PricewaterhouseCoopers has stated that the downgrading of Nigeria by credit rating agencies will reduce investors’ confidence and foreign exchange inflow into the country.
It disclosed that in its Nigeria (Bi-monthly) Economic Outlook report themed “Impact of global economic trends on Nigeria’s foreign exchange and the way forward” released on Wednesday.
“Lower credit ratings due to Nigeria’s widening fiscal deficit, debt service to revenue ratio may reduce confidence in the Nigeria economy. This may lead to reallocation of funds from the Nigerian economy and reduction in FX flows,” the financial consultancy firm remarked.
Recall that FTSE Russell had last month downgraded Nigeria from Frontier to Unclassified Market Status due to the country’s forex challenges.
Also, Moody’s had earlier in the year lowered the country’s credit ratings from B3 to Caa1 due to concerns that the government fiscal and debt position would continue to worsen.
Fitch also had in November last year downgraded Nigeria’s rating from B to B+, citing its economic challenges.
PwC declared that the Central Bank of Nigeria’s (CBN) firm grip on the forex market by offering a more favourable exchange rate and the use of threat of sanctions had enable it to finance over 60% of dollar import demand from 2005 to 2013, giving it significant influence over forx rates for goods and services.
“However, Nigeria’s external accounts were changing due to an artificially strong exchange rate. Non-tradable services in the import basket grew, driven by increased consumption of foreign transportation, education, health, and financial assets. The other big shift in dollar demand composition was in oil imports which rose from 10-15% in 2005 to 20-22% of total imports at end of 2022.
“The rise in Nigeria’s import basket and the decline in crude oil exports relative to autonomous flows widened the gap between the parallel market and the official rate,” it added.
It mentioned that net flow through the CBN was negative, indicative of the decline in both oil sector receipts and non-oil sector inflows from autonomous sources.
“Since 2007 more USD came into the market via autonomous sources peaking at $103 billion in 2013.
“The gap between the official and parallel market rate widened abnormally in 2016Q1 as a result of a fall in oil price to $35/barrel toward the end of February 2016 accompanied by a depreciation of the naira in 2016.
“More exchange-rate flexibility is associated with greater monetary-policy autonomy, so there is some rounding of that corner of the policy trilemma; but temporary, narrowly targeted capital controls do not enable a country with a fixed exchange rate to have greater monetary-policy autonomy than it has under full capital mobility,” the report stated.
PwC urged the government to boost investors’ confidence by putting out a FX management story.
It also encouraged the Federal Government to execute a pocket of sequenced policies to enable the country’s economy withstand external shocks, adding that that there was a need to deepen financial markets.
To overcome the current economic challenges ravaging the country, it suggested a longer term sectorial policy to maximise exports or deepen domestic consumption and short-term fix to enhance foreign exchange liquidity.