Nigeria recorded its largest trade deficit of N7.4 trillion.

While the value of exports declined by 35 per cent in the year, imports value increased by 17 per cent in 2020.

Constrained supply chain, closure of land borders, exchange rate depreciation and weakened exports resulted in a larger trade deficit in the year.

However, the analysts believe that the deficit is expected to narrow in 2021 as economic activities improve.

Further on outlook and expectation, the analysts believe that the need to drive growth and equally curtail the pace of inflationary pressure will put the Central Bank of Nigeria (CBN) in a dilemma of either raising Monetary Policy Rate (MPR) to curtail inflation or reduce MPR to support growth.

But, with the admission that there is weak transmission between the MPR and inflation at the previous Monetary Policy Committee Committee (MPC) meeting, the Committee will not raise rates at the next meeting according to the experts.

“With the introduction of CBN Special Bill alongside conventional OMO Auctions, system liquidity will be relatively stable.

“The interest environment will stabilize deep into the year as the government will have to offer higher rate to attract investors to purchase government securities.

“Exchange rate will remain volatile in the year given the weak reserve position and lower earnings from non-oil exports.

“We expect the naira to depreciate further into the year as the outlook of major sources of inflows – oil price, foreign investment inflow, export earnings – remains constrained,” the FSDN analysts stated.

– Nigerian Tribune

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