Cost of funding increase in debt concerns which has led to lowering of credit ratings may lead to increase in the cost of international funds, PricewaterhouseCooper (PwC) has said.
In its Nigeria bi-monthly Economic Outlook released on its website titled “Impact of global economic trends on Nigeria’s foreign exchange and the way forward”, the professional services firm said it may increase the demand pressure on forex to meet future FX debt service obligations.
According to the firm, it is evident in the decline in capital importation from $24 billion in 2018 to $5.3 billion in 2022.
“The increase in the global Central Bank’s policy rate may lead to capital reallocation away from Nigeria’s financial market to other markets with more attractive yields on investment. This may reduce FX flows to the economy
“The Nigeria MSCI index recorded a significant decline of 113%, from 23.5% in 2020 to -3.02% in 2022, reflecting capital reallocation to other economies
A marginal trade surplus may lead to an increased pressure on FX threatening liquidity in the forex market. In Q2 2023, Nigeria recorded a positive balance of trade of $2.3 billion. The positive trade balance could be attributed to the growth of total export by 9% (y/y) to $12.5 billion
“The decline in remittance flows may reduce FX flows to the economy. Though remittances to Nigeria accounted for 38% of the total flows to the region, it increased by only 3.3% to $20.1 billion
“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,” it said.
Over time, the company observed that there has been a rise in the inflows of FX from autonomous or non-CBN sources, which has led to the widening divergence between the official and parallel market rates.
“Since 2007, the FX inflows from autonomous sources exceeded inflows from the CBN
“The implication of official interventions may not accurately reflect the market demand and supply dynamics as annual inflows are skewed towards unofficial sources,” it said.
To address this imbalance, there is a need for authorities to boost investors’ confidence by deepening the financial markets, ensure longer term sectorial policy to maximise exports or deepen domestic consumption, and roll out short-term fixes to enhance foreign exchange liquidity.
