A Week in Nigeria: 27 June

Highlights from Reuters coverage of Nigeria over the last seven days

World Bank projections point to the possibility of a prolonged downturn in Nigeria that could push million of people into poverty

In this week’s round-up: World Bank and IMF predict deep downturn for Nigeria, Fitch director warns of possible ratings downgrade, South African retailer Mr Price leaves Nigeria, and President Buhari expresses concerns over plans for new west African currency.

  • The World Bank said Nigeria’s COVID-19 outbreak could cause the country’s economy to shrink by up to 7.4% this year, impoverishing 5 million people who would live on less than $2 a day. In the worst case scenario, it said COVID could help push 18 million Nigerians into poverty by 2022. In a report published this week it also said a recession could continue into 2021 when the economy could contract 2%. “Today’s unprecedented crisis will require an equally unprecedented response from the entire Nigerian public sector (and) private sector to contain the outbreak and protect the lives and livelihoods of low-income and vulnerable communities,” the Bank. said. The 5 million people facing poverty due to COVID-19 come on top of the 2 million the World Bank had previously projected would become impoverished, with the pandemic disproportionately affecting the poor, particularly women. Overall, 42.5% of Nigerians will be poor — defined as living on less than $2 a day — as of 2020, the bank said. Nigeria already has the highest number of people living in extreme poverty in the world, and has not recovered from another recession in 2016. Poverty and unemployment have often fuelled violent insecurity in the country, from militants in the oil-rich Niger Delta to the Islamist Boko Haram insurgency in the northeast and banditry in the northwest. Thousands have been killed. The coronavirus pandemic is also fuelling inflation, while a projected 70% hit to oil revenues could further depress “already low” government revenues at a time when greater spending is needed to weather the crisis, said the World Bank.
  • Nigeria needs to deepen economic reforms and boost government revenues in order to have a sustained recovery, the World Bank’s country director told Reuters in an interview. Shubham Chaudhuri said Nigerians are aware they cannot simply wait for oil prices to recover as happened during the last crisis in 2016 to rebuild the economy, particularly with the health crisis caused by the pandemic. Nigeria’s current case is worsened by revenues of around 5% of GDP, which is one of the lowest in the world for similar size countries. The ratio stood at 8% last year before the pandemic. Chaudhuri said the World Bank is considering a $3 billion budget support loan for Nigeria, which would cover around half of the country’s external financing shortfall. He added that approval was expected within the next three to four months. “To wait for oil prices to recover will be shortsighted and I think the government recognises this. It helps us make the case for providing the kind of financing the government has requested,” he told Reuters by phone in Abuja. Nigeria plans to spend 3% of its GDP to stimulate its economy this year, similar to what most sub-Saharan African countries are doing but far less than the G20 countries, due to low buffers. Chaudhuri welcomed a decision to move gasoline and electricity prices to more market-reflecting tariffs and said itwould help free up funds for healthcare and infrastructure, although he added that more needs to be done.
  • Sub-Saharan Africa’s gross domestic product is expected to shrink by 3.2% this year due to the impact of the COVID-19 pandemic, the International Monetary Fund said — more than a previous estimated contraction of 1.6%. In its World Economic Outlook update, the IMF projected that Nigeria would experience a significant economic contraction, with GDP seen falling 5.4% this year after an earlier forecast for a 3.4% contraction. And it projected that GDP in South Africa, the continent’s most advanced economy, would shrink by 8% in 2020, a bigger contraction than the 5.8% forecast in April. South Africa’s strict nationwide lockdown, imposed in late March to curb the spread of the novel coronavirus, sharply curtailed production across key sectors such as mining and retail, further hobbling an economy already in recession.
