High expectations

Nigeria expects to receive $10 billion of inflows in the coming weeks to help ease a liquidity crunch that has pummelled the naira. At the…

Nigeria expects to receive $10 billion of inflows in the coming weeks to help ease a liquidity crunch that has pummelled the naira. At the Nigerian Economic Summit, finance minister Wale Edun said that liquidity would also come from state oil firm crude sales and foreign investment firms willing to invest in Nigeria. The measures will add to other steps being taken by the government to boost foreign-exchange liquidity. He also said President Bola Tinubu had signed two executive orders to allow domestic issuance of instruments in foreign currency and also allow all cash outside the banking system to be brought into the banks.

The government’s need to project confidence at this time is understandable. Since the finance minister announced that Nigeria expects to receive $10 billion of inflows, analysts have been searching for the possible sources of the inflows. Such inflows could come from borrowing via Eurobonds or from multilateral organisations like the IMF, but there would have been sufficient information if that was the case. The market needs this cash injection desperately, but such confidence must be backed by action. The NNPCL head announced a $3 billion deal that fell through not long ago. Announcing a “line of sight” without a concrete strategy is not reassuring for market watchers. It is, therefore, crucial that this announcement yields results over the next few weeks as promised. A negative result will spell disaster for the FX market. It is important to resolve this liquidity problem. Wild goose chases like attempting to put an excise tax on parallel market transactions — addressing a reaction to the supply problem instead of fixing the supply — will only lead to an increase in the gap between official and parallel rates, as the costs of these taxes are passed on to those who seek to obtain FX. There is great expectation that more will be revealed in the coming weeks. However, while $10 billion of inflows would be positive, it may not be enough to significantly support the value of the Naira beyond a few months due to the wide demand-supply gap. How much of a lifeline does this give Nigeria? Not so much. The fundamental problems still need to be addressed, such as the oil theft that has kept domestic crude production at low levels, the dependence on crude oil exports for forex, the presence of non-state actors taxing the informal sector and denying the government of these funds, the low tax-to-GDP ratio, high debt service-to-revenue ratio and the insecurity challenges affecting local food production and dampening investors’ confidence, thereby limiting the expansion of economic activities. Also, it may be good news for speculators who could quickly purchase available FX, knowing that the Naira would likely depreciate in a few months. Until players believe we have reached a point of demand-supply equilibrium, speculation in the FX market will continue, leading to further depreciation of the Naira.