By Collins Nweze
The Central Bank of Nigeria (CBN) at the weekend said the degree of external reserves accumulation would drop as outflows are expected to outweigh inflows in the remaining part of this year.
In its latest Monetary, Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020/2021, the apex bank said external reserves are expected to lie between $29.9 billion and $34.3 billion at end-December 2020 and are predicated on declining oil price of between $20 and $40.
The report said sequel to the COVID-19 pandemic, the viability of the external sector in the year is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil.
Specifically, it said this development, in addition to exchange market pressures, emanating from speculative activities in the Bureau De Change, investors and exporters segments of foreign exchange market, is expected to exert pressure on the naira exchange rate.
“In addition, increased risk aversion behaviour by investors may negatively impact on capital inflow, as they flee to safe-haven assets,” it said.
The apex bank said the outlook for the economy is mildly optimistic, as its growth trajectory is expected to slow-down this year for the tepid global demand, resulting from the COVID-19 pandemic, depressed global aggregate demand and supply, and the oil price war which has resulted in supply glut and decline in crude oil prices.
In this regard, output growth is expected to lie around -3.1, -1.0 and 0.24 per cent in the year, predicated on low oil price of $10 per barrel, $20 per barrel and $30 per barrel.
To ameliorate the impact of slow economic activities arising from the pandemic, fiscal and monetary policy responses were put in place to neutralise the adverse effects on growth-inducing sectors of the economy.
On the real sector, the measures include the credit interventions in the health sector (N100 billion), Micro, Small and Medium Enterprises (MSMEs) (N50 billion) and manufacturing sector (N1 trillion).
These initiatives, it said are expected to encourage and expand domestic production, improve productivity as well as generate employment opportunities.
Also, growth in consumer credit by banks, propelled by the CBN policy to raise the Loan-to-Deposit Ratio from 60 per cent to 65.0 per cent and Global Standing Instruction (GSI) clause, would improve credit delivery to households and MSMEs as well as moderate unemployment and sustain the growth trajectory.
“Although these measures are commendable, there are headwinds that may undermine these expectations. These include: increased Federal Government deficits, which may narrow fiscal space and crowd-out private investment; underutilisation in the labour market due to weakened aggregate demand; and a build-up in inflationary pressures resulting from the increase in Value Added Tax (VAT) and border protection.
“Specifically, headline inflation is expected to hover around 13.97 and 14.15 per cent at end-December 2020, owing to: supply shocks which may likely happen due to decline in economic activities, globally as a result of pandemic that started in China in fourth quarter of last year; demand shocks emanating from domestic and international lockdowns; food supply shocks associated with non-tariff border protection; and effect of the implementation of the new budget and minimum wage,” the report said.
Also, it is projected that the fiscal space may be limited in the year, given escalated vulnerability, as a result of sharp decline in oil prices, occasioned by weak global oil demand and price wars between Russia and Saudi Arabia.
This development would undermine the implementation of government’s capital programmes, impede public investment on infrastructural development and could culminate to higher debt profile and attendant debt service obligations of the government. If the pandemic effects became severe, government may increase fiscal policy responses to ameliorate the impact on the populace.
The financial sector is expected to remain resilient this year on account of the accommodative monetary policy stance, continued efforts by the bank towards ensuring financial system stability and credit expansion policies. Furthermore, the renewed policies aimed at enhancing the payments system and cash-less initiative are expected to sustain efficiency, safety and confidence in the Nigerian payments system.
Against this background, policymakers are expected to nurture the fragile phase of the economy with caution and employ appropriate policy instruments to tackle the likely adverse effects that may emanate as a result of the pandemic.
The apex bank said the fiscal space should be optimally utilised, along with the implementation of structural policies to boost growth and welfare over the medium-term. Furthermore, harmony between fiscal and monetary policy remain crucial to sustain and strengthen growth in the future.
Structural reforms, particularly executing the much-delayed power sector recovery plan, implementing the financial inclusion strategy, and addressing infrastructure gaps remain essential to boosting inclusive growth.
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