World Bank Urges Close Monitoring of Nigeria’s External Financing Sources

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Ndubuisi Francis in Abuja

The World Bank Group (WBG) has advocated close monitoring of Nigeria’s external sources of financing, warning that sudden outflows would eat into already slipping external reserves and destabilise the current Central Bank of Nigeria (CBN)’s decision to hold the Investors and Exporters Foreign Exchange (IEFX) window at about N360 per dollar.

Nigeria’s foreign reserves dropped by $3.2 billion from $45.07 billion in June to $41.85 billion in the third quarter of the year.

The World Bank noted that the Foreign Portfolio Investment (FPI) flows tend to be responsive to domestic monetary policy decisions, oil price movements, and unpredictable policy adjustments globally, adding that for Nigeria, sudden outflows would eat into already slipping foreign reserves and could destabilise the current exchange rate solution decision to hold the IEFX rate at about N360 per dollar.

In its Nigeria Economic Update for the second half of 2019, which was unveiled in Abuja yesterday, the World Bank, also warned that Nigeria’s fiscal and external positions are more fragile due to the depletion of fiscal buffers in the Excess Crude Account (ECA), which renders the country more vulnerable to external shocks .

It also declared that a decline in oil prices to the 2016 levels of below $30 per barrel could potentially trigger another recession.

Between January 2012 and December 2018, a total of N6.48 trillion was withdrawn from the Excess Crude Account, which stood at $324 million as at October 2019. The World Bank report pointed out that externally, Nigeria was confronted with a sharper-than-expected slowdown in the global economic and geopolitical and trade tensions.

It noted that domestically, the main risks are associated with the degree of predictability of macroeconomic policies, the pace of structural reforms, and the country’s security situation.

The Economic Update titled, “Jumpstarting Inclusive Growth: Unlocking the Productive Potential of Nigeria’s People and Resource Endowments,” which was launched by the World Bank Country Director, Shubham Chaudhuri, noted that the economy’s sensitivity to volatile oil markets was a major cause of uncertainty and a disincentive to long-term investment.

“For instance, a decline in oil prices to the levels seen in 2016 would significantly reduce growth, potentially leading to another recession. This time, however, Nigeria’s fiscal and external positions are more fragile because the fiscal buffers in the excess crude

account are depleted, and international reserves mask considerable amounts of foreign-held short-term government and central bank securities.

“In this context, a negative shift in investor confidence could lead to a drop in international reserves and put pressure on the exchange rate and the exchange debt stock.

“Conversely, growth could be accelerated through reforms that boost tax revenue to allow for higher investment in human and physical capital , as well as efforts to improve the quality of spending and

reduce barriers to trade and private sector development,” the 58-page Economic Update said.

The report, however noted that Nigeria’s economy continues to recover from the 2016 recession, adding that the nation’s real gross domestic product (GDP) growth trails growth in peer countries since 2015.

According to the update, although Nigeria’s economic outlook is stable, population growth is expected to expected to continue exceeding economic growth, undermining Nigeria’s prospects for poverty, noting that economic and demographic projections highlight the urgent need for reform.

The World Bank report lamented that unemployment is particularly acute among youth and women, adding
that building reform momentum was essential to mitigate risks and promote faster, more inclusive and sustainable growth that improves living standards and reduces poverty.

It stated that measures that increase the effectiveness of monetary policy would strengthen macroeconomic management.

It described Nigeria’s economic growth as a slow recovery, which limits progress in improving living standards.