Nigeria’s current account deficit and the exchange rate could remain under pressure longer than expected due to analyst outlook of the price of crude oil.
Crude oil prices have been stuck at $40 per barrel and could remain at these levels for the next year. Analysts at OilPrice.com a leading news website dedicated to the petroleum industry.
According to its analysts, oil prices are likely to remain stuck at $40 due to a resurgence in Covid-19 cases that have induced another subtle lockdown in Europe. “Uncertainties about a second wave of COVID-19 and renewed restrictions on social gatherings in several major European economies are weighing on oil market sentiment.”
They also cite higher than expected crude oil stockpiles as another major challenge gripping the industry with almost a billion barrels globally.
“A lot of the major players on the oil market, including some of the largest independent oil traders such as Trafigura and Mercuria, have been bearish on oil near term, expecting global stocks to build in the fourth quarter – due to weak demand – before starting to decline.”
A combination of these factors means oil prices could remain depressed throughout this year and most of 2021, bad news for the Central Bank’s effort to continue to defend the naira and worse for a government that is battling revenue shortfalls.
How bad is it? First-quarter data from the central bank just before the global outbreak of COVID-19 reveals Nigeria had a current account deficit of over $4.8 billion largely due to a fall in oil export earnings. This triggered the first wave of devaluation in March 2020.
- The situation was made worse by Covid-19 as foreign investors stayed out of the country starving the external reserves of the greenback. Foreign portfolio investments in the money market fell to just $332 million a whopping 90% drop in the second quarter of the year.
- Nigeria has also waited agonizingly for the now elusive $1.5 billion World Bank facility which it had hoped will help shore up its external reserves.
- Reports indicate part of the conditions to draw down includes the unification of the naira which led to the latest wave of devaluation by the CBN.
- The COVID-19 pandemic has also limited dollar inflow from remittances, which had been a reliable source of foreign exchange inflow for the country.
The exchange rate received a temporary reprieve in the black market when the CBN resumed dollar sales to BDCs and business travelers. The naira strengthened subsequently but has since depreciated again., falling to N470/$1 recently.
What this means: With oil prices stuck at $40 per barrel, the CBN will find it even harder to support the exchange rate in the near term. With foreign investors inflow still in abeyance, it has a limited window to attract forex, a situation that could lead to further devaluation.
- The latest dollar sales to BDC operators have so far failed to strengthen the naira.
- The CBN has also recently placed restrictions on forex transfer between third parties which according to Nairametrics Research, is aimed at curbing the actions of speculators.
- Yet the exchange rate disparity continues to widen with the parallel market now trading for N470/$1.
- If oil prices remain stuck at around $40 per barrel, then the CBN will likely consider another round of devaluation except it is able to attract forex inflows from foreign investors, concessionary loans, or an increase in local remittances.
- The longer the oil price remains stuck at $40, the more depressed the naira could be.