The board of the International Monetary Fund (IMF) has approved Nigeria’s request for the sum of US$3.4bn (100% of quota) for emergency financial assistance as it faces an immediate balance of payments need following the outbreak of the Covid-19 pandemic, which combined with Nigeria’s already high downside risks increased the urgency of the disbursement to Nigeria. There is no policy conditionality attached to the disbursement.
Nigeria, like a lot of frontier oil-exporting markets, faces the twin challenge of falling oil prices and the Coronavirus pandemic, which is expected to see the economy slip back into a 2016 era recession as lower government revenues, depressed economic activities and higher food inflation due to the lockdown hit hard. The IMF projects real GDP to decline by 3.4% this year, compared to its pre-coronavirus forecast of growth of 2.5%.
The IMF had earlier approved loans to other African countries including Cote d’Ivoire, Gabon, Ghana, Rwanda, Senegal and Tunisia to fight the economic and financial impact of the Covid-19 pandemic. See our IMF emergency financing tracker. Before the approval given to Nigeria, Pakistan was the recipient of the largest amount of emergency financial support from the IMF at US$1.4 billion, followed by Ghana at US$1bn.
Is this the dawn of a shift to a floating exchange rate?
In its official press release, the IMF acknowledged that the authorities have allowed greater exchange rate flexibility and taken steps to unify the exchange rate across all markets. The IMF encourages the authorities to finalise the move towards exchange rate unification immediately and allow a market-determined exchange rate.
The CBN officially responded to this, issuing a statement of its commitment to maintaining a more unified, flexible and market-determined exchange-rate regime and would only intervene to smooth large FX fluctuations.
Recall, that in March 2020, the central bank of Nigeria (CBN) devalued the official currency rate by 15% from NGN305/$1 to NGN360/$1 in the official market, a move which benefits the government as dollar earnings from oil are now being converted to Naira at the higher rate. We had also earlier noted that further devaluation was likely given the Naira’s inherent overvaluation and the devaluation across other oil-exporting peer currencies.
The Naira has been under pressure from the dollar following exceptionally poor Q1 export earnings due to the Covid-19 pandemic (oil accounts for c70% of exports and contributes about 10% to GDP). Earlier this week, the Naira traded at an average rate of NGN390 +/-2 at banks, while the parallel market was much more volatile trading as high as NGN460/US$1 owing to dollar scarcity – as the CBN put its own non-essential services on hold during the lockdown (evidently Nigeria views its FX market as non-essential).
Thankfully, the CBN announced its resumption of dollar sales to commercial banks and BDCs yesterday. The CBN will also begin to provide a quota of US$100mn per week to SMEs with essential import needs and international Nigerian students for school fees payments.
Potential impact of facility
Nigeria’s revised 2020 budget expenditure stands at NGN10.3 trillion with a revenue target of NGN5.1tn and an expected NGN5.2tn fiscal deficit (c3% of GDP). The government still needs to purchase testing equipment, treat infected people and provide stimulus packages to millions of Nigerians who have lost jobs or businesses due to the pandemic, which constitutes an added fiscal burden. The government announced a fiscal stimulus package of US$1.4bn (0.3% of GDP) and cuts to non-essential capital spending of c1% of GDP. The IMF expects the overall fiscal deficit (general government) to widen to 6.8% of GDP this year (from 4.6% previously).
Hence the loan, which in Naira terms at an exchange rate of NGN360/US$1 is about NGN1.2tn, representing 23% of the identified deficit. This loan, which can be treated as direct budget support, if applied appropriately could serve as a bridge facility, providing some cushioning for the country’s revenue shortages until the government can secure more funding. Following the Senate's approval of the President’s NGN850bn loan request yesterday, this funding could come through via a combination of foreign currency loans and local bonds in the following months.