UPDATED: Minimizing the Impact of COVID-19, the New and Unexpected Shock to the Nigerian Economy


Friday, July 10, 2020 / 06:38  PM / FSDH Research / Header Image Credit: FSDH

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Global Economic Outlook

  • In June, the International Monetary Fund (IMF) revised its projection downwards and forecasted a -4.9% contraction in global GDP from -3% projected in April. 
  • Advanced economies, led by the United States (US) and the Euro Area, are expected to lead the decline in global economic growth.
  • The global economy is expected to recover significantly by 5.4% in 2021, although this is lower than 5.8% that was previously anticipated.
  • Growth in Sub-Saharan Africa (SSA) for 2020 was further revised downwards from -1.6% to -3.2% due to the effect of lockdowns on economies in the region.
  • Major oil producing countries such as Nigeria and Angola have been badly hit by the pandemic.
  • Nigeria's growth forecast for 2020 was revised to -5.4% from -3.4%.
  • South Africa, which is the second largest economy will experience a significant decline of -8% in 2020, mainly due to restrictions imposed on the economy.
  • Non-resource intensive countries showed better resilience led by Ethiopia and Uganda. The economies of both countries will expand by 3.2% and 3.5% respectively.
  • SSA is expected to recover in 2021 with a growth of 3.4%. In 2021, the economies of Nigeria and South Africa will expand by 2.6% and 3.4% respectively.


According to the IMF, economic outcomes across countries will largely depend on the following:

  • The length of the pandemic and required lockdowns 
  • Displaced workers' ability to secure employment, possibly in different sectors 
  • Scarring from firm closures and unemployed workers exiting the workforce
  • Global supply chain reconfigurations that affect productivity
  • The extent of cross-border spillovers from weaker external demand as well as funding shortfalls 
  • Eventual resolution of the current disconnect between asset valuations and prospects for economic activity. 


FX Inflows in Nigeria

  • Following the outbreak of COVID-19, Forex inflows into the I&E Window reduced significantly in 2020Q2 on the back of lower Foreign Portfolio inflows.
  • FPI inflow declined to US$27.2 million in June 2020 from US$2.04 billion in January 2020. On a quarterly basis, inflows declined from  US$3.65 billion in 2020Q1 to US$225.7 million in 2020Q2.
  • CBN intervention increased from US$390 million in January 2020 to US$2.48 billion and US$2.89 billion in February and March respectively.
  • The attendant effect of COVID-19 on oil price constrained the CBN's capacity to intervene further as dollar inflow dwindled in April.
  • Following the lockdown and restriction of economic activities in April and May, total inflows to the I&E Window dropped from US$3.7 billion in March to US$459.2 million in April, US$492 million in May 2020.
  • FX Inflows dipped further to US$248 million in June 2020 (Q1'20=US$11.92 billion VS Q2'20=US$1.2 billion). In early July, the CBN adjusted exchange rate in the Secondary Market Intervention Sales (SMIS) - a window where importers access foreign currencies - from N360/$1 to N380/$1.

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Equities Market - Capital flight continues to dominate foreign participation

  • Relative to the last quarter of 2019, there was increase in investors' participation in the market to N626.87 billion in 2020Q1 from N463.72 billion in 2019Q4. Month on month participation continues to shrink.
  • Domestic investment continued to dominate foreign counterparts. Total domestic transaction for 2020Q1 stood at N374.98 billion compared with N251.87 billion from foreign investment. This amount to a share of 60% to 40% while it was 70% to 30% in May 2020 respectively. 
  • Foreign participation continued to decline. Participation from foreign players is more of capital flight than investments in the exchange, however, this is slowing in recent months.
  • The continued capital flight and dampening inflows will impact Nigeria's forex position.
  • Improvements in oil price could slow down capital flights in coming months but declining reserves position is concerning.


CBN moves to unify the exchange rate

  • In early July, the CBN adjusted exchange rate in the Secondary Market Intervention Sales (SMIS) - a window where importers access foreign currencies - from N360/$1 to N380/$1.
  • More recently, the Nigerian naira resumed trading on the official market at 381 to the dollar (CBN official rate: 381/1$ posted on FMDQ on July 7th, 2020 )
  • As contained in the Economic Sustainability Plan (ESP), which was launched in June as government's response to the COVID-19 pandemic, part of the monetary measures to support the economy is the unification of exchange rates to maximise naira returns to FAAC from foreign exchange inflows. This is expected to be implemented in the first 12 months, according to the ESP.
  • The recent move, therefore, to unify the exchange rate is in line with the government's agenda as well as with demands for multilateral agencies who are heavy lenders to the government. The IMF and World Bank had requested for a unified and flexible exchange rate from the monetary authority as Nigeria secured foreign loans from both institutions.
  • While the movement is in the right direction it is not enough


Expected Impact: FSDH Analysis

  • This upward adjustment of the Naira is expected to have positive implications on government revenue and in turn, reduce pressure on the exchange rate in the short term.
  • However, other markets are expected to adjust accordingly- the move would translate to higher pressures in other markets like the parallel market, raising speculative concerns in coming months.
  • With the Reserves at US$36 billion and relatively stable oil price, there appears to be a considerable amount of firepower to intervene in the markets. But as economic activities improve, higher imports and lower foreign investment inflows relative to 2019 will add pressure on the reserves. Despite the adjustments, the CBN will continue to intervene to maintain exchange rate stability and prevent large FX fluctuations.
  • The move is also expected to trigger a marginal increase in inflation rate, particularly imported food inflation.
  • FSDH maintains its forecast for average rate of 420 NGN/$1


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