IMF Loan to Support Dollar Liquidity in the Short Term


Thursday, April 30, 2020 / 12:06 PM / by CSL Research / Header Image Credit:

Earlier this week, the International Monetary Fund approved Nigeria's request for US$3.4 bn (N1.22trn) in emergency financial assistance under the Rapid Financing Instrument (RFI) to support the authorities' efforts in addressing the severe economic impact of the COVID-19 shock and the unprecedented downturn in oil prices. The loan from the IMF would attract 1% interest rate, a repayment moratorium of 3.25 years and a 5-year tenor.

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We expect the funding secured from the IMF to buoy the nation's foreign exchange reserves, which have come under tremendous pressure, following capital flow reversals by foreign portfolio investors who are reducing their exposure to Naira denominated assets. We highlight that the nation's external reserves have fallen by 11% (US$4.3bn) to US$33.4bn as of 28 April from US$37.7bn at the start of the year and 26% from its 2019 peak of US45.2bn in June.

In recent times, we have observed widening spread in the rate at the parallel market (quoted at c.N450-N460) and the I&E window (N383-N387) due to rising dollar illiquidity. Against this backdrop, we think the funding will bolster the ability of the CBN to increase its intervention and ease dollar shortages in the short term. Truly, the CBN announced in a press release that it would resume interventions for PTA and BTA needs in certain segments of the market but said nothing about offshore demand.

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On the fiscal side, the funding will enable the government plug the deficit in the 2020 budget in the face of weaker oil earnings and lower non-oil revenue due to the slowdown in economic activities. Details from the revised budget estimates show new budget deficit of N5.18tn from N2.2tn previously. The surge in deficit was inevitable as the benchmark oil price had been cut to US$30/b (previously; US$57/b) and oil production to 1.7mbpd. With oil prices currently trading at a steep discount to the budget estimate alongside the reduction in the nation's production quota to 1.4mpbd from 1.7mbpd by the alliance of OPEC+ producers, we think the borrowed sum will help mitigate the adverse impacts of the dual shocks (oil price and COVID-19) on government expenditure plans in 2020.

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