Foreign Reserves Adequate For Seven Months Imports- CBN
The Central Bank of Nigeria, CBN, has indicated that the country’s foreign exchange reserves at the current level of about USD35 billion would cover seven months import needs of the economy.
This is contained in the apex bank’s 2020 economy review and 2021 outlook it has just released.
In the review and outlook the Bank explained that with the decline in the nation’s foreign exchange earnings and successive exchange rate adjustments, it was forced to implement a demand management framework which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of external reserves.
It stated: ‘‘Due to the unprecedented nature of the shock, we continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which rapid changes in the exchange rate could have on key macro-economic variables.
This, we believe, is in line with international best practices in countries where managed float arrangements are in operation.
Sources of foreign exchange “At the same time, measures are being taken by the authorities to improve our non-oil exports and other sources of foreign exchange.
These measures have helped to prevent a significant decline in our reserves. Our external reserves currently stand above $35 billion and are sufficient to cover seven months of import of goods and services.” Inflation On the inflationary considerations for its monetary policy measures the apex bank stated: “Inflationary pressure persisted during the year due to several factors. In addition to the disruption to global and domestic supply chains as a result of COVID-19, inflation was exacerbated by the increase in VAT rate, petroleum prices, electricity price adjustments, farmer-herder clashes, exchange rate adjustment, and flooding that occurred in many parts of our farm belt areas. Inflation in October 2020 stood at 14.2 percent.
We, however, expect inflation to begin to moderate by the first half of 2021 as efforts are being made to enable significant cultivation and production of key staple items in the dry season.”
Pre-COVID-19 Economy On the key issues that affected the economy in 2020 CBN said: ‘‘Prior to the onset of the virus in December 2019, the Nigerian economy was on a positive growth trajectory, having made a significant recovery from the 2016-2017 recession, which was triggered by the drop-in commodity prices in 2016.
Following the recession, we witnessed 12 consecutive quarters of economic expansion, and GDP growth in the fourth quarter of 2019 stood at 2.55 percent. The naira/$ exchange rate remained stable for over two years at N360/$ and our external reserve witnessed significant accretions from the sale of crude oil and continued inflows from foreign investors.
“Our banking system remained strong as key indicators reflected improvements across several areas. Capital adequacy ratio for the banking industry was above15 percent, surpassing the prudential requirement. The ratio of non-performing loans declined from 11 percent in April 2019 to less than 6.1 percent by January 2020. Our intervention efforts in the agriculture and manufacturing sectors continued to support employment generating activities and improved local production of goods that can be produced in Nigeria.
‘‘The onset of the COVID-19 pandemic in the first half of 2020, and the lockdown measures put in place to contain the spread of the virus, caused an unprecedented shock to the global economy. Global economic downturn, which was particularly significant in the second quarter of the year, saw declines in growth in advanced and emerging market countries, such as the United States (-9.5 percent), United Kingdom (-20 percent), India (-24 percent) and South Africa (-17 percent). As a result, far-reaching measures were taken by fiscal and monetary authorities in advanced and emerging markets to stabilize their respective economies. “Like other economies, the Nigerian economy was not immune from the COVID-19 shock in 2020. Nigeria’s gross domestic product, GDP, contracted by-3.4 percent in the third quarter, a welcome improvement from the -6.1 percent recorded in the second quarter. The negative rate of growth was due to a series of external factors in addition to the lockdown measures, imposed in order to curtail the spread of the virus. Some of the key constricting factors were: Crude oil
“Restriction on global travel by land and air; along with the slowdown in commercial activities, led to a significant reduction in the demand for crude oil, which contributed to a 65 percent decline in crude oil prices between January and May 2020. The drop in crude prices, along with OPEC reduction of Nigeria’s production quota led to a significant decline in our foreign exchange earnings, along with a more than 60 percent decline in revenues due to the federation account. Today, crude oil prices have recovered from its low of US$19 per barrel in April 2020 to US$51per barrel in January 2021; but it is yet to return to pre-pandemic levels of over US$60 per barrel as at January 2020. GDP growth in the oil sector in the third quarter remained subdued due to the OPEC restrictions on oil output.
Restrictions on Movement “GDP growth in 2020 particularly in the manufacturing sector was significantly impacted by the restrictions on movement as many factories and businesses operated at limited capacity, in addition to a decline in demand for service-related activities, which require extensive in person contact, such as transportation, hospitality and tourism. Global supply chains “Significant disruptions in domestic and global supply chains as a result of lockdown measures in key markets in Asia and Europe between March and May 2020, affected delivery of inputs and machinery to firms in Nigeria and this contributed to a slowdown in manufacturing activities. Some countries such as India and Vietnam imposed restrictions on the exports of vital materials in order to meet the needs of their local market. This challenge reinforces the need to build more resilient systems that can support our production needs in times of crisis. Capital Flows “The impact of the pandemic and the resulting slowdown in economic activity led to a significant outflow of funds from emerging market economies.Foreign investors withdrew over $100bn worth of funds from emerging markets between February and April 2020. These funds were subsequently invested in safe haven assets such as US treasury bills and the Japanese Yen. The increase in outflows from emerging markets also led to a corresponding depreciation in the currencies of several emerging market countries such as Brazil (-27.3%),Turkey(-35.1%), Argentina(-35%), Russia(-20%), Angola(-27%)and South Africa(-9%)in 2020.” Response by the monetary and fiscal authorities: The apex bank report also harped on the efforts of the monetary policies to address other bottlenecks in the economy. It stated: ‘‘Given the impact on COVID-19 on key economic variables earlier mentioned, the fiscal and monetary authorities took unprecedented measures to prevent any long-term damage to the growth prospects of our economy.
