Nigeria’s dollar scarcity to persist – Moody’s

Nigeria’s dollar scarcity is likely to continue in the foreseeable future despite recent efforts by the Central Bank of Nigeria (CBN) to make more dollars available, according to Moody’s Investors Service.

In a report released by the global rating agency on Wednesday, which it said was an “Update to the markets,” the firm said that despite recent progress in foreign exchange liquidity, dollar availability in Nigeria are unlikely to return to previous levels.

Oil prices are highly unlikely to return to the $100 per barrel level that would lead to greater foreign exchange inflows,” Moody’s Vice President (Senior Credit Officer and co-author of the report), Aurélien Mali, said.

He noted that the decline in oil prices between 2014 and 2015 reduced the country’s foreign exchange earnings from exports to around $46bn, from about $90bn. The drop in export earnings was made worse by attacks on oil infrastructure in the Niger delta region that cut production volumes.

Moody’s pointed out that Nigeria’s non-oil sectors have struggled to adjust to limited dollar liquidity, due to the high content of inputs and delays associated with sourcing domestic substitutes.

In the first quarter of 2017, the Central Bank of Nigeria began to increase the availability of foreign exchange through two new exchange rate windows and interventions in the interbank market,” the statement said.

The change in policy has had a tremendous impact on the availability of dollars, narrowing the spread between the parallel rate and the official rate. It also coincides with a sustained recovery in oil production, signaling that the worst of the damage to growth and external accounts from the oil price shock has passed.

The rating agency stated that the improvement in foreign exchange availability is more cyclical than structural.

The CBN policies have helped to ensure the improved foreign exchange earnings have been distributed into the wider economy, but it is highly unlikely that the apex bank would pursue these policies if the fundamentals were not supportive of them, the statement said.

Improved foreign exchange earnings will support Nigeria’s balance of payments position. Nigeria’s current account has already moved from a deficit of $15.3 billion in 2015 to a small surplus in 2016.

Moody’s forecasts, a positive balance of payments outlook for 2017, taking into account additional external borrowing and stable reserves of around $30 billion despite some volatility during the year.

The significant narrowing of the parallel rate spread as a result of the CBN’s policies and the creation of the investor exchange rate window should also support portfolio investment inflows, which have historically been substantially greater than foreign direct investment inflows.

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