  • A sharp rise in Nigeria’s sovereign debt and a ballooning financing gap could trigger a rating downgrade as the nation’s policymakers struggle to deal with the fallout from low oil prices a director at Fitch warned. The global ratings agency downgraded Nigeria to “B” in April with a negative outlook from “B+” citing aggravation of pressure on external finances. Moody’s said in April it would likely downgrade the country if the government was unable to alleviate the damage to its revenue and balance sheet. And S&P cut Nigeria’s rating in March on weakening external finances. Nigeria, Africa’s top oil exporter, is under increasing pressure to stimulate growth and cut debt after its first quarter current account turned negative, overvaluing its naira currency. The oil price slump has slashed government revenues. “We have two elements that could lead us to take a negative rating action/downgrade on Nigeria. Aggravation of external liquidity pressures and a sharp rise in government debt to revenues ratio,” Mahmoud Harb, sovereign ratings director at Fitch, told Reuters. The debt to revenue ratio for Nigeria is set to worsen to 538% by the end of 2020, from 348% a year earlier, before improving slightly next year, Harb said. The medium debt ratio for “B” rated countries is 350%, he said. Nigeria will need $23 billion to meet its external financing needs this year, Fitch estimates, noting that the country has only a few options, including running down its reserves, after shelving plans to issue Eurobonds. Abuja’s foreign currency reserves could fall to $23.3 billion this year if foreign exchange access is normalised, Harb said, from around $36 billion.
  • Nigeria’s central bank will work towards the gradual unification of exchange rates across all forex windows, the bank said in a document seen by Reuters. The country operates a multiple exchange rate regime which it has used to manage pressure on the currency and to absorb the impact of an oil price crash. But dollar shortages have plagued the economy. Last week, Finance Minister Zainab Ahmed said the government would seek a unified exchange rate within the next 12 months in order to generate more local currency from its dollar inflows and manage the rate in a sustainable manner. In a presentation to global investors on Tuesday evening, the central bank, the finance minister and other government officials set out some of the details. “CBN (Central Bank of Nigeria) will continue to work towards a gradual unification of rates across all FX windows,” the bank said in the presentation document. Governor Godwin Emefiele told investors on the call that the bank would not unify rates close to the black market, where the naira has weakened to around 460 on Wednesday because the demand on that market was speculative. The document put Nigeria’s balance of payment gap at $14 billion in 2020 and said the wider deficit will be funded through a combination of reserves and financing from multilateral lenders. The central bank said reserves declined $8.5 billion to around $36 billion in May due to an increase in imports from last year and demand from investors exiting Treasury bills.
  • Mr Price Group became the latest South African retailer to retreat from African markets due to weak economic growth, difficulties with repatriating funds and local procurement. Mark Blair, chief executive of the clothing and homeware retailer, told analysts at the group’s full-year results presentation that it was exiting Nigeria after walking away from Australia and Poland last year. Mr Price, which reported a 10.4% fall in annual earnings, has closed four of its five stores in the West African country and expects to close the last one in the coming months, Blair said. “Quite frankly I’m not prepared to invest any further whether it’s investment in time or in money into a country that is volatile as it is,” he said. “In the early days we were making money but now we just came up against too many roadblocks, whether it’s getting the money out, etc,” he said. The firm is also reviewing franchise operations. In recent years Mr Price has taken a cautious approach to international expansion across and outside Africa as organic growth has proven challenging and “distracting”.
  • President Muhammadu Buhari said west Africa’s plan to adopt a common currency was being put at risk by some countries’ attempts to progress more quickly than the agreed timetable. Nations in the region are aiming to adopt a single currency to boost trade and economic growth. Nigeria currently operates a managed float for its currency, while several other countries peg theirs to the Euro. Buhari told the heads of state of the 15-member West African Community of African States in a virtual meeting that he was concerned francophone countries — such as Ivory Coast and Senegal — had decided to replace their currencies with the new unified one, the Eco, ahead of others. “It, therefore, gives me an uneasy feeling that the UEMOA Zone (francophone countries) now wishes to take up the Eco in replacement for its CFA Franc ahead of the rest of the member states,” the Nigerian leader said, arguing the move could jeopardise the project. Buhari said Nigeria was committed to the single currency and urged leaders to take a common position to safeguard the region. “We cannot ridicule ourselves by entering a union to disintegrate, potentially no sooner than we enter into it,” Buhari told the meeting. He acknowledged the impact of the COVID-19 pandemic could make member states cautious about complying with agreed standards as economies face recession. Several West African countries rely on commodities, whose prices are regulated on international markets.