NIGERIAN importers are facing an unprecedented fiscal crunch as the Central bank of Nigeria (CBN) currently has a foreign exchange demand backlog of $2bn which financial analyst Fitch Ratings said could cripple imports.
Due to the coronavirus pandemic, the Nigerian economy has been hit hard as the lockdown has not only led to massive collapse in crude oil demand but it has also depleted prices. With over 90% of government revenue coming from the sale of crude oil, the CBN is dependent on the proceeds of petroleum sales to provide foreign exchange to private importers and the government.
As a result of limited revenue, the CBN has been unable to meet demand and as a result the backlog keeps growing, rising from $1bn in May to $2bn today. According to Fitch, the dollar demand has been swelling and piling up pressure on the naira.
Apparently the value of the naira rose after the six-week economic lockdown was lifted with manufacturers and other importers seeking more greenbacks to import goods for the end of year sales. Now, this lack of access to foreign exchange is hampering manufacturers’ ability to import vital raw materials, machines and spares that are not available locally.
Importers with due obligations have been scrambling for hard currency while providers of foreign exchange such as offshore investors have exited. However, the CBN is expected to gradually clear the backlog as business activities begin to return to normal and the impact of the Covid-19 pandemic eases.
In August, the CBN adjusted the official rate to N379 per dollar from N360. However, this has not reduced the pressure on the local currency which now trades at N453 per dollar in the parallel market, indicating that it could weaken further.
According to analysts, there remains severe risks to the external reserves and the currency, especially given weak prospects for the recovery of oil and non-oil sources of forex supply. Fitch Ratings had earlier downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook in April due to Covid-19 pressures.
However, Fitch revised its outlook to stable following reduced uncertainties, stable oil prices and the reopening of the economy. Its rating action was also largely influenced by the CBN’s management of external liquidity pressures through partial exchange rate adjustment, capital controls, forex restrictions and the rise in external reserves following the disbursement of International Monetary Fund’s (IMF) $3.4bn rapid financing instrument (RFI).
Analysts at Afrinvest West Africa, an investment and research form, told investors that the revision to the rating is surprising given that severe external and fiscal financing pressures persist. While Fitch alluded to stable oil prices, the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices.
Beyond oil and gas exports which only accounts for 35.8% of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce. Nigeria’s external reserve at $36.2bn, despite inflows from the IMF is still down 15.5% year-to-date.